ARTICLE IN PRESS

Energy Policy 35 (2007) 1257–1273

www.elsevier.com/locate/enpol

Short-term optimal wind power generation capacity in liberalized

electricity markets
Fernando Olsinaa,, Mark Röscherb, Carlos Larissona, Francisco Garcésa
a
Instituto de Energı´a Eléctrica, Av. Lib. Gral. San Martı´n 1109(O) J5400ARL San Juan, Argentina
b
University of Aachen, Schinkelstrasse 6 D-52056 Aachen, Germany
Available online 9 May 2006

Abstract

Mainly because of environmental concerns and fuel price uncertainties, considerable amounts of wind-based generation capacity are
being added to some deregulated power systems. The rapid wind development registered in some countries has essentially been driven by
strong subsidizing programs. Since wind investments are commonly isolated from market signals, installed wind capacity can be higher
than optimal, leading to distortions of the power prices with a consequent loss of social welfare. In this work, the influence of wind
generation on power prices in the framework of a liberalized electricity market has been assessed by means of stochastic simulation
techniques. The developed methodology allows investigating the maximal wind capacity that would be profitably deployed if wind
investments were subject to market conditions only. For this purpose, stochastic variables determining power prices are accurately
modeled. A test system resembling the size and characteristics of the German power system has been selected for this study. The expected
value of the optimal, short-term wind capacity is evaluated for a considerable number of random realizations of power prices. The impact
of dispersing the wind capacity over statistical independent wind sites has also been evaluated. The simulation results reveal that fuel
prices, installation and financing costs of wind investments are very influential parameters on the maximal wind capacity that might be
accommodated in a market-based manner.
r 2006 Published by Elsevier Ltd.

Keywords: Wind power capacity; Electricity markets; Stochastic simulation

1. Introduction provide additional incentives for further increasing wind

Because of environmental concerns, particularly global
warming, as well as uncertainties on the long-run prices of
fossil fuels, many countries in the world are aggressively
promoting wind power capacity development. Conse-
quently, wind has become one of the fastest growing
energy technologies around the world (EWEA, 2004). In
some areas, wind power is now contributing substantially
to meet the electrical demand. Such is particularly the case
of Germany, Spain and Denmark with, respectively,
16.6 GW, 8.3 GW and 3.1 GW of installed wind power
capacity by the end of 2004 (DEWI, 2005; GWEC, 2005).
Further additions of considerable amounts of wind
capacity in the near future are very likely. Indeed, the
coming into force of the Kyoto Protocol will probably
Corresponding author. Tel.: +54 264 4226444; fax: +54 264 4210299.
E-mail address: olsina@iee.unsj.edu.ar (F. Olsina).
installed capacity, especially in EU countries. Some other
countries might undertake wind-favoring mechanisms, if
wind generation demonstrates to be cost-effective or to
have a positive value in mitigating global-warming risks. In
addition, investment costs of wind generating facilities have
shown a substantial reduction over the last decade
(Junginger et al., 2005), turning wind projects increasingly
attractive for independent investors.
Wind power generation has three prominent character-
istics that differentiate from most conventional generation
technologies. Generation proceeding from this primary
source is fluctuating over a wide range of frequencies; it can
only be controlled to a very limited extent, and its
availability is affected by considerable uncertainty.1 Even
1
Short-term wind prediction errors rapidly increase for longer forecast
horizons. Typical forecast errors (RMSE) of the power output for a single
wind farm normalized to the installed wind capacity range from 12% for a

0301-4215/$ - see front matter r 2006 Published by Elsevier Ltd.

doi:10.1016/j.enpol.2006.03.018
 ARTICLE IN PRESS
1258 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273
though the short-term, marginal costs of wind generation
are commonly negligible, wind power does not work as a
simple fuel saver, since it cannot easily be controlled and
accurately predicted (Giebel, 2000). For this reason, the
value of wind capacity for power systems in the framework
of the vertically integrated monopoly industry has been
extensively investigated in the past (Barnes et al., 1994,
1995; Wan and Parsons, 1993). Particularly, the capacity
credit provided by a certain amount of installed wind
capacity has called the attention of researchers for many
years (Billinton and Bai, 2004; Milborrow, 1996; Milligan
and Parsons, 1999; van Wijk et al., 1992; Kahn, 1979).
More recently, the required capacity reserve necessary to
reliably operate the power system for increasing wind
penetrations had been extensively evaluated (Dany, 2000;
Doherty and O’Malley, 2003). Hirst and Hild (2004) have
also assessed the revenues’ net of balancing costs perceived
by wind farms operating in a small utility under scenarios
of increasing installed wind capacity.
The work of Kennedy (2005) presents a methodology for
evaluating the long-term social benefits (including avoided
environmental costs) of adding wind generation capacity to
a power system. The methodology is based on a non-
chronological description of load and wind power injection
combined with screening curves for characterizing the
economies of the different conventional generating tech-
nologies. The stochastic behavior of conventional units, i.e.
forced outages, is neglected from this analysis and the
available generating capacity at each time is assumed to be
deterministic. A drawback of this analysis is the assump-
tion of an electricity market continuously operating under
static, long-run equilibrium conditions. Under this assump-
tion, it is presumed that the mix of generation technologies
can immediately be adjusted to the least-cost generation
system when increasing wind capacity is added to the
system. A similar approach, although more detailed, has
been implemented by Krämer (2003) for determining the
optimal technology mix of the German power system for
different scenarios of wind capacity, fuel prices, emission
caps, etc. Because of temporal constraints and some
inherent time lags, e.g. construction of new power plants,
the generation mix usually requires a prolonged time to
achieve the long-run equilibrium. The rapid deployment of
wind power capacity in a non-market-based manner might
temporarily provoke a major deviation of the equilibrium.
Therefore, the consequent loss of social welfare might
outweigh some of the benefits associated to wind genera-
tion. Although the assumption of long-run equilibrium
provides a well-defined benchmark, it has recently been
demonstrated that liberalized power markets do not
actually behave in this way. Indeed, large deviations from
(footnote continued)
3-h ahead prediction to 30% for a 36-h forecast. By combining various
forecasting techniques, the day-ahead prediction error for the aggregate
wind power output across a wide region is currently about 8–10%. As
comparison, day-ahead load forecast errors lie around 0.5–2.5%.
the long-run economic equilibrium are likely to happen
(Olsina et al., 2006).
The rapid wind development registered in some countries
has essentially been supported by means of strong
subsidizing programs. Wind generation output is remun-
erated with substantially higher prices than the prevailing
prices in the power markets. Furthermore, some incentive
mechanisms, as the feed-in tariff currently used in
Germany, completely remove market risks for wind
investments. That explains why considerable amounts of
wind capacity, mostly private-owned, are being added to
some competitive power systems. Unlike conventional
generating technologies, wind investments are commonly
isolated from market signals. Therefore, the economic
optimality of the installed wind power capacity cannot be
warranted. If installed wind capacity exceeds for a
considerable margin the optimal value, distortions of the
power market with significant loss of social welfare might
occur.
The impact of increasing amounts of wind capacity on
spot prices in the framework of liberalized power markets
has not yet been assessed. The investigation presented in
this article is essential to determine the economically
optimal wind capacity that at a certain time can be
accommodated in a market-based manner (i.e. in absence
of subsidies) to an existing generation system. In this work,
the influence of wind generation on the electricity market
has been assessed by means of stochastic simulations of
power prices. A Especial emphasis is given to the
contribution of geographically dispersing the installed
wind capacity over a number of statistically independent
wind sites. This topic is of particular interest, as most of the
new wind capacity is being installed within the intercon-
nected European system (UCTE), which extends over a
very wide region.
This paper is organized as follows. In Section 2, the basic
concepts referring the optimal installed wind capacity are
briefly exposed. Section 3 presents several modeling
techniques applied in this investigation. For its relevance
as a leading country in wind capacity development, a test
system resembling the size and technology mix of the
German power system has been selected for this study. The
main hypotheses, assumptions and simplifications are
provided in this section. The stochastic behavior of the
variables driving power prices, i.e. load demand, the
existing generation system and wind resources are modeled
in detail in the subsections of Section 3. In Section 4, the
results of stochastic simulations for the base case as well as
a sensitivity analysis to some relevant influencing variables
are presented and analyzed. With a discussion of the
implications of the results presented in Section 4, Section 5
concludes the present article.
2. Optimal short-term wind power generation capacity
Power economics shows that social welfare is maximized
if resources are allocated optimally. If this condition is
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273
achieved, the system is said to be in economic equilibrium.
Under these circumstances, revenues perceived by each and
every firm compensate exactly the total incurred costs and
therefore the firm’s economic profit2 is zero. Thus, firms do
not have any incentive to either invest in new capacity
(since the market does not offer the possibility of gaining
supernormal profits) or exit the business (since the costs are
fully recovered).
In deregulated markets, generation capacity is typically
installed if it looks profitable. Additional generation
capacity should be installed while the associated expected
revenues pay off the total marginal incurred costs. In the
absence of subsidies, this statement allows determining the
maximal wind power capacity, Pmax W , that might be profit-
ably deployed if the wind generator’s revenues were subject
to market forces only. For PW ¼ Pmax W , the optimality
condition is achieved, since the economic profit turns
negative for any additional wind capacity unit. Under this
condition, the total incurred costs of installing and
operating a unit of wind-based capacity is equal to the
revenues collected by selling the wind power output at
market prices.3 This condition can be expressed in terms of
the annual fixed investment cost of a wind capacity unit,
FC measured in h/MW year, and the short-term, annual
revenues, P(PW)4 in h/MW year:
PðPW ¼ Pmax
W Þ  FC ¼ 0,
r0  IC
with FC ¼ ,
1  ð1 þ r0 ÞT a
where IC expressed in h/MW is the installation cost of a
wind unit, Ta in year is the amortization period of the wind
project and r0 in %/year is the discount rate or hurdle rate,
defined by the actual cost of raising capital. For a given set
of financial parameters and by means of stochastic
simulations of the market revenues of wind generators
for increasing values of PW, the maximal profitable wind
capacity Pmax
W can be determined from the previous
equations.
3. Stochastic simulation of power markets
The stochastic power market model presented here can
be characterized as a fundamental or bottom-up model,
since chronological hourly power prices are determined by
simulating the mechanisms having direct influence on the
short term, stochastic movements of supply and demand.
Thus, explicit mathematical models for the aggregate
supply and demand curves are provided. For this reason,
some hypothesis on the degree of competition in the
market and hence on the bid behavior of market
2 5
Economic profit is defined as the difference between total revenues and
total costs including the opportunity cost of capital.
3
As no fuel is required, O&M costs of wind facilities are commonly
negligible.
4
Computed short-term, annual revenues are based on the existing
generation system and the prevailing load conditions.
1259
participants is usually required. Because of representing a
well-defined benchmark, perfect competition is assumed in
the framework of this study. Under this hypothesis,
generators maximize their own profit by bidding their true
marginal costs. Under this market setting, the competitive
price is set at each time by the most expensive running
generator, i.e. the marginal generator. In this work, only
the wholesale energy market will be considered for
determining hourly spot prices. The impact of wind
generation on the market for ancillary services is neglected.
Additionally, as congestions of the transmission network
are very rare events for highly meshed systems, such is the
case of Germany, only one price zone has been considered.
For the purpose of the proposed investigation, a
considerable number of yearly realizations of hourly load
demand and power generation are necessary to perform
Monte Carlo simulations of power prices. In order to
obtain accurate statistical estimates, 1000 yearly realiza-
tions of the power system’s operation and the resulting
hourly spot prices have been performed. This sample size
ensures a maximum error of about 1% at probability levels
as small as 0.01 within 99.7% confidence bounds.
The following subsections provide a detailed description
of the applied modeling techniques for describing the
stochastic behavior of the driving variables, i.e. the load
demand, the power supply of the conventional generation
system and the aggregate wind generation.
3.1. Load demand modeling
Load demand is a major driver of power prices.
Aggregate power demand is assumed to be price-inelastic,
which represents the typical inability of customers to adjust
their consumption at a short notice.5 Thousand chron-
ological time series of hourly power demand over a year
have to be synthetically generated. Any consistent stochas-
tic load model should account for some deterministic
patterns, like the daily, weekly and yearly seasonality, as
well as hourly stochastic fluctuations around the expected
values.
Unfortunately, the only publicly available data sets of
the aggregate German load are not adequate for our
purposes. The statistics provided by the UCTE (2005) only
consists of 24-hourly load values recorded on the third
Wednesday of each month over the period 1994–2004.
Hourly load demand for a Saturday and a Sunday of each
month are available only for year 2000. Therefore, the
standard techniques for identifying an adequate stochastic
model cannot be used in a straightforward manner and a
preconditioning of the data sets was necessary.
It is important to note that some degree of price-elasticity of electricity
demand might induce a valuable correlation between wind power
injections and power load. A better coincidence between wind resources
and load pattern lessens to some extent the difficulties faced by this
generation technology in the framework of the current planning and
operation procedures.
 ARTICLE IN PRESS
1260 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273

In order to obtain the load expressed on a common year
basis, the available time series were detrended using the
growth rate of monthly energy consumptions. The basis
year is year 2000. By doing this, estimates of the
unconditional expected hourly loads, m^ L , as well as
unconditional hourly standard deviations, s^ L , for each
type of day and month were obtained. As only one typical
daily load pattern for each month becomes available after
this procedure, load data sets were interpolated and
smoothed via Fourier series to account for slow changes
within a month. Fig. 1a depicts the unconditional expected
hourly power demand over the year after the conditioning
process. From this figure, the annual and weekly season-
ality can be clearly identified. In Fig. 1b, only the third
week of December and June is plotted aiming at showing in
detail the daily and weekly pattern of load demand.
8
>
>
> m^ L þ s^ 2Li N i ð0; 1Þ
< i
s^ 2Li
Li ¼
>
> m^ Li þ r^ 2 ðLi1  m^ Li1 Þ þ s^ 2Li ð1  r^ 2 ÞN i ð0; 1Þ
>
: s^Li1
considered. By virtue of Central Limit Theorem, the
stochastic fluctuations of the aggregate load demand are
commonly assumed to be Gaussian. A Gauss–Markov
model has been proposed in the literature for describing the
stochastic behavior of load fluctuations in the framework
of reliability analysis of power systems (Breipohl et al.,
1992; Breipohl and Lee, 1991). For a specific US utility, it
was shown that on average this load model outperforms
higher order, autorregresive models as well as other
forecasting techniques. Because of the lack of enough
chronological load observations, hourly fluctuations of the
aggregated German load are assumed to follow a
Gauss–Markov stochastic process given by the following
sampling expression for the load Li within the ith time
interval:
for i ¼ 1;
qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
for i ¼ 2 . . . 8760;

Additionally, random deviations of the load from the where m^ Li is the estimated unconditional mean load at hour
hourly expected values, for example due to weather i, s^ 2Li the estimated unconditional variance for this time
fluctuations, are also an important load feature to be interval, r^ denotes the correlation coefficient between two
consecutive hours (assumed to be fixed and equal to 0.9)
80 and N i ð0; 1Þ identical independent Gaussian distributed
random samples with zero mean and unit variance. Fig. 2a
70 and b show, respectively, a sample realization of the load
Mean hourly load [GW]

path for 1 year and the third week of December and June.
60 By comparing Figs. 1 and 2, the necessity of considering
the random load fluctuations when simulating the stochas-
50 tic behavior of power prices it can be clearly recognized.

40
3.2. Modeling the generation system
30
In this study, a test system, resembling the size and
generation technology mix of the German generation
20
(a) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec system, has been modeled at the plant level. The thermal
generation system encompasses four generating technolo-
80 gies and five fuels amounting 340 power plants and
3rdweek-Dec 81 568 MW of installed operating capacity.6 Parameters
70 3rdweek-Jun of the considered system are given in Table 1.
Hourly load demand [GW]

Generating units are differentiated by technology, fuel,

60 unit size and thermal efficiencies. For each plant, the heat
input function has been linearized at nominal power and
50 through the origin, which leads to consider constant
marginal costs of generation. This simplification allows
40 dispatching of generation units by the merit order or
priority listing method. It is worth to note that the merit
30 order is a simplified heuristic method to solve the unit
commitment problem (UC). This dispatching methodology
20 6
(b) Mon Tue Wed Thu Fri Sat Sun In Germany, hydropower accounts for a small fraction of the total
installed capacity. For simplicity, only thermal generating units have been
Fig. 1. (a,b) Expected hourly load patterns for the German system. considered.
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1261

80 as well as mean-time-to-failure (MTTF) and mean-time-to-

repair (MTTR) for each considered technology are given in
70 Table 2. Under the Markov hypothesis, operation (TTF)
Hourly load demand [GW]

and reparation (TTR) times of generating units can be

60 simulated by taking i.i.d. random samples from an
exponential distribution with parameters l and m respec-
50 tively (Billinton and Allan, 1996):
   
1 1 1 1
40 TTF ¼ ln U½0; 1 ; TTR ¼ ln U½0; 1 ,
l l m m

30 where l ¼ MTTF1 in h1 is referred as the failure rate

and m ¼ MTTR1 measured in h1 is the repair rate, and
U½0; 1 are uniform i.i.d. samples over the interval [0,1].
20
(a) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Both reliability parameters can be related to the outage
probabilities (FOR) by the following expression:
80
3rdweek-Jun l
3rdweek-Dec FOR ¼ .
70 lþm
Hourly load demand [GW]

Fig. 4a shows seven simulated paths over a period

60
50
40
30
20
(b) Mon Tue Wed Thu
Fig. 2. (a,b) Stochastic hourly realizations of the German load demand.
assumes constant unit’s marginal costs and total operating
flexibility for generating units. In fact, operating con-
straints of generating units influencing the optimal UC, like
unit’s startup costs, minimum downtime–uptime and
minimum unit output are not considered.7 Marginal costs
of generation can therefore be computed by dividing the
corresponding fuel price by the unit’s thermal efficiency.
Fuel prices for the different generating technologies are
taken constant over the year. The range of marginal costs
of generation is given for each technology in Table 1. For
this generation system, Fig. 3 illustrates the aggregate
supply curve, which results of plotting the cumulated
power capacity against the sorted marginal cost of
generation.
A major source of price fluctuations is the capacity that
at a certain time is available to meet the load. The available
capacity stochastically fluctuates from hour to hour as
consequence of random outages of the individual units.
For this reason, the stochastic behavior of the thermal
units has to be modeled. A two-state Markov model is
deemed to be enough for describing random outages of
thermal power plants. Typical forced outage rates (FOR)
7
For this linearization, Cumperayot (2004) finds an average over-
estimation of 6.33% when simulating System Marginal Costs for the
German power system.
exceeding 1 year for some individual units of different
technologies. With A it is denoted that the time interval
within the considered generating units are available. On the
contrary, U denotes the period of technical unavailability
due to forced outages. In Fig. 4b, the simulated total
available capacity over 1 year is plotted along with the total
installed capacity (dotted line). As it can be noted, the total
available capacity fluctuates randomly over a quite wide
range. Although unlikely, at some hours the available
Fri Sat Sun generating capacity is lower than the peak load value. At
those times, the risk of having the system unable to fully
satisfy the power demand, which is referred in the
reliability literature as loss of load probability (LOLP), is
greatly increased. Under circumstances of capacity deficit,
there is no intersection of the aggregate supply and demand
curves, and therefore, the power market cannot be cleared.
In these cases, prices would rise to a very high value to
reflect the scarcity and a price cap has to be adminis-
tratively set. The price cap is commonly determined by
regulators and theoretically, it should set equal to the cost
of being curtailed, which is referred in the literature as
value of lost load (VOLL). For the base-case simulations,
the VOLL is set to be equal to 10 000 h/MWh.
3.3. Modeling wind power generation
3.3.1. Statistical description of wind speeds
The occurrence frequencies of wind speeds are usually
very well fitted by the Weibull distribution function, whose
probability density function (PDF), wðvÞ, and cumulative
probability function, W ðvÞ, are respectively defined for the
interval v 2 ½0; 1Þ as
a
wðvÞ ¼ aba va1 eðv=bÞ ,
a
W ðvÞ ¼ 1  eðv=bÞ ,
where a is the shape parameter and b [s/m] the scale
parameter, with a, b40. For some specific wind sites, it is
 ARTICLE IN PRESS
1262 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273

Table 1
Model data for the German conventional generation system

Technology Number of units Avg. unit size (MW) Installed capacity (GW) Fuel prices (h/GJ) Efficiency (%) Marginal costs (h/MWh)

Nuclear 19 1112 21.121 1.07 38.6–31.4 9.98–12.27

Lignite 66 294 19.402 1.40 43.1–27.0 11.7–18.68
Hard coal 124 201 24.879 2.06 45.1–25.0 16.4–29.6
CCGT 23 174 4.013 4.65 59.4–40.0 29.64–41.86
Oil steam 6 400 2.398 3.62 37.3–35.6 34.86–36.6
Gas turbine 29 54 1.570 4.65 38.1–25.0 44–66.98
Gas steam 36 175 6.295 4.65 37.3–28.0 44.88–66.98
Oil turbine 37 51 1.890 7.92 30.5–25.0 93.5–114

120 s2v ¼ 8:43 m2 =s2 . From the previous equations, the para-
meters of the Weibull distribution can be determined by
100 solving numerically for a and b. The Weibull parameters
Marginal cost [C/ MWh]

are found to be 6.4919 and 2.0937 respectively. In Fig. 5a

80 the Weibull probability density function of wind velocities
is plotted for the found values for a and b. Inset shows
60 some statistical parameters of the probability distribution,
i.e. mean, variance, skewness and kurtosis.
40

3.3.2. Power spectrum of wind speed fluctuations

20
In addition to the statistical characterization of wind
speeds, the description of wind velocity fluctuations in the
0 frequency domain also provides relevant information.
0 20 40 60 80
Aggregated Supply [GW] Indeed, wind velocities exhibit a strong auto-correlation
structure between successive time intervals. By virtue of the
Fig. 3. Aggregate supply curve for the German power system. Wiener–Khintchine theorem, the power spectral density
(PSD) function, denoted as S f 0 ðoÞ, of a stochastic process
describing the temporal sequence of wind speeds f 0 ðtÞ, is
Table 2 related to the auto-correlation function, Rf 0 ðtÞ, by Fourier
Typical reliability parameters for conventional generating units Transform pair8:
Z
Technology FOR MTTF (h) MTTR (h) 1 1
Sf 0 ðoÞ ¼ Rf ðtÞ eiot dt;
Nuclear 0.042 1100 48.23 2p 1 0
Z 1
Lignite 0.044 900 41.42
Hard coal 0.055 900 52.38 Rf 0 ðoÞ ¼ S f 0 ðtÞ eiot dt;
1
CCGT 0.036 1100 41.08
Oil-fired steam 0.071 1000 76.43 where o ¼ 2pf is measured in rad/s, f being the frequency
Gas turbine 0.031 600 19.20
in Hz.
Gas-fired steam 0.071 1000 76.43
Oil turbine 0.031 600 19.20 In a famous article, Van der Hoven (1957) presented for
the first time a composite picture of the spectrum of wind
speed fluctuations over a wide frequency band ranging
from 0.0007 h1 (period of about 2 months) to 900 h1
usual that only some statistical measures of the wind
(period of 4 s). He recognized the existence of two very well
resources, like the mean and the total variance, are
differentiated spectrum zones separated by a wide zone
available. The mean mv and the variance s2v for the Weibull
centered at frequencies of about 1 h1 with negligible
distribution are defined in term of the Gamma function as
spectral amplitudes. Numerous studies carried out in many
  different meteorological stations confirmed further that the
mv ¼ bG 1 þ a1 ,
     two spectral wind regimes and the spectral gap characterize
s2v ¼ b2 G 1 þ 2a1  G2 1 þ a1 . consistently wind speed fluctuations.
In this study, a homogeneous wind field over all 8
The PSD function is an alternative description of the temporal auto-
considered wind sites has been assumed. The mean wind dependence of a time series. It is worth to note that the total variance
speed is given as mv ¼ 5:75 m=s and the total variance s2f ¼ Rðt ¼ 0Þ is equal to the area under the PSD function.
0
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1263

A
0.14

U 0.12

Weibull probability density

A
μv = 5.75 m/s
U 0.1 σv2 = 8.43 m2/s2
A
γv1 = 0.57054 m3/s3
U 0.08
A γv2 = 3.13763 m4/s4

U 0.06
A

U 0.04
A
0.02
U
A
0
U 0 5 10 15 20 25 30
1000 2000 3000 4000 5000 6000 7000 8000 9000 1000011000 (a) Wind speed [m/s]
(a) Hours
6
82
daily peak

Mean spectral intensity [m2/s2]

σv2 = 9.42 m / s2
5
Available generation capacity [GW]

80

4
78
3
76
2
annual
74 peak
1

72
0
10-5 10-4 10-3 10-2 10-1 100 101 102 103 104
70 (b) Frequency [1/h]
(b) Jan Feb March April May June July Aug Sept Oct Nov Dec
Fig. 5. (a,b) Statistical and spectral characterization of the wind resources.
Fig. 4. (a,b) Random unit outages and a yearly stochastic realization of
the hourly available capacity.
1 1
frequencies of about 24 h . Although smaller, the yearly
9
Fig. 5b illustrates the mean power spectral intensity of seasonality can also be clearly recognized as an annual
horizontal wind speed fluctuations at 10 m (33 ft) above the 1
peak at frequencies of about 8760 h1 .
ground, computed from a 10-year time series of hourly
records of wind speeds at Caribou, Maine, USA (Oort and
Taylor, 1969). The spectrum covered fluctuation periods
from about 2 years to 1 h. For the high-frequency range, 3.3.3. Stochastic simulation of hourly wind speeds
the Kaimal spectrum, for which an analytical expression Before the widespread use of simulation techniques,
exists (Kaimal et al., 1972), has been adopted.10 The figure probabilistic evaluation of power systems, including
clearly reveals the spectral gap as well as the two spectral unconventional generation sources, were performed in the
regions. On one hand, the low-frequency spectral region is framework of the equivalent load duration curve (ELDC)(-
explained by the passage of large synoptic scale pressure Singh and Lago-Gonzalez, 1985). The initial efforts in
systems with period of 4–7 days. On the other hand, the applying stochastic simulation techniques for generating
high-frequency region is originated in turbulent wind speed wind speed time series were based on statistical considera-
fluctuations, i.e. gusts, with periods in the order of minutes tions only. Monte Carlo methods were applied to obtain
and seconds.11 Very noticeable is the diurnal peak at independent samples of a given marginal probability
distribution of wind speeds. Wind speed time series
9 obtained with this methodology failed in considering the
The mean spectral intensity measured in m2/s2 is related to the PSD as
fSðf Þ, where f is the frequency in Hz and the power spectral density
auto-correlation structure of wind speeds observed in
function S(f) expressed in m2/(s2Hz) or m2/s. consecutive time intervals.
10
Many other analytical descriptions are available for the spectral
modeling of wind turbulence, such as the von Karman and the Davenport (footnote continued)
turbulence models. equal to 8.43 m2/s2. The low contribution to the total variance
11
For this study, only hourly wind speeds time series are required. The corresponding to intrahour wind speed fluctuations will be further
variance corresponding to fluctuations with frequencies bellow 1 h1 is disregarded.
 ARTICLE IN PRESS
1264 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273
Presently, most of the proposed wind speed simulations
techniques are based on autoregressive moving average
(ARMA) models (Torres et al., 2005; Kamal and Jafri,
1997; Daniel and Chen, 1991). The same approach is
chosen by Billinton et al. (1996a, b) in the framework of
Monte Carlo techniques for evaluating reliability of power
systems when considering wind power generation.
Although ARMA models seem to be suitable for simulat-
ing sequences of wind speeds at some particular location,
some considerations must be taken into account. In order
to apply an ARMA model, a transformation (e.g. the
Box–Cox transformation) and standardization of the
observed time series are commonly required to obtain
stationary, Gaussian distributed time series.
The digital simulation of stochastic processes and fields
by means of the spectral representation is a very efficient
alternative approach for generating sample wind speed
time series (Shinozuka and Jan, 1972). A thorough review
of the method for generating univariate, Gaussian stochas-
tic processes according to a prescribed PSD (or auto-
correlation function) can be found in Shinozuka and
Deodatis (1991). In the following, only some introductory
details of the simulation algorithm will be outlined. Every
zero-mean, real-valued, univariate stochastic process, f o ðtÞ,
can be represented in terms of two mutually orthogonal
real processes, uðoÞ and vðoÞ, as follows:
Z 1
f 0 ðtÞ ¼ ½cosðotÞ duðoÞ þ sinðotÞ dvðoÞ.
0 Yamazaki and Shinozuka (1988) proposed an iterative
By adequately defining the orthogonal increments duðoÞ
and dvðoÞ, the integral equation can be expressed in terms
of an infinite series as:
1 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
X marginal probability density function. This algorithm
f 0 ðtÞ ¼ 2 S f 0 ðok ÞDo cosðok t þ Fk Þ,
k¼0
where Fk are independent random phase angles distributed
uniformly over the interval ½0; 2p. Therefore, a sample
realization f ðiÞ ðtÞ of the stochastic process f 0 ðtÞ can be
simulated by the following truncated series as N ! 1:
X
N 1 qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi
f ðiÞ ðtÞ ¼ 2 S f 0 ðon ÞDo cosðon t þ f ðiÞ
n Þ,
n¼0
where
n ¼ 0; 1; 2; . . . ; N  1,
on ¼ nDo; Do ¼ ou =N.
In the previous equations, ou denotes an upper cutoff
frequency beyond which the PSD S f 0 ðoÞ may be assumed
to be zero and N is the number of frequency bands of width
Do in which the PSD has been discretized. The sequence of
random phase angles F0 ; F1 ; F2 ; . . . ; FN1 are replaced by
their respective ith realizations fðiÞ ðiÞ ðiÞ
0 ; f1 ; f2 ; . . . ; fN1 .
According to the sample theorem, the time interval Dt of
the simulated stochastic process has to obey the condition
that Dtp2p=ou in order to avoid aliasing. This approach is
computationally very efficient, as it takes advantage of the
fast fourier transform (FFT). For this purpose, the
simulation formula is rewritten as follows, where M, the
number of time intervals of length Dt, must be selected an
integer power of two:
" #
X qffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi ðiÞ
M1
f ðiÞ ðpDtÞ ¼ Re 2 Sf 0 ðon ÞDo eif n einp2p=M Þ ,
n¼0
p ¼ 0; 1; 2; . . . ; M  1;
M  2N; M ¼ 2m ;
One relevant property of the Shinozuka method is that
each and every sample function obtained with this method
is ergodic in the mean value and auto-correlation function.
Hence, the temporal average and the temporal auto-
correlation function of every sample are identical to the
corresponding targets. In order to guarantee the ergodicity
with respect to the target mean and auto-correlation
function, the following condition must additionally be set:
Sf 0 ðon Þ n¼0 ¼ S f 0 ðo0 Þ ¼ 0.
It is easy to demonstrate that sample functions generated
with this algorithm are periodic with period T 0 ¼ 2p=Do.
The temporal average and the temporal auto-correlation
function of any sample function f ðiÞ ðtÞ are identical to the
corresponding targets only when the length T of the
simulated sample is equal to the period T 0 or when
T ! 1.
procedure (also known as spectral correction method) to
generate stochastic univariate sample functions to match
simultaneously a specified PSD and a prescribed skewed
presents, however, some limitations to match highly
skewed non-Gaussian stochastic processes. Since wind
speeds are non-Gaussian with significant skewness, i.e.
commonly Weibull, an improved extension of Yamaza-
ki–Shinozuka method proposed by Deodatis and Micaletti
(2001) has been applied in this work to synthesize hourly
wind speed time series.
For the jth iteration, the method starts with the
generation of an underlying stochastic process f jG ðtÞ
according to a PSD, Sjf ðoÞ, which evolves as the iterations
G
proceed. For the first iteration, the target spectrum,
T
denoted as S f W ðoÞ, can be used to generate the underlying
stochastic process. Deodatis and Micaletti (2001) demon-
strated that only in the first iteration, f jG ðtÞ is Gaussian and
the Gaussian property is lost in the further iterations. F jG
denotes the empirical cumulative probability distribution
function (CDF) of the underlying stochastic process at the
jth iteration. The CDF is computed via the Kaplan–Meier
estimate of the underlying sample function. By using the
ðiÞ
concept of translation process or memory-less transforma-
tion, the underlying stochastic process is mapped to a new
stochastic process, f jW ðtÞ distributed according to the
prescribed non-Gaussian distribution. By denoting as FW
the Weibull cumulative distribution function, the mapping
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1265

procedure can be mathematically expressed as: 20

h i h i
F W f jW ðtÞ ¼ F jG f jG ðtÞ ,

Simulated wind speed [m/s]

15
and hence
n h io
f jW ðtÞ ¼ F 1
W F j
G f j
G ðtÞ ,
10
where F 1
W denotes the inverse of the Weibull cumulative
distribution function of wind speeds, for which an
analytical expression exists. The power spectral density of 5
the generated Weibull sample function after the j-th
iteration can be computed as
Z T 2 0
1 0 100 200 300 400 500 600 700
j
S f ðoÞ ¼ j
f W ðtÞ e iot
dt Simulated hours
W 2pT 0
2 Fig. 6. Generated sample path of hourly wind speed at 10 m height.
1 1 M1
X j
iopDt
¼ f W ðpDtÞ e ,
Do M p¼0
The described algorithm has been applied to synthesize a
which can be readily calculated via the FFT algorithm. database of 15 000 yearly realizations of hourly wind
Because of the non-linear mapping, the non-Gaussian velocities. These time series will be used to determine the
sample function f jW ðtÞ does no longer possess the target aggregated power output delivered by a number of wind
spectrum, i.e. S jf ðoÞaS TfW ðoÞ. Therefore, an iterative farms located at different wind sites. Fig. 6 shows 730 h of a
W
scheme for correcting the underlying power spectrum yearly sample of wind speeds generated with the spectral
j
S fG ðoÞ is necessary by applying the following updating representation method.
formula: By means of the normal kernel function, the empirical
" T #a PDF of the generated non-Gaussian sample wind speed has
jþ1 j
Sf W ðoÞ been computed and it is shown in Fig. 7a along with the
S f ðoÞ ¼ Sf ðoÞ j , target distribution. For the purpose of comparison with the
G G Sf ðoÞ
W values of the target distribution shown in Fig. 5a, statistical
where the exponent a is set lower than unity in order to parameters of the empirical distribution, i.e. mean,
achieve a more rapid convergence behavior.12 The de- variance, skewness and kurtosis, are provided as well. As
scribed iterative process proceeds while the error between it can be observed, the algorithm achieves a very good
the spectrum of the simulated sample function and the matching with the prescribed Weibull distribution. Fig. 7b
target spectrum exceeds some specified tolerance. The illustrates additionally the computed PSD of a sample
convergence tolerance has been defined in terms of the root function, which shows a very good agreement with the
mean square error (RMSE). The stop criterion was set to wind target spectrum depicted in Fig. 5b.
be
vffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffiffi 3.3.4. Simulation of aggregated wind power supply
u N 1 h i2 In this study, the installed wind power capacity is varied
u1 X j
RMSE ¼ t S f ðon Þ  S TfW ðon Þ p0:008, between 1 and 20 GW. This capacity consists of a number
N n¼0 W
of 1-MW wind turbines spread over 100 identical wind
parks. Therefore, the number of considered wind turbines
which provides an accurate matching to the target
within a wind farm ranges from 10 to 200. In order to
spectrum with reasonable computation time. The speed
assess the influence of allocating the wind capacity among
of convergence depended largely on the set of random
uncorrelated wind sites, simulation experiments with
angles selected. In the case of a well-conditioned phase
different amounts of wind capacity dispersed over 1, 2, 5
angle set, the tolerance criterion was achieved after 15
and 100 statistically independent wind locations have been
iterations. The skewness of the distribution of generated
conducted.
underlying sample function was found to be a very good,
A typical turbine’s power output curve with a nominal
early indicator of bad-conditioned phase angles and hence
power of 1 MW delivered at 13 m/s (nominal wind speed)
of slow convergence behavior. In those cases, the reseeding
and a cut-in speed of 2.5 m/s and cut-off speed of 25 m/s
of the algorithm with a new, better-conditioned set of
have been adopted for this study. Fig. 8 illustrates the non-
random phase angles saved much computation time.
linear conversion characteristics of the considered wind
12
Deodatis and Micaletti (2001) propose for the exponent a value of turbine. This output characteristics is used as a mapping
a ¼ 0.3. From an extensive experimentation, in this case a value of a equal function to convert the synthetic hourly wind speed time
to 0.7 leads to the fastest convergence speed. series in hourly power output time series. As wind speed
 ARTICLE IN PRESS
1266 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273

0.14 0.25
Simulated
0.12 N = 200 wind turbines
Weibull probability density

Target
0.2 p = 2% failure probability
μv = 5.75012 m/s

Outage probability
0.1
σv2 = 8.43043 m2/s2 0.15
0.08
γv1 = 0.57101 m3/s3
0.06
0.1
γv2 = 3.13677 m4/s4
0.04
0.05
0.02

0 0
0 5 10 15 20 25 30 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
(a) Wind speed [m/s] Number of unavailable wind turbines

6 Fig. 9. Binomial probability distribution of the unavailable number of

wind turbines.
Mean spectral intensity [m2/s2]

4 wind speed profile has been selected. The wind speed at a

height z is related to the wind velocity measured at a height
3 zbase as follows:

2
lnðz=z0 Þ
vðzÞ ¼ vðzbase Þ ,
lnðzbase =z0 Þ
1
where z0 ¼ 0.75 m denotes the roughness length, which
depends on the terrain characteristics, and the hub height z
0
10-5 10-4 10-3 10-2 10-1 100 101 is assumed to be equal to 75 m.
(b) Frequency [1/h] As far as only fluctuations of frequencies lower than
1 h1 are considered, full coherence in the power output of
Fig. 7. (a,b) Statistical and spectral characteristics of synthesized wind wind turbines of the wind farm can be assumed without
speed samples.
loss of accuracy (Nanahara et al., 2004). Hence, the wind
farm output can be readily computed by multiplying the
1200
generation output of a single wind turbine by the number
of available turbines. The assumption of identical wind
turbines allows the determination of the number of
1000
available wind turbines for each hour by means of taking
random samples of a binomial probability distribution.13
Power output [kW]

800
The probability PrðnW Þ of having a number nW of
unavailable turbines in a wind farm composed by N W
600
identical machines can be analytically computed as follows:
400 PrðnW Þ ¼ C N W nW ð1  pÞN W nW ,
nW p

200 where p is the turbine’s outage probability, for which a

typical value of 0.02 has been assumed. Fig. 9 shows the
0 failure probability of increasing number of wind turbines
0 5 10 15 20 25 30 for a wind farm containing 200 units. The number of
Wind Speed [m/s]
available wind farms at any time (e.g. due to transformer
Fig. 8. Power generation curve of a typical 1-MW wind turbine. and/or breakers’ outages) is considered in a similar
manner. Forced outage rates for wind farms are taken to
be 0.006. Finally, the generation output of the available
wind farm is further corrected for array efficiency which is
time series represent the prevailing wind conditions at 10 m assumed to be equal to 0.9. The capacity factor delivered
height, they must be corrected for turbine’s hub height
before this non-linear mapping. For this purpose, a 13
A Markov, two-state reliability model for the turbine availability has
standard logarithmic model for describing the vertical been adopted.
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1267

20 120
Price spike

Hourly powerprices [• / MWh]

18
c / MWh
Aggregated power output [GW]

100 10000
16
14 80

12 60
10
40
8
6 20
4
0
2 Jan Feb March April May June July Aug Sept Oct Nov Dec
(a) Hours
0
0 100 200 300 400 500 600 700
120
(a) Hours Price spike

Hourly powerprices [• / MWh]

10 100 10000 c / MWh

9.5 80
Aggregated power output [GW]

9 60
8.5
8
7.5
7 0
6.5
6
0 100 200 300
(b)
Fig. 10. (a,b) Random samples of the aggregate power output for 1 and
100 uncorrelated wind sites, respectively.
by a wind farm subjected to the considered wind resource is
about 35%.
With this methodology, hourly time series representing
the aggregate wind power output of 100 wind farms
encompassing a different number of wind turbines and
dispersed over a number of uncorrelated wind sites has
been generated. Figs. 10a and b illustrate sample realiza-
tions of the aggregated wind power generation for 20 GW
of installed wind capacity. Fig. 10a shows the aggregate
power output when wind capacity is concentrated in only
one wind location (full correlation). On the other hand,
Fig. 10b case depicts a sample of the injected power of
20 GW of installed wind power capacity dispersed over 100
uncorrelated wind sites.
4. Simulation results
4.1. Influence on power prices
Fig. 11a provides a sample simulation of hourly power
prices for 10 GW of installed wind capacity dispersed over
100 statistically independent wind sites. From this figure,
40
20
0
100 200 300 400 500 600 700
(b) Hours
Fig. 11. (a,b) Stochastic yearly realization of power prices.
400 500 600 700
Hours the yearly seasonality of power prices can be easily
recognized. Prices follow approximately the yearly demand
pattern, the summer being the period of lower load demand
and hence of the lowest market prices. On the contrary,
winter loads are considerably higher and therefore power
prices consistently situate on a higher level. In the figure,
price spikes due to unexpectedly high demand along with
tight or even insufficient available power capacity can be
distinguished. In Fig. 11b, a detailed portion of the price
sample containing a price spike event is given. In this
figure, the daily and the weekly seasonality of power prices
as well as the random price fluctuations are illustrated.
Because of the negligible marginal costs of wind
generation, wind power generation alters the dispatching
merit order by entering first in the priority list. Therefore,
the aggregate supply curve is simply shifted toward right
and the more expensive conventional generation is
replaced. Consequently, market prices for energy are
decreased at times when wind power is available.
The empirical probability density functions of power
prices computed after 1000 stochastic simulations of the
power market for 1 and 20 GW of installed wind capacity
are illustrated in Figs. 12. Fig. 12a shows the case of full
spatial correlation. Alternatively, Fig. 12b depicts the case
of wind capacity dispersed over 100 uncorrelated wind
sites. Inset, the expected power prices for the several
conditions are provided. A massive addition of wind
 ARTICLE IN PRESS
1268 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273
Probability density function of power prices

0.25 45
1 wind site

Expected power prices [•/MWh]

1 GW wind installed capacity 100 uncorrelated wind sites
40
0.2 20 GW wind installed capacity

35
0.15
30
Expected price for 1 GW: 38 C /MWh
0.1
Expected price for 20 GW: 23.6 C /MWh 25

0.05 20

15
0 0 2 4 6 8 10 12 14 16 18 20
10 15 20 25 30 35 40 45 50 Installed wind power capacity [GW]
(a) Power prices [ c / MWh]
Fig. 13. Behavior of the expected power prices for increasing wind power
Probability density function of power prices

0.25
capacity.
1 GW wind installed capacity
0.2 20 GW wind installed capacity 0.14
1 wind site
Loss of load probability [in %] 0.12 2 uncorrelated wind sites
0.15
5 uncorrelated wind sites
0.1 100 uncorrelated wind sites
Expected price for 1 GW: 37.6 C /MWh
0.1
Expected price for 20 GW: 18.9 C /MWh 0.08

0.05 0.06

0.04
0
10 15 20 25 30 35 40 45 50 0.02
(b) Power prices [ c / MWh]
0
Fig. 12. (a,b) Probability density functions of market prices for electricity. 1 2 3 4 5 7.5 10 12.5 15 17.5 20
Installed wind power capacity [GW]

Fig. 14. Loss of load probability (LOLP) for increasing levels of wind
capacity results in a dramatic reduction of power prices. penetration.
Although the qualitative influence of wind generation on
the power prices looks similar in both cases, a noticeable
impact on the expected electricity prices was found. This
difference might have a major impact on the investment represents the occurrence probability of price spikes
activity in conventional units. In fact, a scenario of average reaching the price cap. This probability reduces rapidly
electricity prices of about 19 h/MWh might turn unprofi- after adding the first MWs of wind capacity. Because the
table almost any investment in conventional power marginal contribution of wind as firm capacity declines as
generation. In Fig. 13, the non-linear decline of the more wind capacity is installed, a saturation effect takes
expected power prices for increasing wind generating place for high penetration levels. Nevertheless, by disper-
capacity is shown. The impact of wind generation on the sing the wind capacity even over a small number of
expected market prices depends not only on the amount of uncorrelated wind sites, this saturation level can be
wind capacity but also on its dispersion among uncorre- noticeably reduced. Other perspective of the value provided
lated wind sites. by wind capacity as firm capacity is the reduction of the
Although contributing substantially to the price expecta- peak load. Figs. 15a and b depict the load duration curves
tion, the tail of the probability distribution corresponding (LDC) and the equivalent load duration curves (ELDC)
to the price spikes is not shown in Fig. 12. Fig. 14 shows remaining after adding 20 GW of wind capacity, for both
the probability of encountering the generation system cases: full wind speed correlation and dispersion of wind
unable to meet the total load demand for increasing capacity over 100 independent locations. In the first case,
amounts of installed wind capacity.14 Thus, Fig. 14 the reduction of the peak load is negligible. For the case of
statistical independence of wind resources, the firm
14
Conventional generating capacity remains unchanged in LOLP capacity delivered by wind amounts 33% of the wind
computations. installed capacity.
 ARTICLE IN PRESS
F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1269

100 12

Expected internal rate of return [in %]

ELDC, 20 GW, 1 wind site
1 wind site
LDC
10 100 uncorrelated wind sites
80
Equivalent load [GW]

8
60

6
40
4

20 Peak LDC: 83.247 GW

Peak ELDC: 82.731 GW 2

0
0 0.25 0.5 0.75 1 0
(a) Normalised time 2 4 6 8 10 12 14 16 18 20
Installed wind capacity [GW]
100
Fig. 16. Profitability of wind investments for increasing wind power
ELDC, 20 GW, 100 wind sites
capacity.
LDC
80
Equivalent load [GW]

specified level or hurdle rate. The expected IRR denoted as

60 E½r0 , is estimated as follows:

40
Peak LDC:83.247 GW
20 Peak ELDC: 76.566 GW
0 0.25 0.5
(b) Normalised time
Fig. 15. (a,b) Equivalent load duration curves for 20 GW of installed wind
capacity.
4.2. Optimal wind power capacity
The maximal wind power capacity that would profitably
be deployed under full market conditions can be assessed
by applying NPV methods. As it was shown in Section 2,
this can be done by comparing the revenues perceived by a
wind capacity unit, resulting in selling its production at the
prevailing market prices, with its investment fixed costs.
Thousand yearly realizations of power prices are used to
compute short-term, annual revenues Pi ðPW Þ perceived by
a wind investment. For an installed wind capacity PW, the
ith realization of the profitability delivered by a wind
project is computed by solving numerically the following
equation for ri0 :
ri0  IC
Pi ðPW Þ  ¼ 0;
1  ð1 þ ri0 ÞT a
where ri0 is the discount factor that brings the wind project
to the breakeven condition. This figure is a convenient
measure of the project profitability and it is referred in the
finance literature as internal rate of return (IRR). Invest-
ments are profitable if the project’s IRR, exceeds some
1 X1000
E½r0  ¼ ri .
1000 i¼1 0
For the base case, specific investment costs for wind
facilities are assumed to be 1000 h/kW. The capital cost is
set to 8%/year and the amortization period for wind
0.75 1
investments is assumed to be 20 years. The influence of
these adopted values on the optimal wind installed capacity
is further investigated by means of a sensitivity analysis.
In Fig. 16, the behavior of expected IRR for increasing
amounts of installed wind capacity is illustrated. For the
considered set of parameters, the wind capacity that could
be accommodated under market conditions is about 3 GW.
It should be noted that a moderate reduction of the costs of
accessing to capital resources for financing wind projects
could lead to a considerable higher amount of wind
capacity. In addition, by dispersing the wind capacity over
uncorrelated wind sites, considerably more wind power can
be economically deployed, particularly if capital costs are
lower.
One important feature of stochastic simulations is that it
allows computing not only the expected value of the
investment profitability but also the probability distribution
of exceeding some specified value. Figs. 17a and b depict for
one and hundred independent wind sites, respectively the
empirical probability density functions of the IRR for
different amount of wind capacity. Note that the high
i ¼ 1 . . . 1000, dispersion of the annual profitability involves a large
cumulated probability of not exceeding the hurdle rate.
4.3. Sensitivity analysis
In this subsection, the sensitivity of the simulation results
to a change in some relevant input parameters is assessed.
 ARTICLE IN PRESS
1270 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273

Optimal installed windpower capacity [GW]

45 20
1 GW 1 wind site
40 3 GW 2 uncorrelated wind sites
5 GW 5 uncorrelated wind sites
35
10 GW 15 100 uncorrelated wind sites
Probability density

30 15 GW
20 GW
25
10
20

15

10 5

0 0
0 0.05 0.1 0.15 0.2 0.25 600 700 800 900 1000 1100 1200 1300 1400
(a) Internal rate of return [in %] Wind power installation costs [ C /kW]
40
Fig. 18. Sensitivity analysis to changes in the installation costs of wind
1 GW
35 turbines.
3 GW
5 GW
30 10 GW
Optimal installed wind power capacity [GW]
Probability density

15 GW 4.5
25 20 GW 1 wind site
4 2 uncorrelated wind sites
20 5 uncorrelated wind sites
3.5 100 uncorrelated wind sites
15
3
10 2.5
5 2

0 1.5
0 0.05 0.1 0.15 0.2 0.25
(b) Internal rate of return [in%] 1

Fig. 17. (a,b) Probability distributions of the IRR for increasing wind 0.5
capacity.
0
10 15 20 25
Amortization period [years]

For each assessed parameter, simulative investigations
were performed for the case of dispersing the installed
wind capacity over a different number of statistical
independent wind sites. The sensitivity analysis is uni-
variate in the sense that only one parameter is changed
each time. The remaining parameters are fixed and set
equal to the values corresponding to the base case. The
optimal installed wind power capacity is computed as the
mathematical expectation after 1000 stochastic realization
of the market revenues of a wind unit.
The first investigation concerns the impact of a reduction
of the installation costs on the maximal wind capacity that
might be installed in a market-based manner. As it is
shown in Fig. 18, this parameter has a major influence on
the results. Particularly, the wind capacity that might
profitably be accommodated increases dramatically if wind
investment costs fall bellow 800 h/kW. This result is very
relevant, as installation costs have been reduced rapidly in
the last decade and currently, investments costs reported
for some wind projects are below this figure. In addition,
wind technology is yet considered an immature technology
because the learning rate remains high. Hence, some room
Fig. 19. Sensitivity analysis to changes in the amortization period of wind
investments.
for further cost reductions for wind facilities is expected.
Additionally, installation costs exceeding 1400 h/kW turn
unprofitable any wind power capacity. That is an
important result for off-shore wind projects, which have
significantly higher installation costs than similar on-shore
counterparts. It is worth to note that by dispersing the
wind capacity over uncorrelated sites has only some initial
effect in increasing the optimal wind capacity. After
spreading the capacity over five locations with uncorrelated
wind resources, no further apparent improvement is
achieved.
The second simulation experiment is regarding the
influence of the investment amortization period on the
economically deployable wind power capacity. Unlike the
previous case, a considerable extension of the amortization
does not lead to high profitable penetration. That is
because the amortization period has only a relative minor
effect in the profitability of wind investments. In addition
 ARTICLE IN PRESS
Optimal installed wind power capacity [GW] F. Olsina et al. / Energy Policy 35 (2007) 1257–1273 1271

Optimal installed wind power capacity [GW]

20 5
1 wind site 1 wind site
18 2 uncorrelated wind sites 4.5 2 uncorrelated wind sites
16 5 uncorrelated wind sites 5 uncorrelated wind sites
100 uncorrelated wind sites 4
100 uncorrelated wind sites
14 3.5
12 3
10 2.5
8 2
6 1.5
4 1
2 0.5

0 0
60 80 100 120 140 160 180 0 2 4 6 8 10 12 14 16 18 20
Modification of the fuel costs for Value of lost load [Thousand c / MWh]
conventional power plants [in %]
Fig. 21. Sensitivity analysis to changes in the price cap.
Fig. 20. Sensitivity analysis to price escalation of fossil fuels.

to this, a saturation effect can be recognized from investment fixed costs. Similar to the amortization costs,
Fig. 19, particularly when considering a single wind the simulations reveal a saturation effect, even stronger, for
location. high values of the price cap.
A sensitivity analysis of the maximal installable wind
power capacity for different scenarios of fuel prices has also 5. Conclusions
been conducted. Price variations, in both directions, of
fossil fuels required for the conventional generation system Wind power is progressively becoming part of the
(coal, lignite, gas and oil) were investigated. This investiga- mainstream generation. Penetration goals are constantly
tion is relevant, as an increase of fuel prices in the long-run set higher as clean and sustainable generation is encour-
is deemed to be likely. Although somewhat unrealistic, for aged. A high penetration of this generation technology
the sake of simplicity all considered fuel prices are equally implies a major change in the market conditions. In this
increased or reduced in percentage term. Fuel prices are work, the influence of wind power generation on power
equally modified from a decline of 50% to an increase of prices in liberalized electricity markets has been assessed by
180% regarding the base case values given in Table 1. The means of various simulation techniques. The developed
base case level of fuel prices is denoted as 100%. methodology allowed investigating the optimal wind
The results of this simulation experiment are illustrated capacity that would be profitably deployed, if wind
in Fig. 20. The impact of an escalation of fuel prices on the investments were only subjected to the prevailing condi-
maximal profitable wind capacity is highly non-linear. The tions in power markets.
magnitude of the influence of this parameter is only The market simulation approach used in this investiga-
comparable with the reduction of the installation costs of tion is based on modeling explicitly the variables that
wind turbines. Consequently, the combined scenario of a determine the price formation in power markets, i.e. the
moderate reduction of the investment cost with a supply and demand curve. For this purpose, the load
modest raise of fuel prices can turn profitable large characteristics observed in the German power system have
amounts of wind capacity even without subsidizing been adopted for this study. The stochastic fluctuations
programs. Note in this case at that the diversity of wind have been assumed to follow a Gauss–Markov stochastic
resources plays a more significant role than the exhibited in process, what is deemed to be accurate for the purpose of
Fig. 18. this investigation. Additionally, the German conventional
Finally, the last sensitivity analysis is carried out on the generation system as well as the stochastic behavior of
price cap set by regulatory authorities. Results of these thermal units has been considered for the supply side.
investigations are given in Fig. 21. Even though the Under the assumption of perfect competition, short-term
influence of this parameter is minor compared with fuel demand inelasticity and neglecting intertemporal con-
prices and the investment cost, it is important to note that straints, price simulations can be carried out by means of
if the price cap is set too low, e.g. below 2500 h/MWh, no a priority listing algorithm, which is computationally very
wind capacity is profitable under market conditions. That efficient for large-scale systems. Simulations of power
is because despite the fact that price spikes are unlikely prices reflect stochastic characteristics of prices observed in
events, they are still necessary to fully recover the plant actual power markets, such as daily, weekly and yearly
 ARTICLE IN PRESS
1272 F. Olsina et al. / Energy Policy 35 (2007) 1257–1273
patterns as well as some circumstantial, unexpected price
spikes.
The wind resources are characterized by the PSD of wind
speed fluctuations and the marginal PDF of wind
velocities. The simulation of stochastic processes by means
of the spectral representation method constitutes one of the
best modeling alternatives, as it allows synthesizing time
series with a prescribed target power spectrum. Addition-
ally, an iterative method makes possible simulation of non-
Gaussian processes with a specified target marginal
probability Weibull distribution.
One relevant topic investigated is the influence of
increasing the spatial diversity of wind resources on the
overall behavior of the power system. In this work, the
extreme case of adding capacity in uncorrelated wind sites
has been investigated. The overall conclusion over all the
wide range of simulation results is that the marginal
contribution of a new statistical independent site is very
low after the first five uncorrelated wind sites are already
exploited.
The investigation of the influence of the wind on the
market prices reveals that the addition of considerable
wind power capacity results in a significant reduction of the
power prices, particularly for the case of some independent
wind resources. That might dramatically impact the
profitability of investments in conventional power plants,
which are still necessary to provide the higher requirements
imposed on reserve and regulating power. Finally, from the
simulation experiments, it can be concluded that the
profitable deployment of high wind power capacity in a
market-based manner might be possible only for scenarios
of high escalation of fossil fuel prices and a drastic
reduction of either, the installation or financing costs of
wind investment projects. For the evaluated test system
and typical values for current wind projects (IC ¼ 800 h/
kW, r ¼ 8% year, T a ¼ 20 year), the economically optimal
wind power capacity that should be installed is about
7.12 GW (see Fig. 18), representing a penetration of 8.7%
in the generation mix.
The presented methodology allows regulatory authori-
ties and policy makers to determine an objective bench-
mark for wind capacity based on economic considerations
only. The installation of wind capacity beyond the
economic optimal values results in inefficiencies in the
resource allocation with the consequent loss of social
economic welfare.
The internalization in market prices of externalities
associated to conventional generation, as it is expected in
the future, would have a major impact on the optimal wind
capacity that should be placed, and therefore, on the
maximal penetration of wind. Presumably, as long as
market prices account for external costs of emissions, wind
power becomes a more attractive alternative. The
quantification of the amount of wind capacity that
maximizes the social welfare under consideration of the
avoided external costs is a topic subject of ongoing
investigations.
Acknowledgments
The authors thank Dr. Pariya Cumperayot for kindly
providing data of the German conventional generation
system. The financial support from the National Council
and the National Agency for Science and Technology
(CONICET and ANPCyT, Argentina) is gratefully ac-
knowledged.
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