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Optimal renewable-energy promotion: Capacity subsidies vs. generation subsidies

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  • Andor, Mark
  • Voss, Achim

Abstract

We derive optimal subsidization of renewable energies in electricity markets. The analysis takes into account that capacity investment must be chosen under uncertainty about demand conditions and capacity availability, and that capacity as well as electricity generation may be sources of externalities. The main result is that generation subsidies should correspond to externalities of electricity generation (e.g., greenhouse gas reductions), and investment subsidies should correspond to externalities of capacity (e.g., learning spillovers). If only capacity externalities exist, then electricity generation should not be subsidized at all. Our results suggest that some of the most popular promotion instruments cause welfare losses. We demonstrate such welfare losses with data from the German electricity market.

Suggested Citation

  • Andor, Mark & Voss, Achim, 2016. "Optimal renewable-energy promotion: Capacity subsidies vs. generation subsidies," Resource and Energy Economics, Elsevier, vol. 45(C), pages 144-158.
  • Handle: RePEc:eee:resene:v:45:y:2016:i:c:p:144-158
    DOI: 10.1016/j.reseneeco.2016.06.002
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    1. Özdemir, Ö. & Hobbs, B. & van Hout, M. & Koutstaal, P., 2019. "Capacity vs Energy Subsidies for Renewables: Benefits and Costs for the 2030 EU Power Market," Cambridge Working Papers in Economics 1927, Faculty of Economics, University of Cambridge.
    2. Andreas Gerster, 2016. "Negative price spikes at power markets: the role of energy policy," Journal of Regulatory Economics, Springer, vol. 50(3), pages 271-289, December.
    3. Pahle, Michael & Schill, Wolf-Peter & Gambardella, Christian & Tietjen, Oliver, 2016. "Renewable Energy Support, Negative Prices, and Real-time Pricing," EconStor Open Access Articles, ZBW - Leibniz Information Centre for Economics, pages 147-169.
    4. Helm, Carsten & Mier, Mathias, 2019. "Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Carbon Pricing," Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203539, Verein für Socialpolitik / German Economic Association.
    5. Carsten Helm & Mathias Mier, 2016. "Efficient diffusion of renewable energies: A roller-coaster ride," Working Papers V-389-16, University of Oldenburg, Department of Economics, revised Apr 2016.
    6. Mark A. Andor, Manuel Frondel, and Colin Vance, 2017. "Germanys Energiewende: A Tale of Increasing Costs and Decreasing Willingness-To-Pay," The Energy Journal, International Association for Energy Economics, vol. 0(KAPSARC S).
    7. Carsten Helm & Mathias Mier, 2018. "Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Pricing," Working Papers V-413-18, University of Oldenburg, Department of Economics, revised Oct 2018.
    8. Hu, Jing & Harmsen, Robert & Crijns-Graus, Wina & Worrell, Ernst, 2018. "Barriers to investment in utility-scale variable renewable electricity (VRE) generation projects," Renewable Energy, Elsevier, vol. 121(C), pages 730-744.
    9. Helm, Carsten & Mier, Mathias, 2019. "On the efficient market diffusion of intermittent renewable energies," Energy Economics, Elsevier, vol. 80(C), pages 812-830.
    10. Li, Aijun & Peng, Dan & Wang, Daoping & Yao, Xin, 2017. "Comparing regional effects of climate policies to promote non-fossil fuels in China," Energy, Elsevier, vol. 141(C), pages 1998-2012.
    11. Massimiliano Corradini & Valeria Costantini & Anil Markandya & Elena Paglialunga & Giorgia Sforna, 2018. "Some reflections on policy mix in the EU low-carbon strategy," Departmental Working Papers of Economics - University 'Roma Tre' 0236, Department of Economics - University Roma Tre.
    12. Zhishuang Zhu & Hua Liao, 2019. "Do subsidies improve the financial performance of renewable energy companies? Evidence from China," Natural Hazards: Journal of the International Society for the Prevention and Mitigation of Natural Hazards, Springer;International Society for the Prevention and Mitigation of Natural Hazards, vol. 95(1), pages 241-256, January.
    13. Aldersey-Williams, John & Broadbent, Ian D. & Strachan, Peter A., 2020. "Analysis of United Kingdom offshore wind farm performance using public data: Improving the evidence base for policymaking," Utilities Policy, Elsevier, vol. 62(C).
    14. Newbery, David, 2018. "Evaluating the case for supporting renewable electricity," Energy Policy, Elsevier, vol. 120(C), pages 684-696.
    15. Özdemir, Özge & Hobbs, Benjamin F. & van Hout, Marit & Koutstaal, Paul R., 2020. "Capacity vs energy subsidies for promoting renewable investment: Benefits and costs for the EU power market," Energy Policy, Elsevier, vol. 137(C).
    16. Alexopoulos, Thomas A., 2018. "To trust or not to trust? A comparative study of conventional and clean energy exchange-traded funds," Energy Economics, Elsevier, vol. 72(C), pages 97-107.
    17. Corradini, Massimiliano & Costantini, Valeria & Markandya, Anil & Paglialunga, Elena & Sforna, Giorgia, 2018. "A dynamic assessment of instrument interaction and timing alternatives in the EU low-carbon policy mix design," Energy Policy, Elsevier, vol. 120(C), pages 73-84.
    18. Wagner, Johannes, 2016. "Grid Investment and Support Schemes for Renewable Electricity Generation," EWI Working Papers 2016-8, Energiewirtschaftliches Institut an der Universitaet zu Koeln (EWI), revised 10 Aug 2017.
    19. Martí-Ballester, Carmen-Pilar, 2019. "Do European renewable energy mutual funds foster the transition to a low-carbon economy?," Renewable Energy, Elsevier, vol. 143(C), pages 1299-1309.
    20. Hortay, Olivér & Rozner, Bence Péter, 2019. "Allocating renewable subsidies," Economic Analysis and Policy, Elsevier, vol. 64(C), pages 236-247.
    21. Gerster, Andreas, 2016. "Negative price spikes at power markets: The role of energy policy," Ruhr Economic Papers 636, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.

    More about this item

    Keywords

    Peak-load pricing; Capacity investment; Demand uncertainty; Renewable energy sources; Optimal subsidies; Feed-in tariffs;

    JEL classification:

    • 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
    • H23 - Public Economics - - Taxation, Subsidies, and Revenue - - - Externalities; Redistributive Effects; Environmental Taxes and Subsidies

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