Price vs. quantity regulation of volatile energy supply and market entry of RES-E operators

Abstract This paper compares price stabilization (such as feed-in tariffs) versus quantity-based policies in supporting the deployment of renewable energy sources to produce electricity (RES-E) under uncertainty. We challenge a widespread view among RES-E supporters claiming that price stabilization provides more investment security and therefore triggers more market entry than free market price fluctuation. Setting up a model with volatile cost or quantity of both conventional electricity production and RES-E, we find that a price stabilization scheme brings about a lower producer surplus for RES-E firms and less RES-E market entry when price fluctuation is induced by the conventional firms’ cost volatility. The opposite holds when the fluctuation results from RES-E firms’ cost or output shocks. With respect to welfare, the second-best quantity policy through a RES-E capacity target always outperforms the second-best policy of price stabilization.