Impacts of wind and solar spatial diversification on its market value: A case study of the Chilean electricity market

Abstract

Renewable energy is expected to become the main electricity source in the world in the coming decades, with solar and wind power taking a big share of the energy supply. Although there has been a remarkable advance on renewable energy technologies, their integration is still difficult for regulators, market designers and system operators due to the high variability and limited predictability of solar and wind resources. Measures can be adopted to ease their integration, among them geographical diversification. There is plenty of literature about the diversification of solar and wind resources and there is a common conclusion: greater dispersion smooths out power production. However, literature on the effects of spatial diversification on the power system, electricity prices and renewable energy market value is much scarcer. This paper studies the effects of spatial diversification and questions whether integration policies are incentivizing the placement of renewable generators where they provide the highest value to the electricity system in Chile. Using real data and a simplified dispatch model the analysis presented shows evidence of the effects of diversification on wind and solar market value in Chile. Results suggest that spatial diversification has a strong positive effect on the market value of renewable energy, especially in scenarios with active transmission and hydro-storage constraints. Wind market value may vary up to US$10/MW h depending on the level of diversification and the spatial and temporal constraints of the system and, given current storage capacity of hydro reservoirs, the solar market value may increase US$5/MW h due to diversification if transmission capacity is enough. Even though these results must be observed with caution, because they depend on the assumptions made, there is an important effect of renewable spatial diversification that should be observed by regulators.Keywords: Renewable integration; Complementarity; Wind diversity; Solar diversity; Portfolio