The importance of relative costs means that efforts to understand how future expected declines in renewables cost are likely to affect renewables penetration will depend on future predictions of the market price of electricity. An analysis of the accuracy with which past studies from the 1970s and 1980s of several different renewable technologies—including wind, solar photovoltaics (PV), concentrating solar power (CSP), geothermal, and biomass—predicted future costs and future penetrations finds that these past studies performed reasonably well at predicting future cost declines but did not accurately predict market penetrations (McVeigh et al., 2000). McVeigh’s analysis shows that predictions consistently overestimated the expected retail price of electricity in future years. The renewable technologies included in the study had, for the most part, large reductions in cost over time, but these reductions were matched or exceeded by declines in the real cost of supplying electricity with fossil fuels, and thus renewables did not achieve predicted increases in penetration. This suggests that the challenge of predicting future costs of renewables may be exceeded by the challenge of predicting future market conditions that will confront those technologies, which will be equally if not more important in determining the ability of renewables to penetrate the market.

In addition to selling electric energy, most wholesale electricity markets also have an additional source of revenue from capacity payments. Capacity payments are made to encourage some generation to be readily available to meet changes in demand and ensure a high level of reliability in delivered electricity despite unforeseen outages. Requirements for the amount of capacity required vary regionally, but the value directly correlates to the expected performance of the unit when needed for generation. For dispatchable fossil generation and renewables, the capacity value is the highest, usually based on close to 100 percent of the unit’s rated capacity. For other renewables, the capacity value is typically lower to reflect the intermittent availability of the resource. The capacity value of a given renewable technology is regionally specific owing to how the capacity value is determined and the relative alignment between resource and load. Although intermittent, the capacity value of grid-scale solar would typically be higher than that of wind, because there is often better correlation between electricity demand and when the sun is shining. Solar resource availability is more predictable than wind is, though clouds do have a serious impact on solar flux. In a region where the wind resource availability does not correlate well with periods of system load, the capacity value may be as low as 8–10 percent of the rated capacity of the unit (ERCOT, 2007; GE Energy Consulting, 2005). In areas where resource or

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