Support schemes for renewable electricity in the EU

This paper discusses the level and design of support schemes used to promote renewable electricity in Europe. A theoretical model is presented to determine optimal renewable energy policies. Policies that solely aim to address environmental externalities and energy security risks are unlikely to make renewable power technologies competitive. Learning effects and spillovers are necessary to justify the need for support schemes. The analysis suggests that feed-in premiums guaranteed in addition to the electricity market price should be preferred over feed-in tariffs, which provide the eligible power producer with a guaranteed price. The premiums should be time limited and frequently reviewed. Once the technology becomes competitive, tradable green certificates would be a more suitable support instrument. As regards wind energy, the available estimates of externalities suggest that levels are probably too high in many Member States. In addition, the current promotion of photovoltaics could possibly be more cost-efficient if it targeted technology development more directly.