Evaluation and recommendation of a subsidy instrument for new large hydropower plants, use case of Switzerland

Abstract

Hydropower is the central pillar of the current Swiss electricity mix. The Swiss energy transition will profoundly change the electricity mix by transitioning a third of electricity generation from nuclear towards renewable energy sources mainly. This backbone role of hydropower is hindered by the current Europe-wide sluggish economic situation, characterized by subsidized new renewables energies which distort electricity prices, a partially liberalized market and power production overcapacity. In this difficult context, a strong and comprehensive political support through long-term policy will be of utmost importance to accompany hydropower across this transformation. This article explores various subsidy instruments, before using the general framework of “System Engineering” to base a precise recommendation for Swiss hydropower. The recommended mixture of investment contribution with discount reclamation appears the most appropriate instrument. Also, the short time horizon means that the subsidization can be quickly terminated if necessary. In parallel, it is a mature instrument since it is already used for other new renewable energies. The discount model allows reclaiming subsidies in case of an excess profitability. The strength of this study is its robust, comprehensive and all-encompassing methodology which can be replicated to other cases (for instance, other technologies or energy sources) and other countries.