ACDE PhD seminar: The revenue erosion effect: Quantifying the impacts of renewables on generator revenues in Australia

This paper examines how the increasing penetration of wind and solar power erodes generator revenues in Australia’s electricity market.

This paper empirically quantifies the impacts of wind and solar penetration on generator revenues. Using high-frequency data from 386 power generators in Australia’s National Electricity Market, this paper adopts a two-stage least squares strategy that employs exogenous variation in maximum renewable generation potential due to resource availability to instrument renewable penetration. Results show that a one percentage point increase in state-level daily wind and solar penetration shares on average leads to 1.55% and 2.76% reductions in daily generator revenues, respectively. These effects are highly heterogeneous across generation technologies: wind and solar penetration lead to boosted revenues for their respective generators, but lower revenues for coal, gas, and hydro generators. Hourly analyses find that wind generation significantly impairs generator revenues throughout most of the day, whereas solar generation exerts more pronounced negative effects on revenues during daylight hours, with positive effects in the evening. The paper further quantifies two primary channels associated with the revenue-reduction effects: the direct replacement of conventional generation and downward pressure on wholesale electricity prices. The findings provide insights for electricity market design, particularly in revenue insufficiency among generators.

Speaker: Yating Deng, PhD scholar at the ANU Crawford School of Public Policy, Arndt-Corden Department of Economics.