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Optimal renewable-energy promotion: Capacity subsidies vs. generation subsidies

Mark Andor and Achim Voß ()

Resource and Energy Economics, 2016, vol. 45, issue C, 144-158

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 cause welfare losses. We demonstrate such welfare losses with data from the German electricity market.

Keywords: Peak-load pricing; Capacity investment; Demand uncertainty; Renewable energy sources; Optimal subsidies; Feed-in tariffs (search for similar items in EconPapers)
JEL-codes: Q41 Q48 H23 (search for similar items in EconPapers)
Date: 2016
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Working Paper: Optimal Renewable-Energy Subsidies (2014) Downloads
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