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Price vs. quantity regulation of volatile energy supply and market entry of RES-E operators

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  • Narita, Daiju
  • Requate, Till

Abstract

This paper compares price stabilization (such as feed-in tariffs) versus quantity-based policies in supporting the deployment of renewable energy sources to produce electricity (RES-E) under uncertainty. We challenge a widespread view among RES-E supporters claiming that price stabilization provides more investment security and therefore triggers more market entry than free market price fluctuation. Setting up a model with volatile cost or quantity of both conventional electricity production and RES-E, we find that a price stabilization scheme brings about a lower producer surplus for RES-E firms and less RES-E market entry when price fluctuation is induced by the conventional firms’ cost volatility. The opposite holds when the fluctuation results from RES-E firms’ cost or output shocks. With respect to welfare, the second-best quantity policy through a RES-E capacity target always outperforms the second-best policy of price stabilization.

Suggested Citation

  • Narita, Daiju & Requate, Till, 2021. "Price vs. quantity regulation of volatile energy supply and market entry of RES-E operators," Energy Economics, Elsevier, vol. 101(C).
    • Handle: RePEc:eee:eneeco:v:101:y:2021:i:c:s0140988321003182
    DOI: 10.1016/j.eneco.2021.105425
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    More about this item

    Keywords

    Electricity market; Renewable energy sources to produce electricity (RES-E); Cost uncertainty; Feed-in-tariff; Capacity policy; Market entry;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L38 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Policy
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources

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