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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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    5. Veenstra, Arjen T. & Mulder, Machiel, 2024. "Impact of Contracts for Differences for non-carbon electricity generation on efficiency of electricity market," Energy Economics, Elsevier, vol. 136(C).
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    9. Tourgeman, Miriam & Cohen, Chen & Rubin, Ofir, 2024. "Preserving competition and economic welfare in Israel's PV market," Utilities Policy, Elsevier, vol. 91(C).
    10. 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.
    11. 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.
    12. Sanchez Jimenez, I. & Bruninx, K. & de Vries, L.J., 2025. "Capacity remuneration mechanisms for decarbonized power systems," Applied Energy, Elsevier, vol. 391(C).
    13. 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.
    14. Simshauser, Paul, 2025. "Competition vs. coordination: Optimising wind, solar and batteries in renewable energy zones," Energy Economics, Elsevier, vol. 143(C).
    15. 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).
    16. 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.
    17. 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.
    18. 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.
    19. 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.
    20. 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).
    21. Qiao, Qiao & Zeng, Xianhai & Lin, Boqiang, 2024. "Mitigating wind curtailment risk in China: The impact of subsidy reduction policy," Applied Energy, Elsevier, vol. 368(C).
    22. Milstein, I. & Tishler, A. & Woo, C.K., 2025. "Modeling the effects of photovoltaic technology, battery storage, and electric vehicles on Israel's electricity market from 2030 to 2050," Utilities Policy, Elsevier, vol. 95(C).
    23. Thomaßen, Georg & Fuhrmanek, Andreas, 2025. "Where to build renewables in Europe? The benefits of locational auction design," Energy Economics, Elsevier, vol. 147(C).
    24. 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).
    25. 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.

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