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Incentives to Invest in Electricity Production from Renewable Energy under Different Support Schemes

Sven Bode and Helmuth-M. Groscurth

arrhenius Discussion Paper 1 (English)

Promotion of renewable energy source plays a special role among the measures to reduce greenhouse gas (GHG) emissions. On January 23, 2008, the European Commission (EC) presented its energy and climate package containing specific proposals for the time until the year 2020. The pilot study “Renewable Energies” commissioned by the German Federal Ministry for the Environment assumes that a bare 80 per cent of the total power generation will be generated from renewable energies in 2050. The role of support schemes in the future,that are presently an uncontested necessity, is discussed about on a regular basis with regard to these climate protection objectives. The present study is a contribution to this discussion.

In line with the European Union’s overall approach towards competition policy we assume perfect competition on the power market and analyse the incentives to invest in the respective installations. During the investment analysis one has to distinguish between the average annual electricity price and the price at the moment of electricity production. Several investigations during the last 18 months revealed that the electricity price at the power exchange heavily depends on the (fluctuating) electricity production from wind energy and photovoltaics. Whenever wind farms produce electricity, the spot price and thus the revenues from direct sales will decrease. The effect will be the stronger the larger the share of renewable energies in electricity production becomes. This systematic problem with revenues will decrease the incentive to invest in new, additional installations without public support massively. Public support schemes will still be necessary in 2050 if the share of renewable energies is to be incresed further.

The introduction of a supplementary green certificates system would not solve the problem. The decreasing revenues from the electricity market will not be compensated by additional revenues from the sale of certificates. Operators of renewable energy installations will receive certificates at no costs (“on top”) if and only if the corresponding electricity has been delivered to the grid. The marginal cost of producing certificates is therefore equal to zero for all producers. Consequently, in a competitive market the price at the exchange will be “randomly” anywhere between zero and a possible penalty for not meeting one’s quotas. Under such conditions, risk premiums will increase capital costs for new installations substantially. The incentive to invest is likely to be very low. A significant market penetration cannot be expected under this regime.

Even in the year 2050 subsidy schemes like feed-in tariffs or tenders will be necessary - provided that the above mentioned expansion targets are to be met.