IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i11p3168-d237462.html
   My bibliography  Save this article

The Impact of Government Subsidy on Renewable Microgrid Investment Considering Double Externalities

Author

Listed:
  • Deng Xu

    (School of Economics and Business Administration, Chongqing University, Chongqing 400030, China)

  • Yong Long

    (School of Economics and Business Administration, Chongqing University, Chongqing 400030, China)

Abstract

Since microgrids require public support to make economic sense, governments regularly subsidize renewable microgrids to increase their renewable energy market penetration. In this study, we investigated the optimal subsidy level for governments to correct the market failure of microgrids and analyzed the impacts of regulation on the interaction between a microgrid and a distribution network operator (DNO). Specifically, we proposed economic rationales for government subsidies for microgrids regarding public interest benefits in relation to double externalities (learning spillover effect and environmental externality). We incorporated the double externalities into a three-echelon game model in an electricity supply chain with one regulator, one microgrid, and one DNO, in which the regulator decides the subsidy level to achieve maximal social welfare. We found that the double externalities and double marginalization caused underinvestment in microgrid capacity in the scenario without government intervention. The government could choose the appropriate subsidy level to achieve the system optimum, which led to a triple win for the microgrid, the DNO, and the social planner. Our analytical results also showed that the microgrid gained more benefits from regulation than the DNO. The microgrid may offer a negative wholesale price to the DNO in exchange for more opportunities to import electricity into the grid, especially when the investment cost is sufficiently low. Our study suggests that supporting microgrids requires a subsidy phase-out mechanism and alternative market-oriented policies with the development of the microgrid industry.

Suggested Citation

  • Deng Xu & Yong Long, 2019. "The Impact of Government Subsidy on Renewable Microgrid Investment Considering Double Externalities," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:11:p:3168-:d:237462
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/11/3168/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/11/3168/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Varasteh, Farid & Nazar, Mehrdad Setayesh & Heidari, Alireza & Shafie-khah, Miadreza & Catalão, João P.S., 2019. "Distributed energy resource and network expansion planning of a CCHP based active microgrid considering demand response programs," Energy, Elsevier, vol. 172(C), pages 79-105.
    2. Sabrina T. Howell, 2017. "Financing Innovation: Evidence from R&D Grants," American Economic Review, American Economic Association, vol. 107(4), pages 1136-1164, April.
    3. Romankiewicz, John & Marnay, Chris & Zhou, Nan & Qu, Min, 2014. "Lessons from international experience for China's microgrid demonstration program," Energy Policy, Elsevier, vol. 67(C), pages 198-208.
    4. Jung, Jaesung & Villaran, Michael, 2017. "Optimal planning and design of hybrid renewable energy systems for microgrids," Renewable and Sustainable Energy Reviews, Elsevier, vol. 75(C), pages 180-191.
    5. Lo Prete, Chiara & Hobbs, Benjamin F., 2016. "A cooperative game theoretic analysis of incentives for microgrids in regulated electricity markets," Applied Energy, Elsevier, vol. 169(C), pages 524-541.
    6. Rayamajhee, Veeshan & Joshi, Aakrit, 2018. "Economic trade-offs between hydroelectricity production and environmental externalities: A case for local externality mitigation fund," Renewable Energy, Elsevier, vol. 129(PA), pages 237-244.
    7. Kleer, Robin, 2010. "Government R&D subsidies as a signal for private investors," Research Policy, Elsevier, vol. 39(10), pages 1361-1374, December.
    8. Van den Broeck, Giel & Stuyts, Jeroen & Driesen, Johan, 2018. "A critical review of power quality standards and definitions applied to DC microgrids," Applied Energy, Elsevier, vol. 229(C), pages 281-288.
    9. Haghi, Ehsan & Raahemifar, Kaamran & Fowler, Michael, 2018. "Investigating the effect of renewable energy incentives and hydrogen storage on advantages of stakeholders in a microgrid," Energy Policy, Elsevier, vol. 113(C), pages 206-222.
    10. Chen, Weidong & Wei, Pengbang, 2018. "Socially optimal deployment strategy and incentive policy for solar photovoltaic community microgrid: A case of China," Energy Policy, Elsevier, vol. 116(C), pages 86-94.
    11. David F. Drake & Paul R. Kleindorfer & Luk N. Van Wassenhove, 2016. "Technology Choice and Capacity Portfolios under Emissions Regulation," Production and Operations Management, Production and Operations Management Society, vol. 25(6), pages 1006-1025, June.
    12. Husein, Munir & Chung, Il-Yop, 2018. "Optimal design and financial feasibility of a university campus microgrid considering renewable energy incentives," Applied Energy, Elsevier, vol. 225(C), pages 273-289.
    13. Yan, Ziqiao & Li, Yue, 2018. "Signaling through government subsidy: Certification or endorsement," Finance Research Letters, Elsevier, vol. 25(C), pages 90-95.
    14. Hussain, Akhtar & Bui, Van-Hai & Kim, Hak-Man, 2019. "Microgrids as a resilience resource and strategies used by microgrids for enhancing resilience," Applied Energy, Elsevier, vol. 240(C), pages 56-72.
    15. Chen, Weidong & Zeng, Yu & Xu, Chongqing, 2019. "Energy storage subsidy estimation for microgrid: A real option game-theoretic approach," Applied Energy, Elsevier, vol. 239(C), pages 373-382.
    16. Yangfang (Helen) Zhou & Alan Scheller-Wolf & Nicola Secomandi & Stephen Smith, 2016. "Electricity Trading and Negative Prices: Storage vs. Disposal," Management Science, INFORMS, vol. 62(3), pages 880-898, March.
    17. Bronzini, Raffaello & Piselli, Paolo, 2016. "The impact of R&D subsidies on firm innovation," Research Policy, Elsevier, vol. 45(2), pages 442-457.
    18. Yong Long & Yu Wang & Chengrong Pan, 2018. "Incentive Mechanism of Micro-grid Project Development," Sustainability, MDPI, vol. 10(1), pages 1-19, January.
    19. Chen, Jin & Heng, Cheng Suang & Tan, Bernard C.Y. & Lin, Zhijie, 2018. "The distinct signaling effects of R&D subsidy and non-R&D subsidy on IPO performance of IT entrepreneurial firms in China," Research Policy, Elsevier, vol. 47(1), pages 108-120.
    20. Yu, Yugang & Han, Xiaoya & Hu, Guiping, 2016. "Optimal production for manufacturers considering consumer environmental awareness and green subsidies," International Journal of Production Economics, Elsevier, vol. 182(C), pages 397-408.
    21. Yong Long & Chengrong Pan & Yu Wang, 2018. "Research on a Microgrid Subsidy Strategy Based on Operational Efficiency of the Industry Chain," Sustainability, MDPI, vol. 10(5), pages 1-26, May.
    22. Hao, Han & Ou, Xunmin & Du, Jiuyu & Wang, Hewu & Ouyang, Minggao, 2014. "China’s electric vehicle subsidy scheme: Rationale and impacts," Energy Policy, Elsevier, vol. 73(C), pages 722-732.
    23. Jian Huang & Mingming Leng & Liping Liang & Jian Liu, 2013. "Promoting electric automobiles: supply chain analysis under a government’s subsidy incentive scheme," IISE Transactions, Taylor & Francis Journals, vol. 45(8), pages 826-844.
    24. A. Gürhan Kök & Kevin Shang & Şafak Yücel, 2018. "Impact of Electricity Pricing Policies on Renewable Energy Investments and Carbon Emissions," Management Science, INFORMS, vol. 64(1), pages 131-148, January.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Yu, Vincent F. & Le, Thi Huynh Anh & Gupta, Jatinder N.D., 2023. "Sustainable microgrid design with peer-to-peer energy trading involving government subsidies and uncertainties," Renewable Energy, Elsevier, vol. 206(C), pages 658-675.
    2. Feiyu Guo & Erbao Cao, 2020. "Does Reference Dependence Impact Intervention Mechanisms in Vaccine Markets?," Sustainability, MDPI, vol. 12(16), pages 1-28, August.
    3. Gu, Jing & Zhang, Fujuan & Xu, Xun & Xue, Chaokai, 2023. "Stay or switch? The impact of venture capitalists' movement across network communities on enterprises’ innovation performance," Technovation, Elsevier, vol. 125(C).
    4. Tsao, Yu-Chung & Thanh, Vo-Van & Chang, Yi-Ying & Wei, Hsi-Hsien, 2021. "COVID-19: Government subsidy models for sustainable energy supply with disruption risks," Renewable and Sustainable Energy Reviews, Elsevier, vol. 150(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Long, Yong & Liu, Xia, 2024. "Optimal green investment strategy for grid-connected microgrid considering the impact of renewable energy source endowment and incentive policy," Energy, Elsevier, vol. 295(C).
    2. Pablo Benalcazar & Adam Suski & Jacek Kamiński, 2020. "The Effects of Capital and Energy Subsidies on the Optimal Design of Microgrid Systems," Energies, MDPI, vol. 13(4), pages 1-23, February.
    3. Kou, Mingting & Yang, Yuanqi & Chen, Kaihua, 2020. "The impact of external R&D financing on innovation process from a supply-demand perspective," Economic Modelling, Elsevier, vol. 92(C), pages 375-387.
    4. Yang, Yan & Wang, Yuqian & Chen, Shou, 2022. "Do Investors Pay a Premium for Corporate Government Subsidy? Role of China's Strategic Emerging Industries Policy and Political Connections," Research in International Business and Finance, Elsevier, vol. 60(C).
    5. Shiyuan Liu & Jiang Du & Weike Zhang & Xiaoli Tian, 2021. "Opening the box of subsidies: which is more effective for innovation?," Eurasian Business Review, Springer;Eurasia Business and Economics Society, vol. 11(3), pages 421-449, September.
    6. Chen Weijun, 2022. "The Impact of Government Support and Technological Innovation on Enterprise Performance: A Case Study of Guangdong Hi- tech Enterprises," International Journal of Science and Business, IJSAB International, vol. 14(1), pages 196-231.
    7. Cheng, Fei & Chen, Tong & Chen, Qiao, 2022. "Cost-reducing strategy or emission-reducing strategy? The choice of low-carbon decisions under price threshold subsidy," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 157(C).
    8. Giebel, Marek & Kraft, Kornelius, 2021. "Subsidies and innovation in the recent financial crisis," ZEW Discussion Papers 21-097, ZEW - Leibniz Centre for European Economic Research.
    9. Dai, Xiaoyong & Li, Yanchao & Chen, Kaihua, 2021. "Direct demand-pull and indirect certification effects of public procurement for innovation," Technovation, Elsevier, vol. 101(C).
    10. Nur Sunar & Jayashankar M. Swaminathan, 2022. "Socially relevant and inclusive operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4379-4392, December.
    11. Yuan Shao & Xudong Deng & Qiankai Qing & Yajuan Wang, 2018. "Optimal Battery Recycling Strategy for Electric Vehicle under Government Subsidy in China," Sustainability, MDPI, vol. 10(12), pages 1-18, December.
    12. Bianchi, Mattia & Murtinu, Samuele & Scalera, Vittoria G., 2019. "R&D Subsidies as Dual Signals in Technological Collaborations," Research Policy, Elsevier, vol. 48(9), pages 1-1.
    13. Sun, Ya-Fang & Zhang, Yue-Jun & Su, Bin, 2022. "Impact of government subsidy on the optimal R&D and advertising investment in the cooperative supply chain of new energy vehicles," Energy Policy, Elsevier, vol. 164(C).
    14. Vu Ba Hau & Munir Husein & Il-Yop Chung & Dong-Jun Won & William Torre & Truong Nguyen, 2018. "Analyzing the Impact of Renewable Energy Incentives and Parameter Uncertainties on Financial Feasibility of a Campus Microgrid," Energies, MDPI, vol. 11(9), pages 1-24, September.
    15. Luo, Lianfa & Cheng, Zhiming & Ye, Qingqing & Cheng, Yanjun & Smyth, Russell & Yang, Zhiqing & Zhang, Le, 2024. "Nonmonetary awards and innovation: Evidence from winning China's Top Brand Contest," China Economic Review, Elsevier, vol. 86(C).
    16. George A Shinkle & Jo-Ann Suchard, 2019. "Innovation in newly public firms: The influence of government grants, venture capital, and private equity," Australian Journal of Management, Australian School of Business, vol. 44(2), pages 248-281, May.
    17. Weiwei Gao & Ting Cao & Zhen Huang, 2021. "Do outsiders listen to insiders? The role of government support in market reactions to earnings announcements," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 42(4), pages 781-795, June.
    18. Wei Chen & Yongle Tian & Kaiming Zheng & Nana Wan, 2023. "Influences of mechanisms on investment in renewable energy storage equipment," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(11), pages 12569-12595, November.
    19. Unsal, Omer & Houston, Reza, 2024. "R&D grants and medical innovation," Journal of Economics and Business, Elsevier, vol. 128(C).
    20. Cailou Jiang & Ying Zhang & Maoliang Bu & Weishu Liu, 2018. "The Effectiveness of Government Subsidies on Manufacturing Innovation: Evidence from the New Energy Vehicle Industry in China," Sustainability, MDPI, vol. 10(6), pages 1-11, May.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:gam:jsusta:v:11:y:2019:i:11:p:3168-:d:237462. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.