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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:

    1. 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.
    2. 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).
    3. 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).
    4. Davi-Arderius, Daniel & Jamasb, Tooraj, 2024. "Measuring a Paradox: Zero-negative Electricity Prices," Working Papers 13-2024, Copenhagen Business School, Department of Economics.
    5. Tourgeman, Miriam & Cohen, Chen & Rubin, Ofir, 2024. "Preserving competition and economic welfare in Israel's PV market," Utilities Policy, Elsevier, vol. 91(C).
    6. Simshauser, Paul, 2025. "Competition vs. coordination: Optimising wind, solar and batteries in renewable energy zones," Energy Economics, Elsevier, vol. 143(C).
    7. 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).
    8. 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.
    9. 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.
    10. Ansede Ferreiro, Jesús & San-Martín González, Enrique, 2025. "Turmoil in the Chilean electricity sector: A failed attempt at using advanced contracts for differences to support the energy transition?," Utilities Policy, Elsevier, vol. 93(C).
    11. 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).
    12. 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).

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