Journal of Regulatory Economics

, Volume 41, Issue 3, pp 315–336 | Cite as

Regulatory design and incentives for renewable energy

  • Alfredo Garcia
  • Juan Manuel Alzate
  • Jorge Barrera
Original Article


Increasing electric power production from renewable energy sources is currently one of the major objectives of energy policy. The intermittent nature of renewables, such as wind and solar, necessarily imposes complex trade-offs for regulatory objectives, such as resource adequacy (and system reliability) versus reductions in green house gas emissions. We develop a highly stylized model of investments in order to derive insights regarding the workings of regulatory incentives for increased renewable energy. We first show that incentives are indeed needed when there are significant economies of scale in the form of “learning by doing” or alternatively, when there is excess capacity in conventional technology due to legacy investments. We analyze two different regulatory schemes (feed-in tariffs and renewable portafolio standards) aimed at increasing investment in renewable capacity. We show that neither scheme is capable of inducing the socially optimal level of investment in renewable capacity. A single feed-in tariff fails to induce optimal investment as a feed-in tariff exceeding marginal costs of conventional technology incentivizes over-development of the most attractive sites which preempts investment in less attractive, yet socially valuable sites. A renewable portfolio standard that promotes increased investment in renewable technology induces under-investment in the conventional technology. These results suggest that a “clinical” regulatory design, that is, one that promotes the right amount of renewable capacity without affecting conventional capacity is a challenging proposition.


Renewable energy Regulatory design Energy policy Feed-in tariffs Renewable portfolio standards 

JEL Classification

L51 L94 Q42 Q58 D4 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Ambec, S., & Crampes, C. (2009) Electricity production with intermittent sources of energy. Resource and Energy Economics (in press).Google Scholar
  2. Bushnell J. (2010) Building blocks: Investment in renewable and non-renewable technologies, working paper 202. Berkeley: UC Energy Institute.Google Scholar
  3. Butler L., Neuhoff K. (2008) Comparison of feed-in tariff, quota and auction mechanisms to support wind power development. Renewable Energy 33: 1854–1867CrossRefGoogle Scholar
  4. Couture T., Gagnon Y. (2010) An analysis of feed-in tariff remuneration models: Implications for renewable energy investment. Energy Policy 38: 955–965CrossRefGoogle Scholar
  5. Chao H. (1983) Peak load pricing and capacity planning with demand and supply uncertainty. RAND Journal of Economics 14(1): 179–190Google Scholar
  6. Chao, H. (2011). Efficient pricing and investment in electricity markets with intermittent resources. Energy Policy (in Press).Google Scholar
  7. Crew M., Kleindorfer P. (1978) Reliability and public utility pricing. American Economic Review 68(1): 31–40Google Scholar
  8. Filomena, T., Campos-Nañez, E., & Duffey, M. (2011). Technology Selection and capacity investment under uncertainty, working paper. Washington, DC : George Washington University.Google Scholar
  9. Kaltschmitt M., Streicher W., Wiese A (2007) Renewable energy, technology, economics and environment. Springer, BerlinGoogle Scholar
  10. Kleindorfer P., Fernando C. (1993) Peak-load pricing and reliability under uncertainty. Journal of Regulatory Economics 5: 5–23CrossRefGoogle Scholar
  11. Lipp J. (2007) Lessons for effective renewable electricity policy from Denmark, Germany and the United Kingdom. Energy Policy 35: 5481–5495CrossRefGoogle Scholar
  12. Milstein, I., Tishler, A. (2010). Intermittently renewable energy, optimal capacity mix and prices in a deregulated electricity market. Energy Policy (in Press).Google Scholar
  13. Mitchell C., Baucknecht D., Connor P. (2006) Effectiveness through risk reduction: A comparison of the renewable obligation in England and Wales and the feed-in system in Germany. Energy Policy 34: 297–305CrossRefGoogle Scholar
  14. Paish O. (2002) Small hydro power: Technology and current status. Renewable and Sustainable Energy Reviews 6: 537–556CrossRefGoogle Scholar
  15. Rowlands, I. (2005). Envisaging feed-in tariffs for solar photovoltaic electricity: European lessons for Canada. Renewable and Sustainable Energy Reviews, 9.Google Scholar
  16. Stern N. (2006) Stern review on the economics of climate change. HM Treasury, LondonGoogle Scholar
  17. Traber T., Kemfert C. (2011) Gone with the wind?—Electricity market prices and incentives to invest in thermal power plants under increasing wind energy supply. Energy Economics 33: 249–256CrossRefGoogle Scholar
  18. Tol, R.S.J. (2008). The social cost of carbon: Trends, outliers and catastrophes. Economics: The Open-Access, Open-Assessment E-Journal, Vol. 2, 2008–2025.Google Scholar
  19. The Economist. (2010). Germany’s solor subsidies: Fed up. Print edition.Google Scholar

Copyright information

© Springer Science+Business Media, LLC 2012

Authors and Affiliations

  • Alfredo Garcia
    • 1
  • Juan Manuel Alzate
    • 2
  • Jorge Barrera
    • 1
  1. 1.University of VirginiaCharlottesvilleUSA
  2. 2.Universidad de los AndesBogotaColombia

Personalised recommendations