Subsidies for renewable energies in the presence of learning effects and market power

We study the impact of learning by doing, learning spill-overs, and imperfect competition in a model with two types of electricity producers, an oligopolistic sector of polluting fossil-fuel utilities and a competitive fringe of non-polluting generators of electricity from renewable energy sources (RES-E). Furthermore we consider an upstream industry of RES-E equipment producers engaged in learning by doing. We show that a first-best policy requires two instruments, a tax in the fossil-fuel sector and an output subsidy for RES-E equipment producers. We then study second-best-optimal feed-in tariffs that are paid to the generators of RES-E. By means of simulations we calculate the welfare loss of a second-best-optimal feed-in-tariff policy and analyze how market structure impacts on second-best-optimal feed-in tariffs.

► We model fossil-fuel utilities, RES-E suppliers and producers of RES-E equipment. ► Fossil-fuel utilities form a Cournot oligopoly. ► RES-E suppliers and RES-E equipment producers are perfectly competitive. ► Learning spill-overs occur in the RES-E equipment industry. ► We derive first-best emission taxes and subsidies for RES-E equipment producers. ► We analyze second-best feed-in tariffs for RES-E suppliers.