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Efficient diffusion of renewable energies: A roller-coaster ride

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  • Helm, Carsten
  • Mier, Mathias

Abstract

When the supply of intermittent renewable energies like wind and solar is high, the electricity price is low. Conversely, prices are high when their supply is low. This reduces the profit potential in renewable energies and, therefore, incentives to invest in renewable capacities. Nevertheless, we show that perfect competition and dynamic pricing lead to efficient choices of renewable and fossil capacities, provided that external costs of fossils are internalized by an appropriate tax. We also investigate some properties of electricity markets with intermittent renewables and examine the market diffusion of renewables as their capacity costs fall. We show that the intermittency of renewables causes an S-shaped diffusion pattern, implying that a rapid build-up of capacities is followed by a stage of substantially slowerdevelopment. While this pattern is well known from the innovation literature, the mechanism is new. We also find that technology improvements such as better battery storage capacities have substantial effects not only on the speed of market penetration, but also on its pattern. Finally, fluctuations of energy prices rise with the share of renewables. If regulators respond with a price cap, this leads to a faster market diffusion of renewables.

Suggested Citation

  • Helm, Carsten & Mier, Mathias, 2016. "Efficient diffusion of renewable energies: A roller-coaster ride," Annual Conference 2016 (Augsburg): Demographic Change 145893, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc16:145893
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    References listed on IDEAS

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    Cited by:

    1. Abrell, Jan & Rausch, Sebastian & Streitberger, Clemens, 2019. "The economics of renewable energy support," Journal of Public Economics, Elsevier, vol. 176(C), pages 94-117.
    2. Klaus Eisenack & Mathias Mier, 2019. "Peak-load pricing with different types of dispatchability," Journal of Regulatory Economics, Springer, vol. 56(2), pages 105-124, December.
    3. Darudi, Ali & Weigt, Hannes, 2019. "Renewable Support, Intermittency and Market Power: An Equilibrium Investment Approach," Working papers 2019/06, Faculty of Business and Economics - University of Basel.
    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. 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

    JEL classification:

    • Q21 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Demand and Supply; Prices
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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