DO DYNAMIC TARIFFS PROMOTE INVESTMENT IN RENEWABLES? THE CASE OF A NON-REGULATED MONOPOLY

Abstract

We consider a non-regulated monopolist supplier of electricity that may use renewable and/or non-renewable resources to produce electricity. Renewable resources require an ex ante investment and generate an uncertain output with fixed operating costs. Non-renewable resources are perfectly dispatchable and have variable operating costs proportional to output. We find that dynamic tariffs promote investment in renewables in all scenarios except one where output from renewables when weather conditions are favorable is so large that the monopolist prefers to curtail excess energy. Only in that scenario, dynamic tariffs decrease investment in renewables. In any case, dynamic tariffs are welfare-improving in that both the monopolist and consumers become better off.