Decarbonizing Electricity Generation with Intermittent Sources of Energy

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July 2017
Stefan Ambec, Claude Crampes
Toulouse School of Economics, French National Institute for Agricultural Research (INRA), University of Toulouse, University of Gothenburg, GGKP Annual Conference
Decarbonizing electricity generation with intermittent sources of energy

The paper Decarbonizing Electricity Generation with Intermittent Sources of Energy examines public policies and technological solutions that aim to decarbonize electricity production by replacing fossil fuel energy by intermittent renewable sources, namelywind and solar power. It considers a model of investment and production with two sources of energy: one is clean but intermittent (wind or solar), whereas the other one is reliable but polluting (thermal power). Intermittency increases the cost of renewables due to lessfrequent production and the consequent need to back-up production from renewables withthermal power, or to develop of energy storage and demand-response solutions. In competitive markets, the first-best energy mix is achieved with a carbon tax but not with the most popular support for renewables: feed-in tariffs and renewable portfolio standards. Both policies boost electricity production beyond the efficient level, and must be complemented with a tax on electricity consumption. The paper determines the social value of energy storage, and smart meters aimed at making consumers price responsive.