Integration costs and market value of variable renewables: A study for the Dutch power market

Abstract

Increasing shares of wind and solar power in the electricity system have a considerable impact on electricity markets. The variable and uncertain generation from these renewables is a source of additional costs. These costs include the costs of back-up needed for periods with low wind and solar production, the cost of transmission to reach demand centers, and the costs of balancing the electricity system to adjust for wind and solar power forecast errors. Furthermore, electricity generation from wind and solar with very low marginal costs depresses electricity prices on the wholesale market, an effect that is even more pronounced for the price that wind and solar earn on the market. While these cost increases and price effects are common to all electricity markets, the magnitude of the effects will to a large extent depend on the local characteristics of an electricity market, such as the incumbent generation mix and the interconnections with other markets. In this study, we introduce a modelling framework utilizing a detailed European electricity market model to quantify integration costs and price effects of variable renewables in the Netherlands. Our methodology allows calculation of various components of the integration costs based on a single consistent dataset and modelling tool. Our results for the Netherlands underline the importance of interconnections in reducing the integration costs of renewables in the electricity system.