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On the efficient market diffusion of intermittent renewable energies

Carsten Helm () and Mathias Mier

Energy Economics, 2019, vol. 80, issue C, 812-830

Abstract: Capacity costs of renewable energies have been decreasing dramatically and are expected to fall further, making them more competitive with fossils. Building on an analytically tractable peak-load pricing model, we analyze how intermittency of renewable energies affects the market diffusion that results from these lower costs. In particular, once renewables have become competitive by attaining the same levelized cost of electricity (LCOE) as fossils, the marginal increase in efficient capacities due to a further cost reduction varies substantially. Initially it is small, then it rises, but it falls again once renewable capacities are large enough to satisfy the whole electricity demand at times of high availability. If external costs of fossils are internalized by a Pigouvian tax, then perfect competition leads to efficient investments in renewable and fossil capacities; even though we assume that only a subgroup of consumers can adapt their demand to price fluctuations that are caused by the intermittency of renewables. Moreover, fossils receive a capacity payment through the market for their reliability in serving demand of non-reactive consumers. Maximum electricity prices rise with the share of renewables. If regulators impose a price cap, this initially raises investments in renewables, but the effect may reverse if the share of renewables is large.

Keywords: Renewable energies; Peak-load pricing; Intermittent energy sources; Price caps; Energy transition (search for similar items in EconPapers)
JEL-codes: Q21 Q41 Q42 D24 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:80:y:2019:i:c:p:812-830

DOI: 10.1016/j.eneco.2019.01.017

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