Working Paper Series,
Research Institute of Industrial Economics

Abstract: The variability of solar and wind generation increases transmission network operating costs associated with maintaining system stability. These ancillary services costs are likely to increase as a share of total energy costs in regions with ambitious renewable energy targets. We examine how efficient deployment of intermittent renewable generation capacity across locations depends on the costs of balancing real-time system demand and supply. We then show how locational marginal network tariffs can be designed to implement the efficient outcome for intermittent renewable generation unit location decisions. We demonstrate the practical applicability of this approach by applying our theory to obtain quantitative results for the California electricity market.​

Keywords: Ancillary services costs; Efficiency; Locational marginal network tariffs; Renewable electricity generation; System stability

JEL-codes: L94; Q20; Q42

42 pages, November 29, 2019

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