Support schemes for renewable electricity in the European Union: Producer strategies and competition

• I analyze a duopolistic wholesale electricity market with renewable subsidies.
• The model assesses the competitive impact of a premium relative to a feed-in tariff.
• Results hinge upon premium design (fix vs floating) and the availability of renewable energy.
• Under a fixed premium renewable producers become strategic market participants.
• Market power arises with abundant renewable electricity and a low fixed premium.

Current discussion about how to reform European support schemes for renewable electricity neglects certain risks of market power in wholesale electricity markets. In a stylized Cournot model of interacting spot and forward electricity markets, I analyze how different price-based support schemes affect producer strategies and, ultimately, competition in the wholesale market. I compare the strategic behavior of renewable and conventional producers in terms of electricity production and forward market sales in the presence of two different price-based support schemes: feed-in tariffs and feed-in premiums. I show that the feed-in premium, which is the European Commission's current scheme of choice, may enhance market power and favor conventional electricity production. It may also reduce the likelihood of achieving the political objective to increase production from renewable energy sources.