Excess Variance in Decentralized Renewable Energy Investment

The system value of variable renewable energy investments depends not only on expected power production but also on the covariance of production with other intermittent resources. Deregulated electricity markets do not provide sufficient incentives for renewable developers to fully internalize their impact on system variance. We empirically investigate the extent of this inefficiency in wind power investments in the United States. Using high-frequency, spatially granular estimates of wind production potential, we show that alternative investment programs that reallocate existing investment to locations with less correlated wind resources could substantially reduce system variability without sacrificing total output.