Electricity provision with intermittent sources of energy

We analyze the interaction between a reliable source of electricity production and intermittent sources such as wind or solar power. We first characterize the optimal energy mix, emphasizing the availability of the intermittent source as a major parameter for the optimal investment in capacity. We then analyze decentralization through competitive market mechanisms. We show that decentralizing the efficient energy mix requires electricity to be priced contingently on the availability of the intermittent source. By contrast, traditional meters impose uniform pricing, which distorts the optimal mix of energy sources. Decentralizing the efficient energy mix with uniform prices requires either cross-subsidies from the intermittent source to the reliable source of energy or structural integration of the two types of technology.

► We analyze the optimal mix of energy when an intermittent source of electricity such as wind or solar power is available.
► The installed capacities of the intermittent source should be partly or fully backed up by a reliable source.
► The decentralization of the optimal mix requires to price electricity contingently on the availability of the intermittent source.
► Under non-contingent prices, decentralization requires cross-subsidies or structural integration of the two sources of energy.