Renewable energy auctions versus Green Certificate Schemes — lower prices but greater integration costs?

Abstract

This paper addresses the question of which renewable energy policy mechanisms are most appropriate for low carbon electricity industry transformation, focusing on the potential trade-off between direct policy costs versus integration costs. Renewables auctions have proven capabilities to reduce project costs and are increasingly favored worldwide. However, auctions may not necessarily deliver projects with high `energy' value given the focus on maximizing total generation, rather than energy value. By comparison, green certificate mechanisms and premium feed-in-tariffs partially expose renewables developers to energy prices. However, markets involve risks of market failure. We study the experience of both auctions and the certificate based Renewable Energy Target (RET) in the Australian National Electricity Market (NEM). Auctions have certainly provided cheaper renewables than the RET, which appears to exhibit problems with market power and risk premiums. However, NEM outcomes already highlight the very different energy value of different renewable projects. Auctions are likely the best way forward at present until market inefficiencies in both energy and certificate markets are addressed. However, integration costs seem likely to become increasingly problematic if and as renewable penetrations grow. While specific arrangements vary widely across electricity jurisdictions, the potential tradeoff between the cost and value of renewables remains relevant.