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Quantities vs. capacities: Minimizing the social cost of renewable energy promotion

Mark Andor, Kai Flinkerbusch and Achim Voß

No 59, MEP Discussion Papers from University of Münster, Münster Center for Economic Policy (MEP)

Abstract: In this article we show how different promotion schemes for renewables affect economic welfare. Our starting point is that external benefits of renewable electricity supply besides the abatement of greenhouse gases are not related to actual electricity generation but to producing and installing capacity. We argue that generation based subsidies such as feed-in tariffs and bonus payments can only be a second-best solution. Our model framework allows us to explain how these second-best instruments cause welfare losses in an environment of volatile demand. We postulate that capacity payments for renewables should be implemented in order to avoid unnecessary social costs.

Keywords: Renewable Energy Sources; Energy Policy; Promotion Instruments (search for similar items in EconPapers)
JEL-codes: H23 Q41 Q48 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-ene and nep-env
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