Distortions of National Policies to Renewable Energy Cooperation Mechanisms

Abstract

The EU endeavors to stimulate the use of renewable energy cooperation mechanisms. These cooperation mechanisms can significantly reduce the policy cost for meeting renewable targets. Several authors, however, have raised concerns that such cooperation mechanisms can be subject to efficiency losses due to different national regulatory conditions, and due to an ill-advised selection of cross-border support instruments. A quantitative evaluation of these effects remains missing. To address this gap, we first introduce a unifying analytical framework to show how optimal cross-border renewable energy trade should be organized and how these mechanisms could be distorted. We then develop a partial equilibrium model, formulated as a large-scale mathematical program with equilibrium constraints, to assess the impact of (i) different national grid cost allocation regimes and (ii) different cross-border feed-in premium implementations. Our results indicate that EU-wide auctions for renewable electricity should (i) not be based on sliding feed-in premiums and should (ii) ideally be discriminatory if national regulatory conditions differ across Member States. We also consider country-level distributional effects and confirm that Member States can lose when engaging in renewable cooperation.