The Value of Wind Information in U.S. Electricity Generation Competition

Abstract

Wind power grows fast in the US electricity generation and fluctuating wind supply brings significant uncertainty to market competition. This paper studies how wind information affects strategic competition among electricity producers in Midwest electricity wholesale market, where firms that operate both thermal and wind plants have better forecasts about wind supply than firms only owning thermal plants. In a reduced-form analysis, I empirically explore how wind supply affects local market structures through transmission congestion, and find firms with different wind information bid differently. I further construct a strategic bidding model with a belief-formation process, in which I estimate firms’ wind information that determines their beliefs about local competition and explains their supply bids. I find my model, with estimated information parameters, better predicts firms’ bidding behaviors and actual market results, than standard oligopoly model of price competition. Using the model, I predict that an ideal case where all firms have accurate wind information can greatly increase consumer surplus and market efficiency.