DP12700 Evaluating the case for supporting renewable electricity

Author(s): David M G Newbery
Publication Date: February 2018
Keyword(s): cost-benefit analysis, learning-by-doing, PV, Subsidies, wind
JEL(s): C6, H23, H43, Q42, Q5, Q54
Programme Areas: Industrial Organization
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=12700

Renewable electricity, particularly solar PV and wind, creates external benefits of learning-by-doing that drive down costs and reduce CO2 emissions. The Global Apollo Programme called for collective action to develop enewable energy. This paper sets out a method for assessing whether a trajectory of investment that involves initial subsidies is justified by the subsequent learning-by-doing spillovers and if so, computes the maximum justifiable additional subsidy to provide, taking account of the special features of renewable electricity -- geographically dispersed and variable quality resource base and local saturation. Given current costs and learning rates, accelerating the current rate of investment appears globally socially beneficial for solar PV in most but not all cases, less so for on-shore wind. The optimal trajectory appears to involve a gradually decreasing rate of growth of installed capacity.