Market signals and investment in intermittent renewables

This paper examines how price signals affect investment in renewables using a theoretical model in the tradition of Industrial Economics. While feed-in tariffs (FIT) isolate renewables from the spot market, feed-in premium (FIP) support schemes integrate them, thus making them subject to market signals. Under a FIT, investors in renewables are indifferent towards their plants' output intermittency, which increases integration costs. In contrast, market integration under a FIP leads to the internalization of integration costs by investors. Under a FIP, the expected marginal profit of a renewable energy source's capacity is decreasing in its output intermittency and in the correlation between this intermittency and that of other plants but is increasing in its correlation with random shocks in electricity demand. Therefore, FIT do not provide incentives to investors for an optimal choice of renewable technologies and locations, while FIP do.