THE ECONOMICS OF WIND POWER AND WHISKY

Abstract

For many goods, economists tend to ignore the time between the onset of production and the final sale of the good. In some instances, economists do model production with intertemporal considerations such as the extraction of groundwater, population dynamics in fisheries, and manufacturing with costs characterized by learning-by-doing; but even in these cases output at any point in time tends to be unconstrained except when production is limited according to resource availability. In the following three essays, I examine the implications for agent and market behavior when producers cannot perfectly adjust output over time. In the first two essays, I focus on the relationship between electricity markets and both conventional and renewable power producers. Specifically, in the first essay, I quantify the effect a large level of installed wind power capacity (an intermittent renewable energy) has on power market conditions. Because wind power has virtually no marginal costs for generation, and its output cannot be perfectly controlled, a high penetration level of wind power could potentially lower average prices while also impacting price volatility.

In the second essay, I construct a computational model of a conventional power producer that cannot perfectly adjust its output over time and faces prices that change according to a stochastic process. Then, I measure the impact price volatility has on producers in two ways. First, I analyze changes in their optimal generation strategies in light of price volatility, and then I simulate and track changes in output, profit, and emissions over time.

My third essay pertains to production of whisky. While there are other examples of vintage goods that require a significant amount of maturation, the existing literature typically assumes that there is a unique optimal maturation age for a producer's inventory. However, many Scottish distilleries produce a line of whiskies that vary primarily according to age. I demonstrate that it is possible for a profit-maximizing distillery to mature multiple ages of whisky without market power, but a further exploration of distilleries' product lines indicates the market is far from perfectly competitive.