The benefits of flexibility: The value of wind energy with hydropower

Several studies have shown that the revenue of wind power generators on spot markets (“market value”) diminishes with increasing deployment. This “value drop” is mostly observed in power markets that are dominated by thermal power plants, such as in Germany. This paper assesses the wind market value in power systems where hydroelectric stations with large reservoirs prevail, such as in Sweden. Due to their dispatch flexibility, such hydropower compensates for wind power output variability and thereby mitigates the wind power value drop. The market value of electricity from wind declines with penetration in both types of power systems, but it tends to decline at a slower rate if hydropower is present. This paper presents empirical evidence on the relevance of this effect derived from market data and numerical model results. Our results indicate that when moving from 0% to 30% wind penetration, hydropower mitigates the value drop by a third. As a result, 1 MWh of wind energy is worth 18% more in Sweden than in Germany. Sensitivity analyses indicate high robustness despite large parameter uncertainty: in 80% of all sensitivities, wind energy is valuable 12-29% more in Sweden than in Germany. The benefits of hydropower seem to level off at around 20% wind penetration. This suggests that the hydro flexibility is “exhausted” at this level. Low wind speed wind turbines, carbon pricing, and upgrades of hydropower generation capacity can lever the added value of hydro flexibility further. Not only is wind energy more valuable in the presence of hydropower, hydroelectricity also becomes more valuable if paired with wind power.