Optimal renewable-energy subsidies
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Date
2014-03-07
Authors
Andor, Mark
Voss, Achim
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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.
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Keywords
peak-load pricing, feed-in tariffs, optimal subsidies, renewable energy sources, demand uncertainty, capacity investment