Fat Tails due to Variable Renewables and Insufficient Flexibility: Evidence from Germany

Ronald Huisman, Evangelos Kyritsis, Vasile Cristian Stet

Research output: Contribution to journalArticleAcademicpeer-review

Abstract

The large-scale integration of renewable energy sources requires flexibility from power markets in the sense that the latter should quickly counterbalance the re- newable supply variation driven by weather conditions. Most power markets can- not (yet) provide this flexibility effectively as they suffer from inelastic demand and insufficient flexible storage capacity or flexible conventional suppliers.
Research accordingly shows that the volume of renewable energy in the supply system affects the mean and volatility of power prices. We extend this view and show that the level of wind and solar energy supply affects the tails of the electricity price distributions as well and that it does so asymmetrically. The higher the supply from wind and solar energy sources, the fatter the left tail of the price distribution and the thinner the right tail.

This implies that one cannot rely on symmetric price distributions for risk management and for valuation of (flexible) power assets The evidence in this paper suggests that we have to rethink the methods of subsidising variable renewable supply such that they take into consideration also the flexibility needs of power markets.
Original languageEnglish
Pages (from-to)231-247
Number of pages18
JournalEnergy Journal
Volume43
Issue number5
Early online date2021
DOIs
Publication statusPublished - 1 Sep 2022

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