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Do costs fall faster than revenues? Dynamics of renewables entry into electricity markets

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  • Green, Richard
  • Léautier, Thomas-Olivier

Abstract

In many countries, entry of renewable electricity producers has been supported by subsidies and financed by a tax on electricity consumed. This article is the first to analytically derive the dynamics of the generation mix, subsidy, and tax as renewable capacity increases. This enables us to complement and extend previous work by providing analytical expressions for previously obtained simulation results, and deriving additional results. The analysis yields three main findings. First, the subsidy to renewable may never stop, as the value of the energy produced may decrease faster than the cost as renewable capacity increases. Second, high renewable penetration leads to a discontinuity in marginal values, after which the subsidy and tax grow extremely rapidly. Finally, reducing the occurrence of negative prices, for example by providing renewable producers with financial instead of physical dispatch insurance, yields significant benefits.

Suggested Citation

  • Green, Richard & Léautier, Thomas-Olivier, 2015. "Do costs fall faster than revenues? Dynamics of renewables entry into electricity markets," TSE Working Papers 15-591, Toulouse School of Economics (TSE).
  • Handle: RePEc:tse:wpaper:29543
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    References listed on IDEAS

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    1. Natalia Fabra & Mar Reguant, 2014. "Pass-Through of Emissions Costs in Electricity Markets," American Economic Review, American Economic Association, vol. 104(9), pages 2872-2899, September.
    2. Bertsch, Joachim & Growitsch, Christian & Lorenczik, Stefan & Nagl, Stephan, 2016. "Flexibility in Europe's power sector — An additional requirement or an automatic complement?," Energy Economics, Elsevier, vol. 53(C), pages 118-131.
    3. Green, Richard & Vasilakos, Nicholas, 2011. "The economics of offshore wind," Energy Policy, Elsevier, vol. 39(2), pages 496-502, February.
    4. Karsten Neuhoff, 2008. "Learning by Doing with Constrained Growth Rates:An Application to Energy Technology Policy," The Energy Journal, International Association for Energy Economics, vol. 0(Special I), pages 165-182.
    5. Erin Baker & Meredith Fowlie & Derek Lemoine & Stanley S. Reynolds, 2013. "The Economics of Solar Electricity," Annual Review of Resource Economics, Annual Reviews, vol. 5(1), pages 387-426, June.
    6. Richard Green and Nicholas Vasilakos, 2012. "Storing Wind for a Rainy Day: What Kind of Electricity Does Denmark Export?," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    7. Severin Borenstein, 2005. "The Long-Run Efficiency of Real-Time Electricity Pricing," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3), pages 93-116.
    8. Lion Hirth, 2013. "The Market Value of Variable Renewables. The Effect of Solar and Wind Power Variability on their Relative Price," RSCAS Working Papers 2013/36, European University Institute.
    9. Paul L. Joskow, 2011. "Comparing the Costs of Intermittent and Dispatchable Electricity Generating Technologies," American Economic Review, American Economic Association, vol. 101(3), pages 238-241, May.
    10. Joseph Cullen, 2013. "Measuring the Environmental Benefits of Wind-Generated Electricity," American Economic Journal: Economic Policy, American Economic Association, vol. 5(4), pages 107-133, November.
    11. Oswald, James & Raine, Mike & Ashraf-Ball, Hezlin, 2008. "Will British weather provide reliable electricity?," Energy Policy, Elsevier, vol. 36(8), pages 3202-3215, August.
    12. Twomey, Paul & Neuhoff, Karsten, 2010. "Wind power and market power in competitive markets," Energy Policy, Elsevier, vol. 38(7), pages 3198-3210, July.
    13. Staffell, Iain & Green, Richard, 2014. "How does wind farm performance decline with age?," Renewable Energy, Elsevier, vol. 66(C), pages 775-786.
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    Cited by:

    1. repec:aen:journl:ej37-si3-pahle is not listed on IDEAS
    2. 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.
    3. René Aïd & Matteo Basei & Huyên Pham, 2017. "The coordination of centralised and distributed generation," Working Papers hal-01517165, HAL.
    4. Mathias Mier, 2018. "Policy Implications of a World with Renewables, Limited Dispatchability, and Fixed Load," Working Papers V-412-18, University of Oldenburg, Department of Economics, revised Jul 2018.
    5. repec:zbw:espost:200514 is not listed on IDEAS
    6. repec:eee:eneeco:v:72:y:2018:i:c:p:542-557 is not listed on IDEAS
    7. repec:eee:eneeco:v:76:y:2018:i:c:p:257-273 is not listed on IDEAS
    8. Ren'e Aid & Matteo Basei & Huy^en Pham, 2017. "The coordination of centralised and distributed generation," Papers 1705.01302, arXiv.org, revised Mar 2018.
    9. Baran Doda, Sam Fankhauser, 2017. "Energy policy and the power sector in the long run," GRI Working Papers 276, Grantham Research Institute on Climate Change and the Environment.

    More about this item

    Keywords

    Electric power markets; Renewables; Public policy;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • L11 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Production, Pricing, and Market Structure; Size Distribution of Firms
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities

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