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Incumbent's Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets

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  • Ali Darudi and Hannes Weigt

Abstract

Incumbent firms play a decisive role in the success of renewable support policies. Their investments in renewables as well as their operational strategies for their conventional CO2 emitting technologies affect the transition to a sustainable energy system. We use a game theoretical framework to analyze incumbents' reactions to different renewable support policies, namely feed-in tariff (FIT), feed-in premium (FIP), and auction-based policies. We show that a regulator should choose a support scheme based on concerns about either market power or emission abatement: in FIP-based policies, the incumbent's strategic behavior leads to lower CO2 emissions, but a higher market price compared to FIT-based policies. Furthermore, for FIP-based policies, the regulator might want to incentivize incumbents directly (to further reduce CO2 emissions) or newcomers (to further reduce market power). Particularly in FIP-based auctions, incumbents have the incentive to obtain all auctioned capacity, which could lead to an unchanged market price despite the entrance of new capacity into the market.

Suggested Citation

  • Ali Darudi and Hannes Weigt, 2020. "Incumbent's Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets," The Energy Journal, International Association for Energy Economics, vol. 0(Special I).
    • Handle: RePEc:aen:journl:ej41-si1-darudi
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    JEL classification:

    • F0 - International Economics - - General

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