Journal of Regulatory Economics

, Volume 46, Issue 3, pp 318–343 | Cite as

Subsidies for renewable energy in inflexible power markets

  • Orvika RosnesEmail author
Original Article


This paper analyses how short-term operational efficiency and the \(\hbox {CO}_{2}\) emissions of a power system depend on different subsidies for wind power and on the flexibility of the power system. This is analysed in the framework of a numerical power market model, calibrated to Danish data, where the start-up costs and other constraints in fossil-fuelled power plants are taken into account. The main conclusion is that flexibility is crucial for the costs of integrating wind power in an existing system. If thermal power plants are inflexible, subsidies for wind power should strive to increase the flexibility of the market by passing market signals to wind power. A subsidy that conceals market signals from wind power producers (a production subsidy) or disconnects wind power incentives from the market signals altogether (a fixed price) increases costs considerably. An inflexible power system should aim to introduce optimal subsidies (an investment subsidy) instead of production subsidies or a fixed price. The design of the subsidy scheme should take into account both the characteristics of the existing system and the characteristics of renewables.


Electricity Start-up costs Integration of renewables Feed-in tariffs Wind power Intermittent power 

JEL Classification

L94 L98 Q48 Q58 



I am grateful to Arndt von Schemde, Berit Tennbakk, Haakon Vennemo, Torstein Bye, Eirik Romstad, Knut Einar Rosendahl, Maria Sandsmark, Atle Seierstad, the editor and two anonymous referees for helpful discussions and valuable comments. Suggestions from Arne Drud regarding modelling are highly appreciated. Any remaining errors are the responsibility of the author. Funding from the Research Council of Norway, the Norwegian Electricity Industry Association, Agder Energi, BKK, Dalane Energi, E-CO, Statkraft and Professor Wilhelm Keilhaus Minnefond is also gratefully acknowledged.


  1. Acemoglu, D. (2009). Introduction to modern economic growth. Princeton, NJ: Princeton University Press.Google Scholar
  2. Amundsen, E. S., Nesse, A., & Tjøtta, S. (1999). Deregulation of the Nordic power market and environmental policy. Energy Economics, 21, 417–434.CrossRefGoogle Scholar
  3. Amundsen, E. S., & Mortensen, J. B. (2001). The Danish green certificate system: Some simple analytical results. Energy Economics, 23, 489–509.CrossRefGoogle Scholar
  4. Brooke, A., Kendrick, D., Meeraus, A., & Raman, R. (1998). GAMS—A user’s guide. GAMS Development Corporation, Washington, DCGoogle Scholar
  5. COM. (2005). The support of electricity from renewable energy sources. Communication from the Commission COM(2005). 627 final. Brussels, 7.12.2005.Google Scholar
  6. EC. (2001). Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market.Google Scholar
  7. EC. (2009). Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources and amending and subsequently repealing Directives 2001/77/EC and 2003/30/EC.Google Scholar
  8. Green, R. (2007). Nodal pricing of electricity: How much does it cost to get it wrong? Journal of Regulatory Economics, 31, 125–149.CrossRefGoogle Scholar
  9. Green, R. (2008). Electricity wholesale markets: Design now and in a low-carbon future. The Energy Journal, Special Issue. The Future of Electricity: Papers in Honor of David Newbery, pp. 95–124.Google Scholar
  10. Halseth, A. (1998). Market power in the Nordic electricity market. Utilities Policy, 7, 259–268.CrossRefGoogle Scholar
  11. Hauch, J. (2003). Electricity trade and CO\(_{2}\) emission reductions in the Nordic countries. Energy Economics, 25, 509–526.CrossRefGoogle Scholar
  12. IEA. (2010). Policies and measures databases.
  13. Jensen, S. G., & Skytte, K. (2003). Simultaneous attainment of energy goals by means of green certificates and emissions permits. Energy Policy, 31, 63–71.CrossRefGoogle Scholar
  14. Johnsen, T. A. (1998). Modelling the norwegian and nordic electricity markets. Ph.D. thesis, No. 48–1998, Department of Economics, University of Oslo.Google Scholar
  15. Just, S., & Weber, C. (2008). Pricing of reserves: Valuing system reserve capacity against spot prices in electricity markets. Energy Economics, 30, 3198–3221.CrossRefGoogle Scholar
  16. Kiviluoma, J., & Meibom, P. (2010). Influence of wind power, plug-in vehicles, and heat storages on power system investments. Energy, 35(3), 1244–1255.CrossRefGoogle Scholar
  17. Lijesen, M. G. (2007). The real-time price elasticity of electricity. Energy Economics, 29, 249–258.CrossRefGoogle Scholar
  18. Mansur, E. T. (2008). Measuring welfare in restructured electricity markets. The Review of Economics and Statistics, 90(2), 369–386.CrossRefGoogle Scholar
  19. Menanteau, P., Finon, D., & Lamy, M.-L. (2003). Prices versus quantities: Choosing policies for promoting the development of renewable energy. Energy Policy, 31, 799–812.CrossRefGoogle Scholar
  20. Morthorst, P. E. (2001). Interactions of a tradable green certificate market with a tradable permits market. Energy Policy, 29, 345–353.CrossRefGoogle Scholar
  21. Munoz, F., Sauma, E., & Hobbs, B. (2013). Approximations in power transmission planning: Implications for the cost and performance of renewable portfolio standards. Journal of Regulatory Economics, 43(3), 305–338.CrossRefGoogle Scholar
  22. Newbery, D. M. (2012). Reforming competitive electricity markets to meet environmental targets. Economics of Energy & Environmental Policy, 1(1), 69–82.CrossRefGoogle Scholar
  23. Patrick, R. H. & Wolak F. A. (1997). Estimating the customer-level demand for electricity under real-time market prices. Preliminary Draft, August 1997.Google Scholar
  24. Rosnes, O. (2007). Carbon costs in power markets: The importance of the flexibility of power plants. Essay 2 in Short-term effects of long-term policies: Climate policies in power markets. PhD Dissertation No. 2007:11. Department of Economics and Resource Management, Norwegian University of Life Sciences.Google Scholar
  25. Rosnes, O. (2008). The impact of climate policies on the operation of a thermal power plant. The Energy Journal, 29(2), 1–22.CrossRefGoogle Scholar
  26. Sen, S., & Kothari, D. P. (1998). Optimal thermal generating unit commitment: A review. Electrical Power & Energy Systems, 20, 443–451.CrossRefGoogle Scholar
  27. Sheble, G. B., & Fahd, G. N. (1994). Unit commitment literature synopsis. IEEE Transactions on Power Systems, 9, 128–135.CrossRefGoogle Scholar
  28. TRM. (2007). En visionær dansk energipolitik 2025 (A visionary Danish energy policy 2025; in Danish). Ministry of Transport and Energy.Google Scholar
  29. Tseng, C., & Barz, G. (2002). Short-term generation asset valuation: A real options approach. Operations Research, 50, 297–310.CrossRefGoogle Scholar
  30. Unger, T., & Ahlgren, E. O. (2005). Impacts of a common green certificate market on electricity and \(\text{ CO }_{2}\)-emission markets in the Nordic countries. Energy Policy, 33, 2152–2163.CrossRefGoogle Scholar
  31. Wood, A. J., & Wollenberg, B. F. (1996). Power generation, operation, and control. New York: Wiley.Google Scholar

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.Statistics Norway and Oslo Centre for Research on Environmentally Friendly Energy (CREE)OsloNorway
  2. 2.Research DepartmentStatistics NorwayOsloNorway

Personalised recommendations