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Renewable Energy: Lessons from the EU Experience

About the Project 

Recognizing the limitations of common metrics for measuring how renewable energy should be incentivized and how its impact should be measured, the project on renewable energy in the European Union grows out of our academic research into calculating the direct and indirect costs of the various incentive schemes found in the United Kingdom and Europe. Noting that the fluctuating output of renewable energy, at incentivized prices, under dispatch priority creates a cost for conventional generators forced to reduce capacity and reprioritize their plant, we introduce financial option theory to measure the burden upon conventional fossil fuel in hedging against the consequent exposure. The option analytic model was first applied to data for the United Kingdom before being used upon the major countries of the European Union, yielding similar results. As detailed in our research, according to the metric return on capital employed, renewable energy support schemes produced generous rewards with little risks to private investors at a time when Europe’s major energy utilities were earning less than their cost of capital. Using financial option method, we are able to calculate the indirect costs of renewable energy upon incumbents in managing random renewable output under dispatch priority, and find it to be very expensive. The key outcome of this project is showing the economic inefficiency of the European Union support schemes for renewable energy. For the U.K. and the rest of Europe, the indirect costs imposed upon incumbent utilities and generators in accepting the output from renewable energy generators were significant with burdens falling upon all stakeholders.

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