Optimal Renewable-Energy Subsidies

27 Pages Posted: 31 Jul 2014

See all articles by Mark Andor

Mark Andor

RWI – Leibniz Institute for Economic Research

Achim Voss

University of Hamburg - Department of Economics

Date Written: February 23, 2014

Abstract

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

Andor, Mark and Voß, Achim, Optimal Renewable-Energy Subsidies (February 23, 2014). Available at SSRN: https://ssrn.com/abstract=2470546 or http://dx.doi.org/10.2139/ssrn.2470546

Mark Andor (Contact Author)

RWI – Leibniz Institute for Economic Research ( email )

Hohenzollernstr. 1-3
Essen, 45128
Germany

HOME PAGE: http://en.rwi-essen.de/mark-andor

Achim Voß

University of Hamburg - Department of Economics ( email )

Von-Melle-Park 5
room 2128 C rise
Hamburg, 20146
Germany

HOME PAGE: http://www.wiso.uni-hamburg.de/professuren/mikrooekonomische-theorie-und-experimente/team/wissenscha

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