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Three Principles for Subsidizing Renewable Energy

October 3, 2014 By Iván Martén

The Wall Street Journal brought together a group of industry and thought leaders—The Experts—to comment on issues raised in Journal Reports. In October 2014, BCG’s Iván Martén weighed in on several issues.

Renewable-energy production brings extra costs to the power system that should be managed and subsidized in the most effective way. Some of the biggest additional expenses tend to relate to production: Even though costs have dropped as the industry gains experience, renewable energy is still more expensive than conventional technologies. The new investments required to ensure high-quality power in the distribution and transmission networks, such as deviations management and new metering systems, as well as in conventional technologies that can supply backup power, also add significant cost.

All of these factors must be fully considered to efficiently remunerate renewable-energy providers.

Three basic principles both define an efficient remuneration model for renewable-energy sources and ensure that the sources are technically and economically sustainable.

First, introduce mechanisms for automatically reviewing renewable-energy subsidies. Those subsidies should be dynamically adjusted depending on changes in investment costs and in operation and maintenance costs. Germany, for example, regularly adjusts its subsidies for renewable energy and reduces them every year to promote renewable energy’s competitiveness with conventional technologies.

Second, consider and minimize the need for developing new transmission and distribution networks and strengthen the mechanisms for financing the required infrastructure. For example, Spain offers new incentives that reinforce networks so that they totally align with the new renewable-energy capacity in the country’s electricity system.

Third, ensure the economic viability of using conventional plants to provide backup power during times when utilization of renewable sources is low, and promote mechanisms for minimizing renewable-technology deviations.

The final objective is to design models for integrating renewable energy into the power market that minimize the impact on wholesale electricity prices. Underestimating the resources needed to develop renewable energy in the entire power system can create competitive distortions in the power market and generate insufficient income for meeting all of the incurred costs.

This blog was originally published by the Wall Street Journal.

Three Principles for Subsidizing Renewable Energy