Different interpretations of the cost-effectiveness of renewable electricity support: Some analytical results

One of the main criteria to assess the success of instruments to support electricity from renewable energy sources (RES-E) is cost-effectiveness. However, a consensus on the definition of cost-effectiveness does not yet exist in the literature. For some authors, cost-effectiveness refers to the minimisation of RES-E generation costs, but others define it as the minimisation of the costs of RES-E support. This paper compares the two main interpretations of this concept using a mathematical model. The optimisation problems of both approaches are formally stated, the corresponding optimality conditions are obtained, the optimal solutions of both approaches are compared and some rent transfer mechanisms from consumers to producers are proposed. It is shown that the minimisation of generation costs does not imply that consumer costs are minimised, and that the minimisation of consumer costs does not imply that generation costs are minimised. In addition, two types of mechanisms of transfer of rents from consumers to producers which lead to the same optimal solution for both approaches are proposed. (C) 2015 Elsevier Ltd. All rights reserved.