The social efficiency of instruments of promotion of renewable energies: A transaction-cost perspective

This paper compares the social efficiency of the regulatory instruments used to promote renewable energy sources in electricity generation, taking into consideration their role in promoting the preservation of collective goods. They are based on a purchase obligation and act either by price (feed-in tariffs) or by quantity (bidding for new RES-E capacities; RES-E quotas). From the Public Economics perspective, the two instruments are distinct in terms of cost-efficacy and market incentives in a world of imperfect information. Exchangeable quotas of green certificates are preferred because this instrument allows better control over consumer costs and whilst retaining market incentives. Transaction cost economics (TCE) contributes to the assessment of these instruments, by introducing RES-E investment safeguard as a major determinant of social efficiency, and the instruments' conformity to its institutional environment as a determinant of its viability. In light of this additional consideration, the arrangements between RES-E producers and obligated buyers inherent in each instrument are in fact quite similar-either long-term contracting or vertical integration. We compare and assess RES-E price- and quantity-instruments on several dimensions from both the public economics and TCE perspectives: control of the cost for consumers, safeguards of RES-E investments, adaptability of the instrument in order to preserve its stability in the long run, market incentive intensity, and conformity with the new market regime of electricity industry. It shows neither instruments offer an optimal solution in each of these dimensions. The government will thus select an instrument in accordance with the relative importance of its objectives. (c) 2006 Elsevier B.V. All rights reserved.