Wind Farm Location, Location, Location and Correlation: a Gift of Nature

Abstract

We show that wind energy power developers should consider the correlation between the electricity market price (Price) and the energy produced (Quantity) of a wind farm when choosing the investment location. We estimate this correlation for 60 UK wind farms using a dataset that comprises 1.4 million half-hourly observations covering the period between 2006 and 2019, and find persistent and statistically significant differences. Then, we introduce a model that translates into a monetary value those correlation differences and we develop a real options model to evaluate wind energy investments based on Price and Quantity uncertainty as well as the correlation between these two. The two model approaches lead to similar quantitative results and attest that the value of a wind farm increases with the Price-Quantity correlation. Therefore, by investing in locations with higher correlations (ceteris paribus), energy developers benefit from an extra source of revenue, the location Price-Quantity correlation premium that is, indeed, a gift of nature.