Support Schemes and the Integration Costs of Renewable Generation

Abstract

In the EU the two most prevalent support schemes are Feed-in Tariffs (FIT) and Feed-in Premia (FIP). We present a theoretical model that shows that, under both support schemes, firms can have incentives to deploy renewable plants whose output is negatively correlated with residual load. This increases the variability of residual load and, therefore, may cause an increase in the costs of integrating renewables in the system. Under FIT, if the system’s thermal generation costs are convex, firms that own both thermal and renewable generation face this type of incentives. Under FIP, wether a firm faces these incentives depends on the structural characteristics of the market. While the European Commission currently recommends the implementation of FIP in all markets, our model shows that this may lead to ineficiency due to greater integration costs. We examine the case of the Spanish and New England markets and conclude that firms in both of these markets may currently face this kind of incentives.