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Overcoming the limitations of variable renewable production subsidies as a means of decarbonising electricity markets

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  • Nelson, Tim
  • Rai, Alan
  • Esplin, Ryan

Abstract

The limitations of production subsidies for variable renewable energy (VRE) plant as a means of decarbonising electricity markets are well known. Despite this, production subsidies for VRE plant are the most prevalent form of policy intervention in Australia. In the absence of cost-effective storage, production subsidies for VRE plant can create incentives to produce electricity at times the system may not need it, thereby severing the link between the spot market and financial incentives to generate. Such production subsidies can also reduce the incentive for new VRE plant to participate in ‘firm’ forward derivative markets. In this paper, we examine two adjustments that could be made to production subsidies for VRE plant that would correct for these unintended consequences. Firstly, the quantum of the subsidy could be a function of the wholesale electricity price, electricity demand or emissions; and secondly, new generators would be ineligible to receive production subsidies without demonstrating that they are facilitating the supply of financial derivative contracts. The effect of both adjustments would be to increase the incentive of VRE plant to demand-follow; that is, make its output ‘firmer’.

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  • Nelson, Tim & Rai, Alan & Esplin, Ryan, 2021. "Overcoming the limitations of variable renewable production subsidies as a means of decarbonising electricity markets," Economic Analysis and Policy, Elsevier, vol. 69(C), pages 544-556.
    • Handle: RePEc:eee:ecanpo:v:69:y:2021:i:c:p:544-556
    DOI: 10.1016/j.eap.2020.12.018
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    References listed on IDEAS

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    1. Tim Nelson & Fiona Orton & Tony Chappel, 2018. "Decarbonisation and wholesale electricity market design," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 62(4), pages 654-675, October.
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    5. Bell, William Paul & Wild, Phillip & Foster, John & Hewson, Michael, 2017. "Revitalising the wind power induced merit order effect to reduce wholesale and retail electricity prices in Australia," Energy Economics, Elsevier, vol. 67(C), pages 224-241.
    6. Simshauser, Paul, 2020. "Merchant renewables and the valuation of peaking plant in energy-only markets," Energy Economics, Elsevier, vol. 91(C).
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    8. Felder, Frank A., 2011. "Examining Electricity Price Suppression Due to Renewable Resources and Other Grid Investments," The Electricity Journal, Elsevier, vol. 24(4), pages 34-46, May.
    9. Marshman, Daniel & Brear, Michael & Jeppesen, Matthew & Ring, Brendan, 2020. "Performance of wholesale electricity markets with high wind penetration," Energy Economics, Elsevier, vol. 89(C).
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    12. Cludius, Johanna & Forrest, Sam & MacGill, Iain, 2014. "Distributional effects of the Australian Renewable Energy Target (RET) through wholesale and retail electricity price impacts," Energy Policy, Elsevier, vol. 71(C), pages 40-51.
    13. Tim Nelson & Paul Simshauser & James Nelson, 2012. "Queensland solar feed-in tariffs and the merit-order effect: economic benefit, or regressive taxation and wealth transfers?," Economic Analysis and Policy, Elsevier, vol. 42(3), pages 277-301, December.
    14. Paul Simshauser, 2019. "On the Stability of Energy-Only Markets with Government-Initiated Contracts-for-Differences," Energies, MDPI, vol. 12(13), pages 1-24, July.
    15. Nelson, Tim & Reid, Cameron & McNeill, Judith, 2015. "Energy-only markets and renewable energy targets: Complementary policy or policy collision?," Economic Analysis and Policy, Elsevier, vol. 46(C), pages 25-42.
    16. Nelson, Tim & Pascoe, Owen & Calais, Prabpreet & Mitchell, Lily & McNeill, Judith, 2019. "Efficient integration of climate and energy policy in Australia’s National Electricity Market," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 178-193.
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    18. Rai, Alan & Nunn, Oliver, 2020. "On the impact of increasing penetration of variable renewables on electricity spot price extremes in Australia," Economic Analysis and Policy, Elsevier, vol. 67(C), pages 67-86.
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    1. Junling Jiang & Zhaoxin He & Changren Ke, 2023. "Construction Contractors’ Carbon Emissions Reduction Intention: A Study Based on Structural Equation Model," Sustainability, MDPI, vol. 15(14), pages 1-21, July.
    2. Shao, Yanmin & Chen, Zhongfei, 2022. "Can government subsidies promote the green technology innovation transformation? Evidence from Chinese listed companies," Economic Analysis and Policy, Elsevier, vol. 74(C), pages 716-727.
    3. Tim Nelson & Tahlia Nolan & Joel Gilmore, 2022. "What’s next for the Renewable Energy Target – resolving Australia’s integration of energy and climate change policy?," Australian Journal of Agricultural and Resource Economics, Australian Agricultural and Resource Economics Society, vol. 66(1), pages 136-163, January.

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    More about this item

    Keywords

    Electricity market; Production subsidy; Variable renewable energy;
    All these keywords.

    JEL classification:

    • D04 - Microeconomics - - General - - - Microeconomic Policy: Formulation; Implementation; Evaluation
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • Q40 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - General
    • Q41 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Demand and Supply; Prices
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy

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