The effect of variable renewable energy sources on the volatility of wholesale electricity prices — A stylized full cost approach

We analyze the effect of an increasing share of variable renewable energy sources (RES) on the electricity price, particularly on the price variance. To that end, we develop and apply an electricity spot market dispatch and investment model which is formulated as a linear optimization problem (LP) and minimizes the total system costs. We use a full cost approach, i.e. investment costs of the installed capacity are taken into account. In order to focus on theoretical effects, we analyze a stylized electricity system with three generation technologies. In a system with low shares of wind generation, the electricity price variance decreases with additional wind. However, we observe the opposite at higher shares of wind mainly driven by wind curtailment and start-up effects in the thermal system.