Optimal Renewable Energy Policies over Time: Policy Commitment vs. Policy Discretion

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When promoting the large-scale deployment of renewable energy sources (RES), policy-makers face substantial uncertainties, particularly regarding the corresponding future policy costs. Uncertainty implies that RES policies may turn out to be ill-designed to stimulate RES deployment efficiently in the long-run. As a response, RES policies may be adjusted over time to account for new information and knowledge on their impacts. However, the option to adjust RES policies also comes at a cost. Private RES investors which foresee such potential policy adjustments may strategically hold-up necessary RES investments, particularly if such investments are irreversible. Thus, the expectation of future policy adjustments may impair the efficient attainment of ambitious RES deployment targets. Against this background, this research proposal aims to explore the optimal long-term design of RES policies. Should policy-makers be committed to a pre-defined long-term RES policy pathway? Or should they be allowed the discretion to adjust the policy framework if necessary? To answer these questions, the research proposal develops an economic partial equilibrium model which allows examining optimal RES policy options in the presence of uncertainty, path dependencies and strategic behavior of private agents. The research shall be carried out the Institute of New Economic Thinking at the University of Oxford.