Renewable Energy Policy Design


Project duration: 2/2010 - 5/2010


In several studies undertaken at FCN, the design and performance of renewable energy policy measures are investigated. The search for economically efficient policy instruments aimed at promoting the diffusion of renewable energy technologies in liberalized markets has led to the introduction of various alternative policy instruments. Since the 1990s, there has been an intensive debate about whether a quantity control policy (e.g. renewable energy quotas with or without green certificate trading) is preferable compared to a price control policy (e.g. guaranteed feed-in tariffs). Today, there is still a substantial lack of theoretical research in this field. Our research helps to close some of the existing gaps in the literature.

In the doctoral research undertaken by Ilja Neustadt, which builds upon previous theoretical work of Prof. Madlener with Weiyu Gao, we address the design of optimal regulatory instruments in markets for electricity from renewables. More specifically, we compare the two main renewable energy promotion schemes “guaranteed feed-in tariffs” (FIT) and “quota-based tradable green certificates” (TGC), i.e. we contrast price vs. quantity control policies.

More specifically, in Madlener et al. (2010), we start within a framework of a perfectly competitive energy market and extend the analysis for the case of market imperfection. We find that both promotion policies are indeed equivalent in terms of social welfare if the electricity markets are perfectly competitive. However, the price control policy dominates the quantity control policy in terms of social welfare if the assumption of perfect competition is relaxed.

In Madlener and Neustadt (2010), we extend the basic model by considering a perfectly competitive market with a possibility of technological innovation. Again, we contrast guaranteed FIT for electricity from renewables with TGC from the point of view of social welfare as well as that of dynamic efficiency. The decisions about technological innovation are modeled in a game-theoretic framework. In terms of social welfare, subsidy and quota policies are shown to be equivalent as in the static model (Madlener et al., 2010). The main finding is that subsidy policies are preferable in terms of dynamic efficiency. Further, no pre-commitment policies are shown to be at least as good as the pre-commitment case.

In Loss (2010) we compare and contrast the promotion policy schemes for photovoltaics in Germany and Switzerland. In particular, we contrast the two policy programs “Erneuerbare Energien Gesetz” (EEG) and “Kostendeckende Einspeisevergütung” (KEV) with each other. Moreover, we analyze the influencing factors determining the level of the feed-in tariffs granted in the two promotion schemes. Finally, we study inefficiencies in the promotion if differences in the quality of locations are neglected, by using an Excel calculation tool that allows us to evaluate the levelized cost of power generation.

Project publications

Madlener R., Neustadt I. (2010). Renewable Energy Policy in the Presence of Innovation: Does Government Pre-Commitment Matter?, FCN Working Paper No. 4/2010, Institute for Future Energy Consumer Needs and Behavior, Department of Business and Economics, RWTH Aachen University, April (revised June 2010 and December 2011).

Madlener R., Neustadt I., Zweifel P. (2008). Promoting Renewable Electricity Generation in Imperfect Markets: Price vs. Quantity Policies, FCN Working Paper No. 1/2008, Institute for Future Energy Consumer Needs and Behavior, RWTH Aachen University, July (revised November 2011).

Supervised student research

Loss T. (2010). Photovoltaikförderung in Deutschland und der Schweiz. Study thesis, Chair of Energy Economics and Management, Faculty of Business and Economics, RWTH Aachen University, May.