Impact of dynamic pricing on investment in renewables

Abstract

We consider a theoretical model in which non-regulated producers may use renewable and non-renewable sources to produce electricity. Renewable sources require ex ante investment and generate uncertain output with no operating costs. Non-renewable sources do not require investment (existing capacity suffices), are dispatchable, and have linear operating costs. Producers may: use only non-renewables; use renewables and dispatch non-renewables when weather is adverse for renewables; use only renewables. Dynamic pricing has no effect on the introduction of renewables in the production mix, but promotes elimination of non-renewables. Dynamic pricing increases investment in renewables if, under static pricing, producers mix both sources; and reduces investment if, under static pricing, producers only use renewables. In both cases, dynamic pricing improves welfare as consumers and producers become better off.