Support Schemes for Renewable Energy: An Economic Analysis

We consider leading approaches to the decarbonisation of electricity supply. Price supports through long term contracts, such as feed-in-tariffs have been very effective at eliciting rapid escalation of renewable supply, largely because risks have been transferred away from suppliers and tariffs have been generous. However, countries with the most ambitious programs of this type (Denmark, Germany and Spain) have experienced a noticeable increase in electricity costs. Quota programs, combined with some form of tradable carbon certificates, have typically produced a lesser response with lower impact on consumers. Assured access to grids has also played an important role in expediting growth.
Both genres of policy instruments increase global demand for renewable technologies, thereby promoting dynamic efficiency. However, other inefficiencies remain. Feed-in-tariffs place primary onus of technology selection and support on governments and regulators. Limitations on carbon trade reduce effectiveness and increase costs as well. The next generation of instruments would benefit from better locational and temporal price signals.