Renewable generation investment with differentiated downstream competition

Abstract

With the cost of renewable electricity generation like solar and wind decreasing, the share of total generation provided by such sources is growing. This leads to questions of how utilities should deal with integrating renewables into the grid. An interesting and not commonly studied case of this is when firms consume significant amounts of electricity in order to serve their customers (e.g., electric vehicle charging stations) and can get it either from the grid or through renewable generation they install themselves. Furthermore, if they have more renewable generation than needed to serve their customers they can sell it back to the grid. Therefore, the cost of electricity and value of excess generation affects firm’s interest in renewable generation, and has impacts on both the grid (by affecting how much renewable generation firms will provide) as well as the downstream market (by affecting the cost structure at both firms and how they compete).We study this though a two stage oligopolistic model. In the first stage, two differentiated firms choose a level of investment in renewable generation. In the second stage, they compete over prices to serve customers. We show equilibria always exist, and the difference between price of electricity and the feed-in tariff has potentially large implications for the number and type of equilibria as well as aggregate outcomes.