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Efficient Renewable Electricity Support: Designing an Incentive-compatible Support Scheme

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  • David Newbery

Abstract

Most existing renewables support schemes distort location and dispatch decisions. Many impose unnecessary risk on developers, increasing support costs. Efficient policy sets the right carbon price, supports capacity not output, ensures efficient dispatch and location. The EU bans priority dispatch and requires market-based bidding, but does not address the underlying problem that payment is conditional on generation, amplifying incentives to locate in windy/sunny sites. This article identifies the various distortions and proposes an auctioned contract to address location and dispatch distortions: a financial Contract for Difference (CfD) with hourly contracted volume proportional to local renewable output/MW, with a life specified in MWh/MW, with long-term transmission contracts based on predicted output-weighted actual or simulated nodal prices. This yardstick CfD delivers efficient dispatch. It assures but limits the total subsidy. It does not over-pay for windy/sunny sites. The revenue assurance allows high debt:equity, dramatically lowering the subsidy cost.

Suggested Citation

  • David Newbery, 2023. "Efficient Renewable Electricity Support: Designing an Incentive-compatible Support Scheme," The Energy Journal, , vol. 44(3), pages 1-22, May.
    • Handle: RePEc:sae:enejou:v:44:y:2023:i:3:p:1-22
    DOI: 10.5547/01956574.44.3.dnew
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    References listed on IDEAS

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    Cited by:

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    6. Anas Abuzayed, 2025. "From model optimality to market reality: do electricity markets support renewable investments?," Working Papers EPRG2521, Energy Policy Research Group, Cambridge Judge Business School, University of Cambridge.
    7. Kang Hua Cao & Han Qi & Chi-Keung Woo & Jay Zarnikau & Raymond Li, 2024. "Efficient Frontiers for Short-term Sales of Spot and Forward Wind Energy in Texas," The Energy Journal, , vol. 45(6), pages 37-60, November.
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    11. Davi-Arderius, Daniel & Jamasb, Tooraj, 2026. "Measuring a paradox: Zero-negative electricity prices," Utilities Policy, Elsevier, vol. 98(C).
    12. Hirotaka Hiraiwa & Kazuya Ito & Ryuta Takashima, 2025. "The Effect of Generator-Side Charges on Investment in Power Generation and Transmission Under Demand Uncertainty," Sustainability, MDPI, vol. 17(15), pages 1-20, July.
    13. Johanndeiter, Silke & Helistö, Niina & Bertsch, Valentin, 2025. "Does the difference make a difference? Evaluating Contracts for Difference design in a fully decarbonised European electricity market," Resource and Energy Economics, Elsevier, vol. 83(C).
    14. Abuzayed, A., 2025. "From Model Optimality to Market Reality: Do Electricity Markets Support Renewable Investments?," Cambridge Working Papers in Economics 2558, Faculty of Economics, University of Cambridge.
    15. Melita Van Steenberghe & Marten Ovaere, 2025. "Market Inefficiencies in Renewable Support Policies: Evidence from Offshore Wind Contracts for Difference in Great Britain," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 25/1124, Ghent University, Faculty of Economics and Business Administration.
    16. Yong Sun & Xinqi Yang & Runtian Wu & Guangxiang Gong & Tianjie Lei, 2025. "How to address enterprise collusion in falsifying carbon emission data: A game theory analysis," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 46(1), pages 378-392, January.
    17. Milstein, I. & Tishler, A. & Woo, C.K., 2024. "The effect of PV generation's hourly variations on Israel's solar investment," Energy Economics, Elsevier, vol. 136(C).
    18. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2025. "Time for a market upgrade? A review of wholesale electricity market designs for the future," Energy Economics, Elsevier, vol. 148(C).
    19. Chen, Huanhuan & Li, Jinke & O'Leary, Nigel & Shao, Jing, 2025. "Higher prices in a more competitive market: The paradox in the retail electricity market in the United Kingdom," Structural Change and Economic Dynamics, Elsevier, vol. 72(C), pages 374-390.
    20. Simshauser, Paul & Newbery, David, 2024. "Non-firm vs priority access: On the long run average and marginal costs of renewables in Australia," Energy Economics, Elsevier, vol. 136(C).
    21. Soumoy, L. & Abada, I. & Ehrenmann, A. & Massol, O., 2025. "Financial Twins: Adapting Long-term Contract Designs to new Electricity Systems," Cambridge Working Papers in Economics 2582, Faculty of Economics, University of Cambridge.
    22. Lo Prete, Chiara & Palmer, Karen & Robertson, Molly, 2024. "Time for a Market Upgrade? A Review of Wholesale Electricity Market Designs for the Future," RFF Reports 24-09, Resources for the Future.

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