Clean energy technology buydowns: Economic theory, analytic tools, and the photovoltaics case

The conventional responses to the market failures that constrain energy innovation include market tuning (e.g. pollution taxes) as well as supply-push (i.e. public support for research, development, and demonstration). There is no similar consensus favoring demand-pull programs, but this dissertation develops an economic rationale for subsidies to pull emerging clean energy technologies down their respective experience curves. Even with optimal pollution taxes in place, such buydowns can improve welfare—primarily by correcting for learning-by-doing spillover that discourages firms from forward pricing (i.e. pricing below the short-term profit maximizing level in order to reduce costs through production experience). Learning spillover also occurs in other sectors, but the case for clean energy buydowns is unique.; Governments wisely seek a broad supply-push portfolio, but only the most promising clean energy options merit demand-pull support because individual buydowns generate scant spinoff benefits and failure to screen out poor prospects can yield entrenched corporate welfare programs (e.g. grain ethanol). Governments also have more information to inform their choices about technologies at the deployment stage.; The buydown selection criteria proposed herein favor support for photovoltaics (PV) and the recommended implementation strategy optimizes this support. Conventional analyses assume markets fully materialize as soon as the technology reaches financial breakeven, suggesting buydowns should be implemented as quickly as possible. The optimal path method introduced in this dissertation more accurately models demand and defines the welfare-maximizing subsidy/output schedule. An optimal PV buydown would triple current demand subsidies and sustain declining per-unit support for over four decades. Such a buydown (initially targeting residential markets in industrialized countries) need never raise electricity rates by more than 0.5 percent while delivering roughly {dollar}50 billion in long-term net benefits (relative to a no-subsidy scenario) and allowing PV to provide over 5 percent of industrialized country electricity by 2030. (vs. less than 1 percent without subsidies).; Finally, implementing buydowns at the regional level bypasses the international collective action problem and reduces the disruption from the failure of any single program. A decentralized approach also facilitates program innovation and reduces free rider subsidy costs—a crucial determinant of buydown economics.