Capacity vs energy subsidies for promoting renewable investment: Benefits and costs for the EU power market. (February 2020)

• Record Type: Journal Article
• Authors: Özdemir, Özge; Hobbs, Benjamin F.; van Hout, Marit; Koutstaal, Paul R.
• Is Part Of: Energy policy. Volume 137(2020)
• Publication Date: 2020-02
• Subjects: Electricity markets -- Renewable policy -- Capacity subsidy -- Energy subsidy -- Renewable target; Energy policy -- Periodicals; Politique énergétique -- Périodiques; Electronic journals; 333.79
• DOI: 10.1016/j.enpol.2019.111166
• Languages: English
• ISSNs: 0301-4215

Abstract

Abstract: Policy makers across Europe have implemented renewable support policies with several policy objectives in mind. Among these are achieving ambitious renewable energy targets at the lowest cost, reducing CO2 -emissions and promoting technology improvement through learning-by-doing. Using a detailed country-level model of generation markets, we address the question of how policies that subsidize renewable energy (feed-in premia and renewable portfolio standards (RPSs)) versus capacity (investment subsidies) impact the mix of renewable investments, electricity costs, renewable share, the amount of subsidies, and consumer prices in the EU electric power market in 2030 and how they interact with other policies such as the EU ETS. Our analysis shows that subsidies of energy output are cost-effective for achieving renewable energy targets in the short run, whereas policies tied to capacity installation yield more investment and might be more effective in reducing technology costs in the longer term. The difference in costs between these two policy options diminish with higher CO2 -prices. Although the differences are significant, they are smaller than cost impacts of other renewable policy design features, namely the effect of not allowing EU members to meet their individual targets by trading renewable credits with other member states. Highlights: Subsidies for renewable capacity spur more investment than energy subsidies. CO2 emissions are lower with capacity than with energy subsidies in the EU. Higher CO2 prices reduce costs of capacity subsidies more than of energy subsidies. National renewable targets can cost seven times as much as an EU-wide subsidy.