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Efficient Renewable Electricity Support: Designing an Incentive-compatible Support Scheme

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Most existing renewables support schemes distort location and dispatch decisions. Many impose unnecessary risk on developers, increasing support costs. Efficient policy sets the right carbon price, supports capacity not output, ensures efficient dispatch and location. The EU bans priority dispatch and requires market-based bidding, but does not address the underlying problem that payment is conditional on generation, amplifying incentives to locate in windy/sunny sites. This article identifies the various distortions and proposes an auctioned contract to address location and dispatch distortions: a financial Contract for Difference (CfD) with hourly contracted volume proportional to local renewable output/MW, with a life specified in MWh/MW, with long-term transmission contracts based on predicted output-weighted actual or simulated nodal prices. This yardstick CfD delivers efficient dispatch. It assures but limits the total subsidy. It does not over-pay for windy/sunny sites. The revenue assurance allows high debt:equity, dramatically lowering the subsidy cost.

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Keywords: Renewables support schemes, Distortions, Auctions, Yardstick contracts

DOI: 10.5547/01956574.44.3.dnew

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Published in Volume 44, Number 3 of the bi-monthly journal of the IAEE's Energy Economics Education Foundation.


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