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Comparison of Incentive Policies for Renewable Energy in an Oligopolistic Market with Price-Responsive Demand

Abstract:
This article compares different incentive policies to encourage the development of renewable energy (RE). These incentive policies (carbon tax, feed-in tariff, premium payment and quota system) are modeled in a simplified radial power network, using price-responsive demand. Most results are derived assuming an oligopolistic Cournot competitive framework and that the costs of subsidies are covered by the government (i.e., customers do not directly pay back for the subsidies). We compare the different RE incentive schemes at different congestion levels in terms of energy prices, RE generation, CO2 emissions, and social welfare. We find that the effectiveness of the different incentive schemes varies significantly depending on the market structure assumed, the costs of renewable energy, and the subsidy recovery method considered. Subsidy policies (FIT and premium payments) are more cost effective in reducing CO2 emissions than those policies that apply penalties or taxes, when assuming oligopoly competition and that customers do not directly pay back for the subsidies. Quota and carbon tax policies are more cost effective when assuming that either a perfectly competitive electricity market takes place or customers directly pay back for the subsidies. Additionally, we show that, in the feed-in tariff system, there is an interaction among incentive levels for renewable energy technologies. Given a certain feed-in tariff price to be set for a particular renewable technology, this price influences the optimal feed-in tariff price to be set for another technology.

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Energy Specializations: Renewables – Solar ; Renewables – Wind ; Renewables – R&D and Emerging Technologies; Renewables – Policy and Regulation; Electricity – Generation Technologies; Nuclear Power – Policy and Regulation

JEL Codes:
Q51 - Valuation of Environmental Effects
O32 - Management of Technological Innovation and R&D
Q52 - Pollution Control Adoption and Costs; Distributional Effects; Employment Effects
Q2 -
E60 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook: General

Keywords: Renewable energy, Carbon tax, Feed-in tariff, Premium payment, Quota system, Oligopoly

DOI: 10.5547/01956574.37.3.mdea

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Published in Volume 37, Number 3 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.