Strategic behaviour by wind generators: An empirical investigation

Renewable generation of electricity is a vital step in reducing dependence on fossil fuels, and wind generation is particularly important in countries such as Britain. A large part of the windfarms are in Scotland but links with England are relatively limited and subject to exogenous failure of an interconnector. As a consequence, for a significant portion of time the system operator imposes constraints on wind generation in Scotland. We investigate the resulting effects on a majority subset of these windfarms operating under a scheme called Renewables Obligation, which involves a subsidy on top of market price. One feature of this scheme is that windfarms each declare a price at which they are willing to be constrained; these prices are used in the selection of windfarms to constrain when necessary. Thus, windfarms are sometimes paid not to produce. We investigate the strategic consequences of this, given that the prices set by windfarms to turn off in practice exceed the opportunity cost, finding significant evidence consistent with windfarm strategic behaviour. Specifically, we observe that in making their final physical declarations of output, the sample windfarms overestimate their final physical notifications of generation, the more so when other circumstances suggest constraints will be required. Following our findings we propose two potential policies to reduce both the extent of over-prediction and the payments made to windfarms to curtail output.