How wind and solar erode generator revenues: Evidence from Australia’s electricity market

This paper empirically quantifies the impacts of wind and solar penetration on generators’ electricity sales revenue using high-frequency data from 386 power generators in Australia’s National Electricity Market. To address the potential endogeneity concerns, this paper adopts a two-stage least squares strategy, which employs plausibly exogenous variation in maximum renewable generation potential driven by resource availability to instrument renewable penetration. Results show that a percentage point increase in state-level daily wind and solar penetration shares on average leads to 1.58% and 2.79% reductions in daily generator revenues relative to the mean, respectively. As expected, 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 additional wind generation significantly impairs generator revenues throughout most of the day, whereas additional solar generation exerts more pronounced negative effects on revenues during daylight hours, with positive effects in the evening. This paper also uncovers that wind and solar power decrease generator revenues through altering generator dispatch patterns and wholesale electricity prices. Furthermore, the revenue-erosion effects of renewable expansion are primarily driven by the displacement of conventional generation. The findings provide valuable insights for designing policies to alleviate revenue losses for generators.