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Incumbent’s Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets

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  • Ali Darudi
  • Hannes Weigt

Abstract

Incumbent firms play a decisive role in the success of renewable support policies. Their investments in renewables as well as their operational strategies for their conventional CO2 emitting technologies affect the transition to a sustainable energy system. We use a game theoretical framework to analyze incumbents’ reactions to different renewable support policies, namely feed-in tariff (FIT), feed-in premium (FIP), and auction-based policies. We show that a regulator should choose a support scheme based on concerns about either market power or emission abatement: in FIP-based policies, the incumbent’s strategic behavior leads to lower CO2 emissions, but a higher market price compared to FIT-based policies. Furthermore, for FIP-based policies, the regulator might want to incentivize incumbents directly (to further reduce CO2 emissions) or newcomers (to further reduce market power). Particularly in FIP-based auctions, incumbents have the incentive to obtain all auctioned capacity, which could lead to an unchanged market price despite the entrance of new capacity into the market.

Suggested Citation

  • Ali Darudi & Hannes Weigt, 2020. "Incumbent’s Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets," The Energy Journal, , vol. 41(1_suppl), pages 167-190, June.
    • Handle: RePEc:sae:enejou:v:41:y:2020:i:1_suppl:p:167-190
    DOI: 10.5547/01956574.41.SI1.adar
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    1. Gert Brunekreeft & Marius Buchmann & Roland Meyer, 2016. "The Rise of Third Parties and the Fall of Incumbents Driven by Large-Scale Integration of Renewable Energies: The Case of Germany," Bremen Energy Working Papers 0024, Bremen Energy Research.
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