Wind Capacity Investments: Inefficient Drivers and Long-Term Impacts

Ian Schneider and Mardavij Roozbehani

January 2017

A pure energy-only market has been shown, under certain conditions, to create the optimal incentives for market entry and exit. This research extends these results to the case of potential entrants with variable and non-controllable production, such as wind generators. The research shows how the stochasticity of the wind resource implies a trade-off between sites with higher capacity factors and higher covariance with prices at the efficient frontier. The analysis suggests that the Production Tax Credit (PTC), along with some capacity mechanisms, bias wind investment towards high-producing sites but with lower covariance of their variable output with market prices. Furthermore, since wind production depresses prices, this bias is linked to covariance between wind sites. Fixed-price support mechanisms like the PTC lead to market equilibriums with higher levels of wind correlation. The long-run effects of correlation in the wind investment portfolio in a theoretical market are somewhat nuanced, depending on the nature of the joint distribution of wind availability; they may be incorrectly interpreted in the usual discourse.