Electricity Expenditure Risk with Renewable Energy Support Schemes

In deregulated electricity markets, economic support schemes for renewable energy (RES-E) technologies are typically implemented under the pretense of shielding investors from revenue risk arising from stochastic wholesale electricity prices. Two dominant RES-E support policies worldwide are feed-in tariffs (FIT) and renewable portfolio standards (RPS). Thus far, the economic and policy literature has failed to acknowledge a key benefit to retail electricity providers (and, ultimately, to consumers)—that stimulating investment in RES-E generation itself reduces wholesale price risk. Using a simple theoretical model of an electricity market, we demonstrate that greater RES-E generation should reduce the short-run variance in the wholesale electricity price, and thus in total electricity expenditures per unit (which include payments to RES-E related to the prevailing support policy). We find empirical support for this hypothesis using a panel of policy, price, and generation data for 19 countries over the period 20002011. Both FIT and RPS are found to reduce the short-run variance in total electricity expenditures per unit, due largely to a reduction in the variance in wholesale prices. Moreover, we find evidence that FIT reduces the variance in electricity expenditures per unit over the long-run, whereas RPS does not. † This research was presented at the 17 Annual CU Environmental and Resource Economics Workshop (Sept. 4-5, 2015, Vail, CO), the Association for Public Policy Analysis & Management (APPAM) 2015 Fall Research Conference (Nov. 12-14, 2015, Miami, FL), and the 85 Annual Meetings of the Southern Economic Association (Nov. 21-23, 2015, New Orleans, LA). We thank participants of those events for a number of helpful comments and observations. Additionally, we thank Wesley Burnett, Christoph Graf, Ian Lange, and Mark Lively for many useful comments and suggestions. We are indebted to Nick Johnstone for providing the international RPS and FIT data. Chris Blackburn provided essential graduate assistant work related to data cleaning, and Mishal Ahmed performed minor graduate assistant work related to data collection. Finally, we thank the Georgia Tech School of Economics for financial support. * Johnson: [email protected] Oliver: [email protected]