Optimal Renewable-Energy Subsidies
27 Pages Posted: 31 Jul 2014
Date Written: February 23, 2014
We derive optimal subsidization of renewable energies in electricity markets. The analysis takes into account that capacity investment must be chosen under uncertainty about demand conditions and capacity availability, and that capacity as well as electricity generation may be sources of externalities. The main result is that generation subsidies should correspond to externalities of electricity generation (e.g., greenhouse gas reductions), and investment subsidies should correspond to externalities of capacity (e.g., learning spillovers). If only capacity externalities exist, then electricity generation should not be subsidized at all. Our results suggest that some of the most popular promotion instruments are likely to cause welfare losses.
Keywords: Peak-load pricing; capacity investment; demand and supply uncertainty; renewable energy sources; energy policy; optimal subsidies; feed-in tariffs
JEL Classification: Q41, Q48, H23
Suggested Citation: Suggested Citation