The policy implications of the different interpretations of the cost-effectiveness of renewable electricity support

The cost-effectiveness of support for renewable electricity is a main criterion to assess the success of policy instruments, together with effectiveness. The costs of support are also a source of significant concern for governments all over the world. However, significant confusion exists in the literature on the cost-effectiveness of public support for renewable electricity. While some authors define the concept of cost-effectiveness as that which complies with the equimarginality principle, many others, including documents from relevant organisations (European Commission, International Energy Agency, Intergovernmental Panel on Climate Change) define it as “the lowest costs of support”, generally equating it with the minimisation of consumer costs. The aim of this paper is to clarify the differences between both approaches and their policy implications regarding the choice of instruments and design elements. It is shown that they partly overlap and that their policy implications clearly differ, leading to very different policy prescriptions. While the former favours technology neutral instruments and design elements, the “minimisation of consumer costs” approach favours instruments and design elements which adjust support levels to the costs of the technologies.