The Influence of interconnection capacity on the market value of wind power

One key prerequisite for reaching high wind shares in Europe is an expansion of the existing transmission grid. So far, grid studies focus on welfare effects and technical aspects of grid planning. In this paper, a stylized two-system model is used to analyze principal effects of transmission grid expansions on the market value of wind power. When two markets with similar supply characteristics and wind shares but not perfectly correlated wind power generations are interconnected, the market value of wind power increases. For a more general case of an importing and exporting market, this is still true for overall wind power generation but not necessarily for generations in both markets. The reduction in generation cost due to the interconnection of markets with significant wind shares is highly sensitive to the correlation of wind power generations. These results have two major implications: (i) Wind power generators can manage the risk associated with market value changes due to interconnection capacity by distributing their portfolio across markets and (ii) when evaluating the economics of an interconnector proper modeling of wind power generation is crucial. (C) 2012 John Wiley & Sons, Ltd.