Renewable electricity support in perfect markets: Economic incentives under diverse subsidy instruments

We aim to provide an overview of renewable subsidy schemes, thereby focusing on renewable investment incentives and cost effects in a uniformly-priced market zone. Specifically, we develop a deterministic short-term market equilibrium model that allows to investigate both siting and technological distortions in onshore wind turbine deployment. This paper includes five support instruments: the feed-in tariff, sliding feed-in premium, fixed feed-in premium, investment-based subsidies and capacity-based subsidies. Investment decisions under these instruments are analyzed using an extensive German case study. Apart from providing a general overview, our contribution is threefold. First, we show that investment- and capacity-based subsidies generally are not equivalent, despite being used interchangeably in literature. Generators granted investment offsets opt for the most system-friendly technologies, whilst those granted capacity-based subsidies tend to select the least system-friendly ones. As these two generation-independent subsidy instruments promote very different technologies, we question the prevailing belief that learning-by-doing externalities must be related to capacity. Second, sliding feed-in premiums yield very similar outcomes as fixed feed-in premiums for both investment and cost effects, and can substitute fixed premiums to mitigate investment risks. This conclusion holds for technology-specific support within a uniformly-priced market zone, but might not hold over multiple pricing zones or for technology-neutral support. Finally, we show that most of these effects arise from technological distortions, whilst locational incentives are roughly the same under all instruments.