The Electricity Market Structure in Greece and the Paradox of Renewable Energy Sources

Abstract

The European Union, in an effort to boost the use of Renewable Energy Sources (RES) in power generation, applies supportive tools consisting in financial motivation either as grants or as subsidies. According to welfare economics, a subsidy should reflect the external benefits; otherwise a distortion of competition takes place. The most widespread method to calculate externalities is the avoided cost approach, despite the fact that it encounters equally all the RES units leading to technological neutrality. In the present article, the avoided cost approach with the objective social justification of RES subsidies/feed in tariffs (FITs) in the case of Greece, for the year 2014, is applied. The results show a high gap between the current FITs and the suggested ones amounting to approximately 40%. This uncomfortable outcome indicates that, at least in the case of Greece, either the level of the current guaranteed tariffs is not socially justified, or the CO2 value derived from the European carbon market does not reflect the real social cost, or that the avoided cost method, alone, is not adequate to explain the level of subsidies. In light of the foregoing, the need for the development of a concrete and integrated methodology for calculating all RES externalities emerges.