Renewable Energy Policy Instruments and Market Power

Abstract

Markets for green certificates allow generators with market power to squeeze the margins of their competitors, as a generator that is vertically integrated into network activities might do. We analyse this issue in a stylised electricity industry in which a dominant producer of both conventional and renewable energy is facing a competitive fringe of renewable-energy producers. We demonstrate that whether or not a dominant firm is vertically integrated into network activities, it can disadvantage the fringe producers by distorting certificates prices, thereby inducing cost inefficiency in the generation of renewable energy. We compare green certificates to a system of feed-in tariffs, where a similar margin squeeze is not possible.

Incumbent’s Bane or Gain? Renewable Support and Strategic Behavior in Electricity Markets

“…Accordingly, in line with findings of von der Fehr and Ropenus (2017), in a FIP scheme, the marginal cost of the conventional technology is one of the main drivers of renewable investment decisions for the incumbent, and the market price has no direct effect; while this is the opposite for 6. See Proposition 2 on why policymakers might want to target incumbents specifically.…”

“…Von der Fehr and Ropenus (2017) demonstrate that under a green certificate policy, a dominant firm may squeeze the margin of a fringe by driving down the price of certificates. However, under FIP, such margin squeezes are not possible.…”

“…Furthermore, German market development in the last two decades showcases how incumbents' market power is impacted by, among other things, the increasing role of renewable generation: the electricity share of the big four incumbents 1 and their sister companies has decreased from about 75% in 2007 to about 50% in 2017. 2 On the other hand, incumbents may use their market power to strategically manipulate market prices, which might affect the efficiency of renewable support policies (von der Fehr and Ropenus, 2017). The interplay of incumbents' behavior, competitiveness, and renewable policies will likely gain more importance considering that the EU guidelines on "Environmental and Energy State Aid" (European Commission, 2014) are believed to favor big companies due to the EU's preference for market-based support policies (Verbruggen et al, 2015).…”

Technology Policy and Market Structure: Evidence from the Power Sector

“…Reguant (2019) investi-gates the interaction between carbon taxes, feed-in tariffs, and renewable portfolio standards in California, and shows trade-offs between efficiency and distributional concerns. Dressler (2016), Acemoglu et al (2017), and von der Fehr and Ropenus (2017) analyze the market impact of support mechanisms and costs to consumers theoretically. They propose oligopoly or dominant firm models to analyze pricing decisions when firms hold a portfolio of conventional and subsidized wind and solar capacity.…”