Economic and legal principles in renewable energy development policy - Solar, Wind and Land: Conflicts in Renewable Energy Development - page 5

s

M C

M C

M BS

-MBp

Q, Q*

Q u a n tit y o f in s ta lle d r le n le w a b le le n le r g y c a p a c ity

Figure 1.2 Intended effect of subsidies and related cost reduction programs on the
quantity of renewable energy development

In contrast, renewable portfolio standards, feed-in tariffs and some other
incentive programs seek to correct or mitigate the positive externality
problems associated with renewable energy by helping developers to inter-
nalize more of the external benefits of their developments. These programs,
which directly or indirectly increase the market price of renewable energy,
effectively shift developers' private marginal benefit curve ( MB p ) outward
so that it matches or more closely approximates the social marginal benefit
curve ( MB s ). Much of the recent growth in the global renewable energy
sector can be attributed to these types of policies.
Renewable portfolio standard (RPS) programs enacted in much of the
United States exemplify this policy strategy. These programs, which typically
require utilities in affected jurisdictions to purchase some minimum amount
of their energy from renewable sources, increase the market demand for and
price of renewable energy. 4 The United States' per-kilowatt “production tax
credit” for various types of renewable energy 5 and various “feed-in tariff”
programs common in some other countries 6 are even more direct versions
of this approach. Production tax credits and feed-in tariffs increase the
marginal benefits of renewable energy development by artificially increasing
the sale price of renewable energy itself.
As shown in Figure 1.3 below, to perfectly correct for positive externalities
associated with renewable energy development, a policy strategy of relying
solely on one of the aforementioned programs would need to be calibrated to
shift developers' private marginal benefit curve associated with development
from MB p to MB pi such that it matched the social marginal benefit curve
( MB s ). If successful, such a program would thereby increase the quantity of
installed renewable energy capacity to Q* , the optimal level.