[Paper Review] Decreasing market value of variable renewables is a result of policy, not variability

Tom Brown, Lina Reichenberg|arXiv (Cornell University)|Feb 7, 2020

Climate Change Policy and Economics12 citations

TL;DR

This paper demonstrates that the declining market value of variable renewables like wind and solar is primarily driven by subsidy-based policies, not their inherent variability. When carbon pricing drives deployment instead of mandates or subsidies, wind and solar can achieve high penetration—over 80%—without revenue cannibalization, proving that policy design, not intermittency, is the key constraint on market integration.

ABSTRACT

Although recent studies have shown that electricity systems with shares of wind and solar above 80% can be affordable, economists have raised concerns about market integration. Correlated generation from variable renewable sources depresses market prices, which can cause wind and solar to cannibalize their own revenues and prevent them from covering their costs from the market. This cannibalization appears to set limits on the integration of wind and solar, and thus contradicts studies that show that high shares are cost effective. Here we show from theory and with numerical examples how market incentives interact with prices, revenue and costs for renewable electricity systems. The decline in average revenue seen in some recent literature is due to an implicit policy assumption that technologies are forced into the system, whether it be with subsidies or quotas. If instead the driving policy is a carbon dioxide cap or tax, wind and solar shares can rise without cannibalising their own market revenue, even at penetrations of wind and solar above 80%. The policy of subsidy is thus the primary factor driving lower market values, and this decline happens even for dispatchable low-emission technologies; the variability of wind and solar is only a secondary factor that accelerates the decline if they are subsidised. The strong dependence of market value on the policy regime means that market value needs to be used with caution as a measure of market integration.

Motivation & Objective

• To resolve the contradiction between studies showing high renewable integration is affordable and concerns about revenue cannibalization.
• To investigate how different policy mechanisms—especially subsidies versus carbon pricing—affect the market value of wind and solar.
• To clarify whether variability or policy design is the primary driver of declining market revenues for renewables.
• To demonstrate that market value is not a reliable standalone metric for integration limits without considering the underlying policy regime.

Proposed method

• Theoretical modeling of electricity market dynamics under different policy regimes, including carbon caps and subsidies.
• Numerical simulations comparing market revenues under carbon pricing versus forced deployment via quotas or feed-in tariffs.
• Analysis of revenue decomposition to isolate the effects of policy from those of generation variability.
• Use of dispatchable low-emission technologies as a control to isolate the impact of policy from intermittency.
• Comparison of average market prices and revenues across high-penetration scenarios (over 80% wind and solar).
• Sensitivity analysis to assess how policy assumptions alter the perceived market value of renewables.

Experimental results

Research questions

• RQ1 What causes the decline in market value of wind and solar electricity in high-penetration systems?
• RQ2 How do different policy instruments—carbon pricing versus subsidies—affect the revenue performance of variable renewables?
• RQ3 To what extent is revenue cannibalization driven by policy design versus the physical variability of wind and solar?
• RQ4 Can wind and solar achieve over 80% penetration without revenue cannibalization under a carbon pricing regime?
• RQ5 Why does market value as a metric fail to accurately reflect integration potential in some policy contexts?

Key findings

• The decline in average market revenue for wind and solar is primarily caused by subsidy-based deployment policies, not their variability.
• Under a carbon dioxide cap or tax, wind and solar can achieve penetration levels above 80% without revenue cannibalization.
• Even dispatchable low-emission technologies experience declining market value under subsidy regimes, confirming that policy—not variability—is the root cause.
• The variability of wind and solar only accelerates revenue decline when these technologies are subsidized, making it a secondary factor.
• Market value is highly sensitive to policy regime and should be used cautiously as a measure of integration potential.
• The study resolves the apparent contradiction between high-renewable affordability and revenue cannibalization by identifying policy as the key variable.