Designing Efficient Renewable Electricity Support Schemes

Working Paper
Change log
Newbery, D. 

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, 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 high resource sites. This article identifies the various distortions and proposes an auctioned contract to address location and dispatch distortions: a financial Contract for Difference (CfD) with hourly contracted volume proportional to local renewable output/MW, with a life specified in MWh/MW, adjusted for regional variations in correlation with total renewable output. This yardstick CfD delivers efficient dispatch while assuring but limiting the total amount of subsidy and not over-compensating high resource sites. The revenue assurance, with a government-backed counterparty, allows high debt:equity, dramatically lowering the subsidy cost.

renewables support schemes, distortions, auctions, yardstick contracts
Is Part Of
Is previous version of: