Addressing the reliability challenge: Subsidy policies for promoting renewable electricity consumption

Abstract

The intermittency and volatility of renewable electricity pose challenges to supply reliability, which is not conducive to renewable energy consumption. To ensure a reliable electricity supply, more governments implement subsidy policies to promote the adoption of innovative technologies by renewable energy producers to enhance supply reliability. We compare two types of subsidies provided by a government: investment subsidy (IS) policy, which is implemented in the deployment stage to directly reduce improvement costs, and operational subsidy (OS) policy, which is implemented in the operational stage to increase the renewable energy producer’s marginal returns. First, we show that without government intervention, customers’ low green consciousness or higher improvement costs may prevent the renewable energy producer from enhancing supply reliability. Second, through a comprehensive comparison, we find that both subsidy policies can incentivize the renewable energy producer to improve supply reliability when customers are more green-conscious, and the improvement cost is high. However, the OS policy and the IS policy operate on different mechanisms: the IS policy can directly alleviate the improvement cost burden on the renewable energy producer, while the OS policy serves a dual role of increasing the renewable energy producer’s marginal operational profit and expanding the market demand for renewable electricity. When customers’ green consciousness is low, the government can only choose whether or not to implement the OS policy. Finally, we highlight that the implementation of the IS policy by the government may not be more beneficial to both the renewable energy producer and customers compared to the OS policy. This result informs regulators that energy security should be considered when designing subsidy policies and should not be limited to promoting the interests of participants.