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Incumbent's Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets

Abstract:
Incumbent firms play a decisive role in the success of renewable support policies. Their investments in renewables as well as their operational strategies for their conventional CO2 emitting technologies affect the transition to a sustainable energy system. We use a game theoretical framework to analyze incumbents’ reactions to different renewable support policies, namely feed-in tariff (FIT), feed-in premium (FIP), and auction-based policies. We show that a regulator should choose a support scheme based on concerns about either market power or emission abatement: in FIP-based policies, the incumbent’s strategic behavior leads to lower CO2 emissions, but a higher market price compared to FIT-based policies. Furthermore, for FIP-based policies, the regulator might want to incentivize incumbents directly (to further reduce CO2 emissions) or newcomers (to further reduce market power). Particularly in FIP-based auctions, incumbents have the incentive to obtain all auctioned capacity, which could lead to an unchanged market price despite the entrance of new capacity into the market.

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Keywords: Electricity market, Renewable energy, Support policies, Game theory, Incumbent

DOI: 10.5547/01956574.41.SI1.adar

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Published in Volume 41, Special Issue of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.

 

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