Theories on fixed prices and quotas

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Different regulatory regimes were once again compared in your April issue. Current empirical evidence only proves that a constantly high price (German case) leads to a significant supply of wind energy, while in the UK case a limited demand for NFFO contracts led to an equilibrium with rather low bid prices. Once 10% of power will have to come from new renewables in the UK, prices required will also be different. When the UK reaches a similar market penetration, comparisons with Germany and other countries with fixed prices will become more meaningful, particularly using prices for power produced, not just bid prices. Average prices of wind power have been quite high in the UK during much of the 1990s, as NFFO 2 power was dominating the "real" production. That may not differ much from German prices.

Economic theory would predict lower capital costs when investment risks are low and when all possible investors are encouraged to participate in a market at any time. The UK system had its deficiencies with the irregular bids, which discouraged constant involvement and small scale investments. The German feed-in law had until 2000 not encouraged utility participation. Higher investment risk from fluctuating prices can lead to higher profits for investors who take the risk. Thus, different participants in the market may prefer different regulatory regimes.

The selection of the regulatory regime will also depend on the available resource. To erect the 9000 MW of wind in Germany under a NFFO-style tender system could have required over 15,000 MW of bids to allow at least some selection in the tender process, requiring much more development effort. Competition for leases of suitable land would have increased tremendously under an auction system, as developers that speculate for high cut-off prices in the energy auction would have been able to offer higher leases, to be paid upon success of their bids.

In areas like the US Great Plains, where large suitable sites are abundant, quota systems or production incentives will be more appropriate than fixed prices, second-best only to emission taxes. Combinations of quotas and price components could combine the advantages of both in countries with intermediate resource situations like the UK.

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