Is green energy expensive? Empirical evidence from the Spanish electricity market

Renewable energy promotion and its cost are at the heart of the energy policy debate in many countries. The question from an economic perspective is how expensive the promotion of renewable sources through price-based incentive schemes is. This paper addresses this issue empirically. We analyze the Spanish electricity market during the period 2008-2012, where renewable energy production rose by 57%. To determine how expensive it was, we first measure the savings due to the spot price reduction driven by the merit order effect and, second, we compute the amount paid as incentives to green energy by the electricity system; the difference between the two is the net cost of green energy to the electricity markets. We present aggregate results for renewable sources as a whole, as well as individual results for each technology. We show that at the initial stages, when renewable capacity was low, green energy promotion paid for itself (2008-2009); however, from 2010 on, when renewable production reached a relatively high level, it started to impose a positive net cost on the system. Finally, we found substantial differences among technologies: wind energy implied the lowest net cost, while solar photovoltaic was the most expensive. (C) 2014 Elsevier Ltd. All rights reserved.