Ruhr Economic Papers
Ruhr Economic Papers #473
Optimal Renewable-Energy Subsidies
by Mark Andor and Achim Voss
RWI, 02/2014, 25 S./p., 8 Euro, ISBN 978-3-86788-533-1 DOI: 10.4419/86788533download
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.
JEL-Classification: Q41, Q48, H23
Keywords: Peak-load pricing; capacity investment; demand and supply uncertainty; renewable energy sources; energy policy; optimal subsidies; feed-in tariffs