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Support of renewable energy: Prices versus quantities GIN 2006, Cardiff Jeroen De Paepe University of Ghent.

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Presentation on theme: "Support of renewable energy: Prices versus quantities GIN 2006, Cardiff Jeroen De Paepe University of Ghent."— Presentation transcript:

1 Support of renewable energy: Prices versus quantities GIN 2006, Cardiff Jeroen De Paepe University of Ghent

2 Content Need for support of renewable energy Comparison of the different support mechanisms for renewable energy Model Flemish support system Conlusions

3 Need for support of RE Fossil fuel electricity production leads to environmental damage: external costs (static) -cfr. GHG, NOx, SO2 Technologies are still immature (dynamic) Also: -Reliability and diversity of energy supplies -Job creation at local level Remark: importance of energy efficiency!

4 Support mechanisms for RE Feed-in tariffs (price-based approach): obligation of electric utilities to purchase RES-E at a predetermined price Tradable green certificates (quantity-based approach): -Suppliers obliged to supply a certain quota -Penalty for every missing certificate

5 Feed-in tariffs Very effective (cfr. Spain, Germany, …) Fixed prices provide stable investment climate Risk reduction as a way of increasing the efficiency of a support system Long term stability leads to innovation Wind fall profits for RES-E producers can be avoided by stepped feed-in tarrifs

6 TGC Quotas allacoted in an efficient way (cost efficiency) Interesting in international context with more trading possibilities BUT: -Volatility of certificate prices have negative effect on investments => less effective than feed-in tariffs -High windfall profits for incumbent RES-E generators

7 Model Environmental economics: prices versus quantities when Marginal Reduction Costs are uncertain Price mechanism: emission tax Quantity mechanism: tradable permits Proposition of Weitzman: The preferred policy instrument depends on the relative steepness of the marginal damage and cost curves.

8 Example Treshold; very steep MD curve once a given level of emissions is reached Under a situation of uncertainty, a price mechanism can lead to serious welfare losses when the resulting emission level is too high Quantity mechanisms are better when the slope of the MD curve is higher than the slope of the MC curve

9 Model MRC = cost difference between RES-E and fossil fuel electricity MD = external costs of producing fossil fuel electricity Price mechanisms: feed-in tariffs in stead of emission fees Quantity mechanisms: TGC shemes in stead of tradable permits

10 Emissions MRC H MRC L MD p* q* MRC

11 Model Weitzman: Quantity regulations are preferred if MD of emissions are more steeply sloped than MRC; price mechanisms are preferred if MRC are more steeply sloped than MD Ass: MD of emissions are rather flat for the domain of variation considered Static efficiency is higher for feed-in tariffs

12 Model results Parameters: MD of emissions, MRC H, MRC L Optimal values for feed-in tariff and quota Calculation of the comparative welfare loss of an optimal quotum leads to the following results: 1.The expected comparative welfare loss increases as the marginal damage of emissions increases 2.The expected comparative welfare loss increases as the degree of uncertainty of the MRC increases

13 Emissions MRC H MRC L p* q* MRC

14 Model results Adding a penalty to a quota system increases the efficiency: when MRC are high, emission reduction will stop earlier Penalty choise is important When an optimal penalty is added, the efficiency can be further increased by increasing the quota Adding uncertainty to the MD of emissions does not influence the instrument choise but decreases the expected welfare gain

15 Flemish situation Weighted average external cost of fossil fuel electricity in Flanders: 34.5 /MWh MRC L and MRC H determined by the current marginal costs and the potential of the different technologies (wind, biomass, PV) Potential in Flanders is rather small which leads to higher values for the slopes of the MRC-curves (e.g. best sites are chosen first)

16 Optimal quotum: 7.2% Optimal penalty: 24.5 /MWh Current system: - quotum: 3% - penalty: 125 /MWh Quotum increases every year and will amount to 6% in 2010 However, according to our model, the penalty is set much too high => emission reduction/RES-E production at too high costs might occur

17 Conclusions Effectivity: Feed-in systems are more effective than TGC shemes because of risk reduction Distribution of profits: stepped feed-in tariffs can avoid windfall profits that occur when TGC shemes are used Static efficiency: under the assumption of constant marginal damages of fossil fuel electricity production, feed-in tariffs lead to higher static efficiency

18 However: - there is not much experience with systems of TGC - systems of TGC can be very useful in an international context

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