PhD students seminar: Clément Leblanc

Abstract

The deployment of intermittent renewable energies is supported by public authorities in many countries, particularly in Europe, through production subsidy mechanisms. These are increasingly taking the form of subsidy contracts awarded through tenders to projects requesting the lowest level of subsidy in an auction. These mechanisms vary over time and across jurisdictions, particularly with respect to the design of the contract that determines the subsidy paid, which can range from a fixed feed-in tariff to a system of pure feed-in premiums to more complex systems sliding feed-in premiums. The design of these contracts has consequences on the incentives transmitted to renewable power plant developers, consequences on the risk borne by investors, and can sometimes open the way to strategic behaviors detrimental to the objectives pursued by the public authorities. This thesis attempts to analyze these different dimensions through microeconomic modeling of the behavior of firms that are subsidized to develop solar and wind power plants, using tools from contract theory and auction theory. Elements of quantification are brought by bottom-up modeling of the power system and of the production of wind and solar power in France.

In particular, the location of power plants or the technical choices (e.g., models of wind turbines being installed, orientation of solar panels) depend on how exposed (or not) firms are to price signals from electricity markets. These price signals induce firms to place a higher value on projects that are likely to produce when electricity is most expensive, provided that their revenue is dependent on market electricity prices. This is the case with feed-in premium systems but not with fixed feed-in tariffs. Although significant, the role of these incentives is to be weighed against the increased risk to firms that exposure to market electricity prices generates, which is likely to translate into higher risk premiums that will be factored into the bids placed in the auction determining the subsidy level. Simulation exercises of the power system presented in this thesis show that in France today, the increase in risk premiums that would result from a system of subsidies through pure feed-in premiums is an order of magnitude higher than the welfare gains that would result from better incentives provided to developers. However, some sliding feed-in premium schemes can keep the risk to investors low while improving the incentives provided to developers, as long as these schemes are well designed (which is not true of all schemes in place in Europe today). However, the growing share of intermittent renewables in the electricity mix could change these conclusions in the longer term.

Although risk limitation for investors appears to be a major issue in the design of subsidy contracts, this thesis also highlights the pitfall of trying to insure investors against the production risk of their projects (which depends notably on weather conditions): it is shown that contract designs aiming to insure against this risk are very likely to induce strategic behaviors on the part of developers, which would induce additional costs and/or inefficiencies in the development of renewable energy. This observation applies in particular to the mechanism used by France for offshore wind in the early 2010s.