The Impact of Government Subsidy on Renewable Microgrid Investment Considering Double Externalities

Deng Xu and Yong Long
Additional contact information
Deng Xu: School of Economics and Business Administration, Chongqing University, Chongqing 400030, China
Yong Long: School of Economics and Business Administration, Chongqing University, Chongqing 400030, China

Sustainability, 2019, vol. 11, issue 11, 1-15

Abstract: Since microgrids require public support to make economic sense, governments regularly subsidize renewable microgrids to increase their renewable energy market penetration. In this study, we investigated the optimal subsidy level for governments to correct the market failure of microgrids and analyzed the impacts of regulation on the interaction between a microgrid and a distribution network operator (DNO). Specifically, we proposed economic rationales for government subsidies for microgrids regarding public interest benefits in relation to double externalities (learning spillover effect and environmental externality). We incorporated the double externalities into a three-echelon game model in an electricity supply chain with one regulator, one microgrid, and one DNO, in which the regulator decides the subsidy level to achieve maximal social welfare. We found that the double externalities and double marginalization caused underinvestment in microgrid capacity in the scenario without government intervention. The government could choose the appropriate subsidy level to achieve the system optimum, which led to a triple win for the microgrid, the DNO, and the social planner. Our analytical results also showed that the microgrid gained more benefits from regulation than the DNO. The microgrid may offer a negative wholesale price to the DNO in exchange for more opportunities to import electricity into the grid, especially when the investment cost is sufficiently low. Our study suggests that supporting microgrids requires a subsidy phase-out mechanism and alternative market-oriented policies with the development of the microgrid industry.

Keywords: microgrid; distribution network operator; double externalities; subsidy (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

Downloads: (external link)
https://www.mdpi.com/2071-1050/11/11/3168/pdf (application/pdf)
https://www.mdpi.com/2071-1050/11/11/3168/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jsusta:v:11:y:2019:i:11:p:3168-:d:237462

Access Statistics for this article

Sustainability is currently edited by Ms. Alexandra Wu

More articles in Sustainability from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().