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Impacts of the German Support for Renewable Energy on Electricity Prices, Emissions, and Firms

Most models that are used to analyze support policies for renewable electricity neglect important market features like oligopolistic behavior, emission trading, and restricted cross-border transmission capacities. We use a quantitative electricity market model that accounts for these aspects and decompose the impact of the German Feed-in tariff (FIT) into two frequently counteracting effects: a substitution effect and a permit price effect. We find that the total effect of the policy increases the German consumer price slightly by three percent, while the producer price decreases by eight percent. In addition, emissions from electricity generation in Germany are reduced by eleven percent but are hardly altered on the European scale. Finally, it turns out that price-cost margins of almost all firms are increased by the FIT, while nonetheless, the profits of firms are significantly lowered unless the firms combine relatively carbon-intensive production with a weak connection to the German grid.

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Energy Specializations: Electricity – Markets and Prices ; Renewables – Policy and Regulation; Energy and the Environment – Policy and Regulation

JEL Codes:
D42 - Market Structure, Pricing, and Design: Monopoly
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Renewable energy, electricity prices, Feed-in-tariff, Germany, ETS

DOI: 10.5547/ISSN0195-6574-EJ-Vol30-No3-8

Published in Volume 30, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.