Cannibalization

Variable renewable energy technologies, such as wind and solar, are fundamentally different from conventional electricity generation technologies in at least two aspects: they have virtually zero marginal costs (opposite to the positive marginal cost of fossil fuel technologies), and they are variable, i.e. they only generate electricity when and where the resource is available. This entails that electricity prices decline in the wholesale market at times of high variable renewables penetration. Since the price drops when renewables are generating more, their market value declines in a kind of cannibalization effect: the higher the penetration of variable renewables, the lower is their value and the higher is their revenue risk. The absolute cannibalization effect refers to the decline of the revenues of wind and solar per unit of electricity generated, and the relative cannibalization effect is the decline of the value of wind and solar in relation to the general evolution of the electricity price. This project will estimate absolute and relative cannibalization effects of wind and solar in those wholesale electricity markets with highest penetration, i.e. markets in most of Western Europe and the US states of California and Texas. Econometric methods (time series and panel data) will be used to estimate not only the impact of one technologys penetration on its own value and risk, but also the cross-cannibalization effects between technologies. The cannibalization effect has far-reaching implications, not only for the competitiveness of variable renewable technologies themselves, but also for governments (since the lower value of renewables translates into higher cost of support policies), for the value of flexibility technologies, such as storage, interconnections or demand management, which increases as the value of variable renewables falls, and for the design of the wholesale electricity market as a whole. Moreover, the relative cannibalization effect can be interpreted as the integration cost of variable renewables, and therefore our results might be useful to conduct further comprehensive cost-benefit analysis and to validate ex-ante models of the electricity system. This research will be carried out by Javier Lpez Prol, Master in International and Development Economics and PhD in Economics, in collaboration with the Wegener Center for Climate and Global Change at the University of Graz (Austria), the German Institute for Economic Research (DIW Berlin, Germany), and the University of Vigo (Spain).