Abstract
We analyze the welfare effects of two different renewable support schemes designed to achieve a given target for the share of fluctuating renewable electricity generation: a feed-in premium (FiP), which can induce negative wholesale prices, and a capacity premium (CP), which does not. For doing so we use a stylized economic model that differentiates between real-time and flat-rate pricing and is loosely calibrated on German market data. Counter-intuitively, we find that distortions through induced negative prices do not reduce the net consumer surplus of the FiP relative to the CP. Rather, the FiP performs better under all assumptions considered. The reason is that increased use of renewables under the FiP, particularly in periods of negative prices, leads to a reduction of required renewable capacity and respective costs. This effect dominates larger deadweight losses of consumer surplus generated by the FiP compared to the CP. Furthermore, surplus gains experienced by consumers who switch from flat-rate to real-time pricing are markedly higher under the FiP, which might be interpreted as greater incentives to enable such switching. While our findings are primarily of theoretical nature and the full range of implications of negative prices needs to be carefully considered, we hope that our analysis makes policy-makers more considerate of their potential benefits.
Highlights
Many countries around the world strive for high shares of renewable energy sources (RES) in their electricity systems, and fluctuating RES, such as wind power and solar photovoltaics, are likely to make up a major share of most of them
The first effect holds for both instruments: due to the additional levy l on top of wholesale prices pt, the retail price Rt = pt + l is Renewable Energy Support, Negative Prices, and Real-time Pricing / 157 Figure 1: Effects of feed-in premium (FiP) on consumer surplus
The overall size of these effects depends on the proportion of real-time pricing (RTP) consumers, because flat-rate pricing (FRP) consumers only respond to average annual prices and cannot increase consumption in periods of low prices
Summary
Many countries around the world strive for high shares of renewable energy sources (RES) in their electricity systems, and fluctuating RES, such as wind power and solar photovoltaics, are likely to make up a major share of most of them. One particular question in this regard, is which support instrument can achieve a given RES target most efficiently. 148 / The Energy Journal focus of our analysis, which compares the following two instruments: a subsidy on production, often called a market premium on energy or feed-in premium (FiP), and a subsidy on investment, often called a market premium on capacity or capacity premium (CP). The former can give rise to negatives prices up to the (negative) level of the premium, while the latter does not. As we shall show later, the contrary may hold when targets are defined as relative production shares
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