Cost-effectiveness and incidence of alternative mechanisms for financing renewables

The promotion of renewable energy in the electricity sector is increasing rapidly around the world based on its positive environmental and socioeconomic effects. However, there is also growing concern about the effect that these policies may have on the final price of electricity and how this may affect different social groups and competitiveness. Here we study distributional implications of different schemes for financing the promotion of renewables in the Spanish electricity sector. These schemes include exemptions from the electricity surcharge for residential and industry consumers and also various alternatives where the cost of renewables is not financed through the electricity bill but from other tax sources such as oil taxes, value added taxes or lump-sum transfers. The method that we use is an integration of a computable general equilibrium (CGE) model and a microsimulation (MS) model that enables us to capture a rich representation of the heterogeneity of households along with inter-sectoral and price-related effects, which are fundamental for analyzing the implications of schemes that are not restricted to the electricity sector. Our results provide evidence against using an electricity surcharge to finance the promotion of renewables due to its regressive effects. However, alternative financing options that do not increase electricity prices can significantly attenuate these adverse effects while not affecting welfare or competitiveness.