Spatial dependencies of wind power and interrelations with spot price dynamics

Wind power has seen strong growth over the last decade and increasingly affects electricity spot prices. Generation from wind energy is stochastic, and if there is lot of wind, prices tend to be lower. Therefore, for an investor, but also for the whole electricity system, it is important to assess the value of wind power at different locations. In this paper, we develop a stochastic simulation model that captures the full spatial dependence structure of wind power by using copulas, incorporated into a structural supply and demand based model for the electricity spot price. This model is calibrated with German data. We find that the specific location of a turbine - i.e., its spatial dependence with respect to the aggregated wind power in the system - is of high relevance for its value. Many of the locations analyzed show an upper tail dependence that adversely impacts the market value. Therefore, a model that assumes a linear dependence structure would systematically overestimate the market value of wind power in many cases. This effect becomes more important for increasing levels of wind power penetration and may render the large-scale integration into markets more difficult.