Renewable electricity policy and market integration

Thomas Tangerås analyzes renewable electricity policy in a multinational electricity market with transmission investment. If national policy makers choose support schemes to maximize domestic welfare, then a trade policy motive arises operating independently of any direct benefit of renewable electricity. The model predicts that electricity importing (exporting) countries will choose policies which reduce (increase) electricity prices. A narrow pursuit of domestic objectives distorts transmission investment, and thereby market integration, below the efficient level. Distortions cannot be corrected by imposing national renewable targets alone. Instead, subsidies for transmission investment and a harmonization of and reduction in the number of policy instruments can improve welfare.