Decarbonizing electricity generation with intermittent sources of energy

We examine the impact of public policies that aim to decarbonate electricity production by replacing fossil fuel energy by intermittent renewable sources, namely wind and solar power. We consider a model of energy investment and production with two sources of energy: one is clean but intermittent (e.g. wind), whereas the other one is reliable but polluting (e.g. coal). A carbon tax decreases electricity production while simultaneously increasing investment in wind power. This tax may however increase total capacity because the retailing price of electricity does not depend on energy availability, which means that windmill capacity must be backed-up by thermal power plants. Feed-in tariffs and renewable portfolio standards enhance investment into intermittent sources of energy. However, both are likely to boost electricity production beyond the efficient level, in which case they must be complemented with a tax on electricity consumption. We also determine the social value of two technologies to accommodate intermittency: energy storage and smart meters. Lastly, we consider the case of a monopoly thermal power producer. The entry of a competitive fringe of wind power producers makes the thermal power producer reduce further its production capacity, which increases the electricity price.