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Renewable energy support programs: New studies examine how and when they work

November 05, 2014

Investment in Renewable Energy Sources has exploded over the last decade; two new papers explore how policy makers can support the trend while achieving their long-term goals.

In a pair of new papers, University of Chicago Booth School of Business Professor John R. Birge, along with Ingmar Ritzenhofen and Professor Stefan Spinler of the WHU-Otto Beisheim School of Management (Germany) have quantitatively analyzed the effects of various schemes to support renewable energy generation and, consequently, to reduce carbon emissions and end fossil fuel dependence.

In "The Structural Impact of Renewable Portfolio Standards and Feed-In-Tariffs on Electricity Markets"  they use the California electricity market to test various subsidies and support arrangements.  "In Robustness of Renewable Energy Support Schemes Facing Uncertainty and Regulatory Ambiguity" they expand their work to include the ambiguities faced by policymakers.

In 2013, new investment into renewable power sources totaled $214 billion worldwide. This is up from $40 billion in 2004. At the start of the renewables push, the question for policymakers was how to spur spending on renewable energy expansion. Now, policymakers rather consider how to best achieve the larger goals of energy affordability, supply security and sustainability.

Broadly speaking, the most prominent regulatory support for alternative energy generations fits into one of three categories: Renewable Portfolio Standards are quota systems that require power companies or customers to provide or use a quota of renewable energy sources or to buy certificates to meet that obligation; Feed-In-Tariffs guarantee payments to power providers even if market prices collapse; Market Premia, like Feed-In-Tariffs, guarantee payments to providers but are market based to provide a premium to spot prices. One hundred thirty-eight countries, states and provinces use one or all of these programs to support renewable energy development.

The researchers tested each program for efficacy and robustness against uncertain regulatory and economic environments. They found that all of them have succeeded in increasing renewable power supply and reducing carbon emissions. Tariffs and premium payments are often the lowest cost solutions but quotas tend to generate more predictable long term results both in terms of renewable energy adoption and long-term investment. Because, to varying degrees, tariffs and premium payments distort markets by ignoring prevailing prices, the potential for over- and under-investment is great over longer periods of time.

Taken together, the two papers offer policymakers a framework for decision-making by identifying the short and long term tradeoffs implicit in each arrangement and by suggesting that a system of Renewable Portfolio Standards might provide the most robust long-term supply of renewable energy sources, even in a changing economic and regulatory environment.

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Contact: John R. Birge is available for comment at jbirge@chicagobooth.edu or 773-834-1701.

From: Susan Guibert, Chicago Booth Office of Media Relations, 773-702-9232 (office); 574-286-4839 (cell) or susan.guibert@chicagobooth.edu