Designing an incentive-compatible efficient Renewable Electricity Support Scheme
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Authors
Newbery, D.
Publication Date
2021-03-23Series
Cambridge Working Papers in Economics
Publisher
Faculty of Economics, University of Cambridge
Type
Working Paper
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Newbery, D. (2021). Designing an incentive-compatible efficient Renewable Electricity Support Scheme. https://doi.org/10.17863/CAM.83977
Abstract
Most existing renewables support schemes distort location and dispatch decisions. Many impose unnecessary risk on developers, increasing support costs. Efficient policy sets the right carbon price, supports capacity not output, and ensures efficient dispatch and location. The EU bans priority dispatch and requires market-based bidding, but does not address the underlying problem that payment is conditional on generation, amplifying incentives to locate in wind/sunny sites. This article identifies the various distortions and proposes an auctioned contract to address location and dispatch distortions: a financial Premium Contract for Difference (PCfD) with hourly contracted volume proportional to local renewable output/MW, with a life specified in MWh/MW, reflecting regional differences in correlation with wholesale prices. This yardstick PCfD delivers efficient dispatch, assures but limits the total subsidy while not over-rewarding windy/sunny sites. The revenue assurance allows high debt: equity, dramatically lowering the subsidy cost.
Keywords
renewables support schemes, distortions, auctions, yardstick contracts
Identifiers
CWPE2128
This record's DOI: https://doi.org/10.17863/CAM.83977
This record's URL: https://www.repository.cam.ac.uk/handle/1810/336556
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