Rethinking Government Subsidies for Renewable Electricity Generation Resources

Compass Lexecon's Joseph Cavicchi published an article in The Electricity Journal focused on the impact of renewable resource subsidization programs on power markets in the U.S. U.S. renewable electricity resource subsidization programs have increased the supply of zero-emission resources substantially in recent years and considerable growth in supply is expected to continue over the next 10-15 years. Although renewable resources are typically credited with reductions of greenhouse gases and other air pollutants, localized economic stimulus and estimated wholesale power market price reductions often drive benefits identified in subsidization program economic analyses. These economic impacts do not directly measure whether a program increases social welfare and often exclude the benefits of reducing unpriced environmental externalities. Moreover, subsidization program design relies heavily on production-based payments that push electric energy market prices down, often below zero, contrary to the objective of increasing market prices when correcting for an environmental externality. An alternative pricing approach, capacity-based subsidy payments, would substantially reduce the likelihood of negative electric market prices. The article concludes that the impending growth of renewable resources calls for a more thoughtful examination of the impact of subsidization program design on wholesale power markets.