Dynamic interactions of renewable and carbon policies on power generation investments

The EU and its member states implement different policy tools aiming to promote a more sustainable power sector and achieve security of supply. Here carbon and renewable policies are the most prominently implemented (with the EU ETS established at the European level, and several national renewable policies implemented by the member states). In principle a distinction between price-based and quantity-based policies can be made for both carbon and renewable policies. Both policies directly affect the power sector and reciprocally interact. While this has already been investigated for equilibrium situations, the feedback loops between policy mechanisms, the electricity market and investors over several years, is less well known. We present a long-term simulation of a single country power sector where carbon and renewable policies are implemented on a national level. Different scenarios are investigated alternating quantity and price-based mechanism for both carbon and renewable policies, namely a carbon tax, carbon market, feed-in tariffs and tradeable green certificates. The simulation is primarily economic model with risk-averse, expected-profit maximising agents, which use a conditional value at risk approach as a measure of investment risk. The results show the dynamic impact that different policy implementations and combinations have on decision of investors. The paper concludes with suggestions for policy makers.