Comparison of auctions and alternative policy options for RES-E support

Abstract

This report summarises the findings of Task 6.2 of the AURES project. It intends to compare auctions with alternative policy instruments and examines under which circumstances auctions may be superior and inferior to achieve intended policy targets. Among an abundant list of potential policy drivers, which may affect an instrument’s effectiveness, its efficiency or further success criteria, the basis for the present analysis is the factor risk. It is demonstrated that risk constitutes an important factor as it may have decisive effects on societal welfare and thus may affect the decision-making of policy makers. Given a degree of uncertainty regarding the marginal costs and the marginal benefits of renewable support, particularly the choice between price and quantity-based instruments may yield different welfare effects. Both instruments expose policy makers to a risk of setting inefficient investment incentives. However, while price instruments may reduce the risk of welfare losses given a relatively steep marginal cost and a comparably flat marginal benefit curve, a quantity scheme may be superior if the relation between the two curves is vice versa. Building on this insight, our analysis reveals that the incentives for the use of policy instruments to support the deployment of RES are both country and technology specific. In general, it appears that the incentive to employ a quantity-based mean such as an auction is larger when the natural resources of the technology that is to be supported are abundant and if that technology is rather well developed. Moreover, since within a country the market and natural conditions of the different RES technologies and hence their supply costs may vary considerably, our findings provide an argument against a technology-neutral support.