2010) "Regulatory design and incentives for renewable energy" manuscript

Increasing electric power production from renewable energy sources is now widely perceived as a sensible goal for energy policy. In this paper, we analyze the most widely used regulatory mechanisms aimed at achieving this goal, i.e. feed-in tari¤s and mandatory portfolio standards. We show without regulatory intervention there may indeed be a need for strong incentives because of high levels of resource adequacy associated to conventional technologies. The optimal feed-in tari ¤ exceeds the marginal cost of the conventional technology if and only if there are signi\u85cant economies of scale. In this case, an increase in the marginal cost of conventional technology (e.g. incorporation of social costs of GHG emissions) implies a reduction in the optimal feed-in tari¤. The RPS standard that induces optimal investment in renewables further exacerbates under-investment in the conventional technology. A lower capacity margin in the conventional technology induces higher spot prices (on average) which serve to recoup the losses associated with socially optimal investment levels in the renewable technology. Given that regulators are generally averse to low excess capacity margins, an RPS standard is bound to co-exist with other regulatory interventions aimed at maintaining acceptable capacity margins (e.g. capacity market). 1