Renewable Electricity Policies, Heterogeneity, and Cost Effectiveness

Renewable electricity policies promote investment in renewable electricity generators and have become increasingly common around the world. Because of intermittency and the composition of other generators in the power system, the value of certain renewables—particularly wind and solar—varies across locations and technologies. This paper investigates the implications of this heterogeneity for the cost effectiveness of renewable electricity prices as compared to one another and to a carbon dioxide emissions price. A simple model of the power system shows that renewable electricity policies cause different mixes of investment in renewable and other generator technologies. Policies also differ according to their effect on electricity prices, and both factors cause the cost effectiveness to vary across policies. We use a detailed, long-run planning model that accounts for intermittency on an hourly basis to compare the cost effectiveness for a range of policies and alternative parameter assumptions. The differences in cost effectiveness are economically significant, where broader policies, such as an emissions price, outperform renewable electricity policies. JEL codes: L94, Q48, Q52 . ∗ We are grateful to the Heising-Simons foundation for supporting this research.