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Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Pricing

Author

Listed:
  • Carsten Helm

    () (University of Oldenburg, Department of Economics)

  • Mathias Mier

    () (ifo Institute, Munich)

Abstract

We consider an economy in which competitive firms use three technologies for electricity production: pollutive fossils, intermittent renewables like wind or solar, and storage. We determine optimal subsidies for renewables and storage capacities when carbon pricing is imperfect. This policy is efficient for low market shares of intermittent renewables in the energy system, but it turns inefficient once there are sucient renewables to partly displace fossil electricity production at times of high availability. Moreover, the subsidy scheme is substantially more complex than a first-best Pigouvian tax. The optimal renewable subsidy is always positive but tends to decrease as electricity production becomes less reliant on fossils. The optimal storage subsidy even changes its sign. It is usually negative as long as fossils contribute to lling the storage, but turns positive if fossils are used only during times of low availability of renewables. This is because more storage capacity reduces the price during times of destorage, but raises it when electricity is taken from the market to fill the storage. This has countervailing effects on firms' incentives to invest in fossil capacities, and these effects are more pronounced the higher the round-trip effciency losses during a storage cycle.

Suggested Citation

  • Carsten Helm & Mathias Mier, 2018. "Subsidising Renewables but Taxing Storage? Second-Best Policies with Imperfect Pricing," Working Papers V-413-18, University of Oldenburg, Department of Economics, revised Oct 2018.
  • Handle: RePEc:old:dpaper:413
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    References listed on IDEAS

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    Cited by:

    1. Aude Pommeret & Katheline Schubert, 2019. "Energy Transition with Variable and Intermittent Renewable Electricity Generation," CESifo Working Paper Series 7442, CESifo Group Munich.
    2. Helm, Carsten & Mier, Mathias, 2019. "On the efficient market diffusion of intermittent renewable energies," Energy Economics, Elsevier, vol. 80(C), pages 812-830.
    3. Jasper Meya & Paul Neetzow, 2019. "Renewable energy policies in federal government systems," Working Papers V-423-19, University of Oldenburg, Department of Economics, revised Jul 2019.
    4. Mathias Mier & Christoph Weissbart, 2019. "Power Markets in Transition: Decarbonization, Energy Efficiency, and Short-Term Demand Response," ifo Working Paper Series 284, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.

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