(Mis)allocation of Renewable Energy Sources

Abstract

Policies to incentivize the adoption of renewable energy sources usually offer little flexibility to adapt to heterogeneous benefits across locations. We evaluate the geographical misallocation of solar photovoltaic installations and their relation with the uniform nature of subsidies. We estimate the dispersion of marginal benefits from solar production in Germany and compute the social and private benefits from optimal reallocations of residential solar installations keeping total capacity fixed. Our findings suggest that the value of solar would increase by 5.2% relative to the current allocation using conservative values for the rates of solar installations. Reallocating all solar capacity and taking into account transmission would yield gains that range from about 16 to 30%. A benefit-cost analysis shows that additional transmission can be beneficial if there is sufficient solar capacity reallocated across regions. This puts in perspective the social costs of nation-wide policies that do not offer heterogeneous incentives.

Keywords: Renewable Energy Sources, Electricity Markets, Feed-in-Tariffs, Ancillary Services, Misallocation

JEL Classification: H23, Q42, Q48, Q51