Renewable support and strategic pricing in electricity markets

We show how policies to support clean technologies change price competition and market outcomes. We present evidence from electricity markets, where regulators have implemented different policies to subsidize clean energy. Building on a multi-unit auction model, we show that currently applied subsidy designs either foster or attenuate competition. Contract-based output subsidies decrease firms’ mark-ups. In contrast, market-based designs that subsidize clean output via a regulatory premium on the market price lead to higher mark-ups. We confirm this finding empirically using auction data from the Spanish power market. Our empirical results show that the design choice for renewable subsidies significantly impacts pricing behavior of firms and policy costs for consumers.