Renewable compensation policies and conventional energy investment: A theoretical model

• Published in: Heliyon Vol. 10; no. 14; p. e33971
• Main Author: Ortega Moreno, Boris
• Format: Journal Article
• Language: English
• Published: England Elsevier Ltd 30.07.2024; Elsevier
• Subjects: Capacity investment; consumer surplus; Cournot duopoly; electricity; energy; imperfect competition; markets; Natural gas; Renewable compensation policies; theoretical models; Renewable compensation policies; Cournot duopoly; Capacity investment; Natural gas
• ISSN: 2405-8440; 2405-8440
• DOI: 10.1016/j.heliyon.2024.e33971

Many jurisdictions are simultaneously expanding natural gas and renewable capacities, largely supported by renewable compensation policies (RCPs). However, RCPs' impacts on firms' incentives for conventional capacity investment remain unclear. This paper develops a two-stage theoretical model to investigate this interaction within an imperfect competition and uncertain demand context. Firms initially invest in conventional energy capacity, followed by competing to supply electricity from conventional and previously owned renewables. Conventional output is compensated at market prices, but renewable output is subject to two common RCPs: feed-in tariffs (FiT) and feed-in premiums (FiP). The illustrative numerical example shows that increasing the proportion of renewable output compensated by a FiT from 20% to 80% increases the market-level conventional investment by 18%, leading to an increase in consumer surplus but decreasing firms' profits. These results exemplify the unintended effects of RCPs, encouraging the adoption of conventional generation capacity. The model presented in this paper provides a theoretical foundation for understanding the relationship between RCPs and conventional energy capacity investment—critical for carbon-intensive nations transitioning to renewables while maintaining reliable electricity supply through conventional generation.