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Journal of Regulatory Economics

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

Subsidies for renewable energy in inflexible power markets

  • Orvika Rosnes
Original Article

Abstract

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.

Keywords

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

JEL Classification

L94 L98 Q48 Q58 

Notes

Acknowledgments

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.

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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

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