IET Renewable Power Generation

Research Article

Influence of optimal government subsidies for ISSN 1752-1416

Received on 9th July 2015

renewable energy enterprises

Revised 20th April 2016
Accepted on 8th June 2016
E-First on 14th July 2016
doi: 10.1049/iet-rpg.2015.0307
www.ietdl.org

Dong-xiao Yang1 , Pu-yan Nie2

1Institute of Industrial Economics, Jinan University, Guangzhou, 510632, People's Republic of China
2School of Finance, Guangdong University of Finance and Economics, Guangzhou 510320, People's Republic of China
E-mail: [email protected]

Abstract: On the basis of the government subsidies for renewable energy electricity, this study builds a two-stage duopoly
model in an industry with a renewable electricity enterprise and a conventional electricity enterprise in the market. Under the
assumption of the generalised social welfare maximisation authority, this study discusses the effects of three types of
government subsidies, business fixed input subsidy, output subsidy and mixed subsidy. First, the mixed subsidy policy is the
best one under generalised social welfare. However, when the cost of renewable energy production or the energy negative
coefficient is low, this subsidy policy generates a high electricity price. Second, when the output subsidy is used, the optimal
price and optimal output of renewable energy will decrease with the increase of production cost and negative externality
coefficient of renewable energy enterprises. Finally, both the optimal price and optimal outputs depend on the level of negative
externality and the cost of renewable energy production.

Nomenclatures grants, and plan to achieve the goal of its market share of
renewable energy in the certain period of time. In addition, United
P price of electricity Arab Emirates use biding subsidies to promote the development of
A market size renewable energy. According to the comparison, they believe that
Qi output of each enterprise mixed policy including feed-in-tariff and the quota system ought to
SI subsidy for pre-investment be taken for United Arab Emirates to achieve the goal in renewable
SO subsidy for per unit output energy departments. Under this condition, the best measure is to
πR profit of the renewable energy enterprise give certain economic subsidies to renewable energy industry to
πD profit of the conventional energy power enterprise stimulate its development.
PG price that the government decided As is known, all conventional energy has strong negative
CR cost of renewable energy enterprise externality, and, only by government regulation, this harmful
influence can be reduced. In the 1960s, the regulation theory was
CO cost of conventional energy power enterprise first proposed by British economist Coase [2]. A group of scholars
GE cost of the government put forward a new theory of social cost, that the government has
η, ξ the cost coefficient of the government the ability to perform certain activities with a lower cost than
NE the negative externality of conventional energy private organisations. In other words, when the enterprises carry
γ coefficient of negative externality of conventional energy out the production with negative externality based on government
and the government's emphasis on environment regulation, the effect of solving the impact caused by negative
W the social welfare externality is often better than their own measures. Based on the
Coase's theory, few scholars discuss the issue of government
1 Introduction regulation in the energy industry.
Some scholars found that the subsidies for conventional energy
On one hand, economic growth critically depends on conventional enterprises may lead to the price mechanism's disorder and the
energies that would be depleted during the next few decades. On inefficiencies in the economic level. [3, 4] Besides, subsidies on
the other hand, waste emission mainly comes from fossil energies traditional energy lead to the increase of energy price, which is
and global warming caused by fossil energy increased sharply in harmful for promoting consumption [5]. However, Lin and Jiang
the past decades. Renewable energy owns clean advantages and has (2011) discussed the rationality of Chinese energy subsidies. They
gradually played a pivotal role in the whole world. Many insist that for developing countries such as China, energy subsidies
governments all over the world have launched relevant policies to are reasonable and even necessary in order to achieve social goals.
develop renewable energy. As an example, the European Union has However, the conflict of energy subsidies, energy demand and
committed itself to increase the share of renewable energy sources climate change have revealed gradually owing to the rise of energy
in total energy consumption to 20% by 2020.The US government price and consideration of environmental protection [6]. Similarly,
also planned to double the production of renewable energy, and to Iwaro and Abraham (2010) established the quantitative analysis of
increase the proportion of new energy power generation in the total subsidies for renewable energy of developing countries. They
generating capacity to 20% by 2012 and 25% by 2025 (2009) [1]. believed that in a large number of investment and government
Meanwhile, similar renewable energy development strategies were intervention, energy subsidies lower the price of energy products,
declared in China, Japan and Russia. It is arranged and analysed by and further clarify that it is the best choice to develop the
Mezher, Dawelbait and Abbas (2012), who compared the impact of renewable energy technologies with energy subsidies in developing
renewable energy policies in 61 countries on their own energy countries [7]. The removal of energy subsidies will reduce the
sectors and summarised the advantages and disadvantages of each social welfare and raise the level of poverty, especially in
policy. Many countries, such as American, New Zealand and developing countries [8, 9]. In the country whose energy price is
Finland, adopt a variety of policies including capital subsidies and valorised by government, Jiang and Tan (2013) utilised a price-gap

IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421 1413
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
approach to estimate the subsidy cost of Chinese fossil energy with theory, we comparatively analyse the electricity prices, electricity
externalities, the results show that in China the maximum subsidies output and social welfare level of three kinds of subsidies in
is for oil, followed by coal and electricity industry. In addition, different situation.
they also analysed the impact of energy subsidies reform in As a result, this paper analyses the influence of the
different sectors and general price index based on input–output government's financial subsidies for renewable energy enterprises.
model. The elimination of energy subsidies has a major influence The rest of this paper proceeds as follows: Section 2 establishes a
on energy intensive industry, so as to increase the level of price. two-stage game model including three different kinds of subsidy
Oil, power and natural gas are the most frequent used energy when input to analyse the influence mechanisms of the three kinds of
energy subsidies are abrogated [10]. Solaymani and Kari (2014) subsidy ways. In Section 3, the model is solved and analysed by
analysed the impact of the abolition of energy subsidies on the backward induction and numerical simulation analysis. Section 4
domestic economy in Malaysia through establishing a CGE model, compares the three situations. Conclusions are remarked in the
the research shows that the removal of energy subsidies will reduce final section.
the total energy needs [11].
The opinions of scholars on regulation of the government like 2 Model
subsidies for the renewable energy industry are unified. They
believe it is a preferable policy in energy-saving and emission- We consider a duopoly model that has two producers: one
reduction [12], as well as raising the social welfare level [13, 14]. enterprise, named D, generates electricity by coals, natural gas,
Some researches consider that government expenditure and fossil oil, etc. The other is a renewable energy enterprise, denoted
subsidies are pivotal for renewable energy in its early stage of as R, and it generates electricity by renewable energy, such as wind
development by analysing the current situation and latent capacity energy, solar energy, biomass energy and so on. In order to promote
of renewable energy in India [15]. For instance, Wohlgemuth and the development of renewable energy, the government will give an
Madlener (2000) compared the two common kinds of subsidies for optimal subsidy to the renewable energy enterprise to maximise the
renewable energy: Investment cost subsidies and operating cost social welfare.
subsidies. An interesting discovery is that subsidies for the The inverse demand function can be given as follows:
electricity enterprises may not be the best solution for production
of renewable energy industry, whose cost is expensive in developed � = � − � R − � �, (1)
countries such as Europe. In most cases, the amount of subsidies
for renewable energy industry should be related to project where A > 0 is a constant and represents the market size and Qi is
performance instead of capital investment [16]. the output of each enterprise for i ∈ (R, D), Pis the price of
Kalkuhla et al. (2013) analysed the influence of renewable electricity. This paper employs the linear demand function to
energy policies on welfare level and energy price level in the simplify the model.
situation that the pricing mechanism of carbon is unsound and We assume that the function of government subsidies for the
regulatory authorities want to reduce emissions [17]. They built a renewable energy enterprise is f(SI, SO), where SI denotes the
global general equilibrium model with an intertemporal fossil subsidy for pre-investment and SO denotes the subsidy for per unit
resource sector and illustrate if carbon pricing is permanently output of the renewable energy enterprise given by the government.
missing, mitigation cost increase by a multiple (compared with the Hence the profit function of the renewable energy enterprise is
optimal carbon pricing policy) for a wide range of parameters given as follows:
describing extraction cost, renewable energy cost, substitution
possibilities and normative attitudes. Furthermore, they believed
that small deviations from the second-best subsidy can lead to
�R = �G�R − �R�R + � �I, �O , (2)
acute rise in emissions and consumption losses.
To sum up, a majority of research articles focus on the content where PG is price that the government decided and we assume the
of the subsidies for renewable energy [18–24]. Other articles total cost of renewable energy enterprise is decreasing returns to
explore the effects of subsidy policy for renewable energy scale. CR > 0 is a constant.
electricity enterprises [25–28]. The profit function of the conventional energy power enterprise
All of these scholars discussed how the policies of promoting is given as follows:
renewable energy affect society and environment. However, few
scholars analysed the way and the amount of subsidies for �� = �G�� − ����, (3)
renewable energy industry in different aspects, and few scholars
did the analysis of cost and benefit of subsidy policies for Where ���� is the total cost of conventional energy enterprise. We
renewable energy. We cannot evaluate a policy based on one
perspective. Actually, different policies have their own advantages assume it is decreasing returns to scale too. CD > 0 is a constant.
and disadvantages. Currently, many countries take corresponding The cost function of the government disposable subsidy for
measures of subsidies for development of new energy projects. For renewable energy enterprises is given by [29]:
example, the US uses the investment tax credit and the production
tax credit as two important tax forms for new energy industry; �� = �� �I, �O , (4)
Japan also use tax policies to support the research, production and
consumption of new energy technology; in Britain, the government where ξ > 0 is a constant, which means the cost coefficient. The
provides subsidy for the difference between contract price of new cost function is a quadratic function of subsidies, because there is a
energy electricity project and the average market price of relatively higher cost of supervision when government gives
electricity. Those diverse subsidy policies for new energy renewable energy enterprises disposable subsidies. On the contrary,
enterprises aim at upfront investment or financial support for the relatively speaking, government cost is lower when government
outputs of product in the final analysis. Hence it is an urgent issue gives renewable energy enterprise output subsidies than the former
to develop renewable energy industry and to choose appropriate case, hence we assume the cost function of government is a linear
subsidy policies in different situations. function, which is:
Although numerous scholars have made plenty of excellent
researches about renewable energy development, there are �� = + � � �I, �O , (5)
increasing numbers of countries have adopted various subsidies to
promote the development of renewable energy. However, few where η > 0 means the management and supervision cost of
scholars study on choosing appropriate subsidies aimed at different government.
situations. In this paper, the existing forms of subsidy methods are Consumer surplus can be expressed as follows:
summarised as three kinds of subsidies: input subsidy, output
subsidy and mixed subsidy. Besides, under the perspective of game

1414 IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
�R + �� �G
CS = ∫ � − �G �� = � − �G �R + ��
(6)
�R∗ , =
�R
(10)
�G
− �R + �� . ��∗ , = .
��

The negative externality of conventional energy consumption Hence we can obtain these equations:
function is
�G
NE = ���, (7) �� = , (11)
��
where ��� (� ) is pollution damage function of consumption of
�G
fossil energy function which is quadratic function of pollution �R = + �I, (12)
emissions [30, 31]. �R
We can obtain the social welfare function: (see (8)) From (8),
social welfare is the profits of renewable energy enterprise plus �G �R + �� �G �R + ��
profit of conventional energy power enterprise plus consumer CS = � − �G − , (13)
�R�� 8�R��
surplus minus cost of the government subsidies for renewable
energy enterprises minus the negative externality of conventional
energy consumption. The social welfare is defined as generalised �� = ��I , (14)
social welfare in this paper, in which the social welfare function
includes the negative externality of the industry compared with the ��G
usual description. This is because the traditional energy industry NE = . (15)
��
will bring great negative externality in the production process, and
governments at all levels pay more and more attention to the needs The social welfare function can be given as:
of environmental protection, hence generalised social welfare can
also be called green social welfare in this paper.
�G �G �G �R + ��
� = + + � I + � − �G
�� �R �R��
3 Solution of the model (16)
�G �R + �� ��G
We assume that there are three kinds of subsidies here, which are − − ��I − .
input subsidy, output subsidy and mixed subsidy. According to the 8�R�� ��
three types of subsidies, we build a two-stage game model. In the
first stage, the amount of subsidies is determined by government. Apparently, (16) is a concave function of SI and PG. When we
In the second stage, the output is determined by the renewable calculate partial derivatives in SI and PG, we have:
energy enterprise and conventional energy enterprise. We will use
backward induction methods and discuss the price level, the output ∂�
level and the social welfare level under three different forms of = − ��I,
∂�I
subsidies.

∂� �G �G �G �R + ��
3.1 Situation 1: input subsidy = + −
∂�G �� �R �R��
In this situation, the government gives a disposable subsidy to the
� − �G �R + �� �G �R + �� ��G
renewable energy enterprise before putting into operation; we can + − − .
call this kind of subsidy policy one-time subsidy. We can obtain �R�� �R�� ��
f(SI, SO) = SI. Hence the profit function of the renewable energy
enterprise is given as follows: It means that we have the maximum social welfare when
�I∗ , = / � , and the optimal price is
�R = �G�R − �R�R + �I, (9)
� �R + �� �R��
The profit function of the conventional energy power enterprise is �G∗ , = . (17)
�R�� + �R�� + �R + �� + ��R
the same as (3).
It is obvious that these two function are concave functions of Apparently, from (17), the optimal regulation price is positively
QR and QD. Taking partial derivative of profit functions with related to the size of the market, and is negatively related to the
respect to output we can obtain: negative externality coefficient of the traditional energy.

∂�R 3.2 Situation 2: output subsidy

= �G − �R�R
∂�R
In this situation, subsidies for the renewable energy enterprise are
∂�� dependent on output of the enterprise, we can obtain f(SI, SO) =
= �G − ���� . SOQR, where SO is subsidies for per unit output of the enterprise.
∂��
Hence the profit function of the renewable energy enterprise is
The necessary conditions for profit maximisation are given as follows:
∂�R /∂�R = ∂�� /∂�� = . By solving these two equations,
�R = �G�R − �R�R + �O�R . (18)
it is easy to get the optimal outputs

� = �R + �� + CS − �� − NE = �G�R − �R�R + � �I, �O + �G��

(8)
−���� + � − �G �R + �� − �R + �� − �� − ��� .

IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421 1415
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
The profit function of the conventional energy power enterprise is: (see equation below) When (∂W(2)/∂SO) = (∂Q/∂PG) = 0, we can
find: (see (27) and (28)) (see (28)) When �O = �O∗ , , social welfare
�� = �G�� − ���� . (19) reaches the maximum, and the optimal price is given by (28). The
optimal production and optimal regulation price of government are
The optimal outputs which make profit maximisation can be positively related to the scale of the market.
obtained as:
3.3 Situation 3: mixed subsidy
�G + �O
�R∗ , = In this situation, the government not only launches disposable
�R
(20) subsidies to the renewable energy enterprise to construct and
�G operate, but also offers subsidies for each unit of output. Hence the
��∗ , = .
�� profit function of the renewable energy firm is:

By (18) and (19), we have: �R = �G�R − �R�R + �O�R + �I . (29)

�G The profit function of the conventional energy power enterprise is:

�� = , (21)
��
�� = �G�� − ���� . (30)
� G + � G� O
�R = , (22) By the similar method, we can obtain the equilibrium outputs
�R
�G + � O
�G�R + �G�� + �O�� �R∗ , =
CS = � − �G �R
�R�� (31)
(23) �G
�G�R + �G�� + �O�� ∗,
�� = .
− , ��
8�R��
The corresponding solutions are given by:
�G + �O
�� = + � �O , (24)
�R �G
�� = , (32)
��
��G
NE = . (25)
�R �G + �G�O
�R = , (33)
�R
Similarly, the social welfare is: (see (26)) In the social welfare
function, the coefficients of �O and �G are negative, which means �G�R + �G�� + �O��
(26) is a concave function of SO and PG . By the partial derivative CS = � − �G
�R��
in SI and PG, we have: (34)
�G�R + �G�� + �O��
− ,
∂� �G � − �G �G�R + �G�� + �O�� 8�R��
= + −
∂�O �R �R �R��
+ � �G + �O + � �O �G + �O
− − , �� = + � �O + ��I , (35)
�R �R �R

�G �G + �G�O �G�R + �G�� + �O�� �G�R + �G�� + �O��

� = + + � − �G −
�� �R �R�� 8�R��
(26)
�G + �O ��G
− + � �O − .
�R �R

∂� �G �G + �O �G�R + �G�� + �O�� � − �G �R − ��

= + − +
∂�G �� �R �R�� �R��
�G�R + �G�� + �O�� �R + �� + � �O ��G
− − − .
�R�� �R �R

��R�� − ��R + �R�� + ��� + �� �

�O∗ , = , (27)
−8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��

��� ��� + ��R + �� + �R

�G∗ , = . (28)
−8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��

1416 IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
�I∗ , = . (39)
�

Similar to the first two cases, the optimal production and optimal
regulation price increase with the size of the market.

4 Comparison of different subsidy policies

Due to the complexity of parameters in analytic expression under
different subsidy policies, it is difficult to compare the level of the
solutions in different subsidy policies based on static analysis
methods directly, hence this paper uses the numerical simulation
techniques. Specifically speaking, evaluating the impact of
different indicators on the social, enterprise and consumer under
three kinds of subsidy policies. All the procedures and graphics
processing is completed by the Maple 15.

Assumption 1: We assume that the size of market and production

cost of each electricity enterprise under different subsidy policies
are permanent in a short run.

4.1 Comparison of price

According to (17), we have the price of electricity chosen by the
government under disposable subsidy policy.
Fig. 1 Optimal price comparisons for A = 30, γ = 1, CD = 1, η = 0.2 Moreover, optimal price under output subsidy policy and mixed
subsidy policy is the same as (28) and (38).
��G Obviously the optimal price chosen by the government in
NE = . (36) negatively related with the degree of attention to environmental
�R
regardless of the type of subsidy policy, which means when
coefficient of energy negative externality increases, the optimal
The social welfare function is: (see equation below) From the price decreases. Moreover, the optimal price increases with the
above social welfare function, we can obtain: increase of the market size.
Actually, the cost of conventional energy electricity enterprise
∂� �G � − �G �G�R + �G�� + �O�� is stable, while the cost of renewable energy electric power
= + −
∂�O �R �R �R�� enterprise is higher.
+ � �G + �� + � �O The cost changes greatly when renewable energy differs. We
− − , analyse the optimal price level chosen by the government under the
�R �R
change of cost of power production in different subsidy methods.
The result has been shown in Figs. 1 and 2.
(see equation below)
Proposition 1: When the cost of renewable energy enterprise is
∂� high enough, no matter which type of subsidies is selected, the
= − ��I .
∂�I optimal price will tend to an identical value.

By solving (34), (35) and (36), we have: (see (37) and (38)) (see Proof: By (17), we have
(38))

�G �G + �G�O �G�R + �G�� + �O�I �G�R + �G�� + �O��

� = + + � − �G −
�� �R �R�� 8�R��
�G + �O ��G
− + � �O + ��I − .
�R �R

∂� �G �G + �O �G�R + �G�� + �O�� � − �G �R − ��

= + − +
∂�G �� �R �R�� �R��
�G�R + �G�� + �O�� �R + �� + � �O ��G
− − − ,
�R�� �R �R

��R�� − ��R + �R�� + ��� + �� �

��∗ , = , (37)
−8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��

��� ��� + ��R + �� + �R

�G∗ , = , (38)
−8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��

IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421 1417
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Apparently, when there is output subsidy, the sensitivity of optimal
price to the government's emphasis on the environment is higher.
When government improves the emphasis on the environment, the
reduction of price under output subsidy is larger than that under
other types of subsidies. Therefore, there are good methods to offer
the output subsidy to renewable energy enterprises or improve the
emphasis on the environment when government attempts to reduce
the electricity price. This result has been shown in Fig. 2.

4.2 Comparison of output

When substituting (17) to (10) and (27), (28) to (20), we have the
optimal output of each enterprise under the different subsidy
policies as follows:

� �R + �� ��
��R = , (40)
���R + ���R + �R + �R�� + �� + ��R

� �R + �� �R
��� = , (41)
���R + ���R + �R + �R�� + �� + ��R

(see (42))

� �R + �� �R
Fig. 2 Optimal price comparisons for A = 30, CR = 3, CD = 1, η = 0.2 ��� = ��
� = . (43)
���R + ���R + �R + �R�� + �� + ��R
� �R + �� �R��
lim On the basis of the above formulations, we have the following
�R�� + �R�� + �R + �� + ��R
�R → + ∞ proposition:
���
= .
� + + �� Proposition 3: In order to promote the production of renewable
energy enterprise, disposable subsidy policy is a good way when
By (28) and (38), moreover, (see equation below) Therefore, the cost is not high, but when the cost is high enough, output
subsidy policy seems better than other subsidy policies.
��� From these equations, it is not difficult to see that no matter
lim �G∗ , = lim �G∗ , = lim �G∗ , = . under what kind of subsidy policy, the output of conventional
�R → ∞ �� → ∞ �� → ∞ � + + �� energy enterprise is unrelated to the subsidies. We also consider
that there are great changes for the production cost of renewable
□ Judged from Figs. 1 and 2, we have: energy enterprise, there are two curves in Fig. 3, where we can
know that the relationship between the optimal production and cost
Proposition 2: When the cost of production is not high, the optimal of renewable energy enterprise changes.
price under the disposable subsidy is lower than that under the As vividly shown in Fig. 3, optimal production of the renewable
output subsidy, and the situation is just the opposite when the cost energy enterprise decreases with the cost of renewable energy
is high. enterprise no matter under which kind of subsidy policy. However,
Apparently, the optimal price decreases with the negative the optimal output under disposable subsidy policy is higher than
externalities of energy, as in Fig. 1. The optimal price always when output subsidy is used. With the increase of the cost of
decreases with the increase of the cost when output subsidy is used, renewable energy enterprise, the optimal output under the
and the optimal price under the disposable subsidy increases with disposable subsidy policy becomes lower than under the output
the increase of the cost when the cost of the renewable energy subsidy policy.
enterprise is relatively lower. However, when there is a higher cost From Fig. 4, apparently, the optimal output of the renewable
of production, the price would decrease with the product cost. energy enterprise under the one-time subsidy policy relatively
When the cost of production is not high, the price under the small changes with change of degree of coefficient of the negative
disposable subsidy is lower than when output subsidy is used. In external environment. However, when the output subsidy is used, it
contrast, the situation is just the opposite when the cost is high. decreases sharply with emphatic degree on environmental
Hence, we conclude that disposable subsidy has larger effect on protection.
reducing the price when the cost of production is not high. On the basis of Figs. 3 and 4, when input subsidy exists, output
No matter what kind of subsidy policy is used the optimal price is less sensitive to CR and γ. In other words, the sensitivity of
will decrease with the degree of attention on the environment.

��� ��� + ��R + �� + �R

lim
�R → + ∞ −8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��
���
= .
� + + ��

� �R + �� �R��
��R = ��
R = ,
�R ���R + ���R + �R + �R�� + � + ��R
(42)
�R��� − �R� + �R�� + ��� + �� �
+
�R −8���R − �R − 8��R − ��R − � − �� − ��� + ��� + � �� − 8��R�� + �� − 8�R��

1418 IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Fig. 3 Optimal output comparisons for A = 30, γ = 1, CD = 1, η = 0.2 Fig. 5 Social welfare comparisons for A = 30, CD = 1, CR = 3, η = 0.2, ξ
= 0.0001

Fig. 4 Optimal output comparisons for A = 30, CR = 3, CD = 1, η = 0.2

Fig. 6 Social welfare comparisons for A = 30, CD = 1, CR = 3, η = 0.2, ξ

output to the cost of renewable energy enterprises and coefficient
= 0.001
of negative externality of conventional energy is less when input
subsidy is given than which when output subsidy or mixed subsidy
is given. Output is less sensitive to cost of renewable energy As shown in Figs. 5 and 6 ,the social welfare increases with the
enterprises can be understood as the input subsidy can make the degree of attention to the environment when there is no output
enterprises adjust production according to the comprehensive cost subsidy, which means the bigger energy negative externalities
to avoid excessive fluctuations in output. coefficient leads to the higher social welfare level.
On the contrary, for output subsidy policy or mixed subsidy
policy, the social welfare decreases with the degree of attention to
4.3 Comparison of social welfare the environment, though there is just a little change. Based on
Putting optimal output, optimal subsidy and optimal price decided Figs. 5 and 6, when one-time subsidy is used, the level of social
by government into social welfare function, we have social welfare welfare falls quickly with the increase of government's cost
under three kinds of subsidy policies which have been shown. coefficient of input subsidy.
We have the following proposition: From Fig. 6, an interesting phenomenon is found. When the
output subsidy is used, the social welfare level is almost invariant
Proposition 4: From the social welfare perspective, mixed subsidy with the increased cost of renewable energy enterprise. However,
is the best among the three subsidy policies. for one-time subsidy policy, the social welfare level decreases
Social welfare under different subsidy policies is shown in Figs. 5– rapidly with the production cost of renewable energy enterprise.
8. The relationship between market size and social welfare is
illustrated in Fig. 7. When output subsidy is used, social welfare

IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421 1419
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
Fig. 7 Social welfare comparisons for A = 30, CD = 1, γ = 1, η = 0.2, ξ Fig. 8 Social welfare comparisons for CR = 3, CD = 1, γ = 1, η = 0.2, ξ
= 0.0001 = 0.0001

level increases with the expansion of the market. However, for one- be the best way. In the case of mixed subsidy, renewable energy
time subsidy, social welfare level falls sharply with the expansion can have a higher level of production, and the level of social
of the market. welfare it brings is also higher than the other two kinds of single
From the above four figures we conclude that no matter what subsidies. However, although the level of social welfare is the
perspective is, when output subsidy is used the change of social highest under the mixed subsidy policy when the negative
welfare with the variation of parameter is relatively small and the externality coefficient of energy enterprises is very high, this policy
social welfare level is the highest under the mixed subsidy policy. will bring the reduction of production of renewable energy
If there is only output subsidy, the social welfare level is relatively enterprise.
low. One-time subsidy policy is more sensitive to each parameter, Different subsidy policies have their own advantages. There are
the social welfare has a big change accordingly with the variation also relevant limitations in some aspects. Hence policymakers
of every parameters. should make and implement reasonable policies to fit their own
On the basis of Figs. 5–8, when input subsidy is given, social needs according to their own situations and targets.
welfare is more sensitive to government's emphasis on
environment; when output subsidy exists, the sensitivity of social 6 Acknowledgments
welfare to government's emphasis on environment is less and the
amplitude of variation is identical. Sincere thanks to the editor and two anonymous reviewers for their
helpful suggestions.
This work was partially supported by Foundation for High-level
5 Concluding remarks
Talents in Higher Education of Guangdong, GDUPS (2012) and
Subsidy policy is the most common and important policy to National Natural Science Foundation of PRC (grant no. 71271100),
stimulate the development of renewable energy industry. Generally Fundamental Research Funds for the Central Universities, and
speaking, three types of subsidies are used in reality. Almost all Innovative Group Foundation (Humanities and Social Sciences) for
countries in the world who expand the renewable energy formulate Higher Education of Guangdong Province (2015).
and implement at least one of these subsidy way. However, the
implementation results in many countries present different subsidy 7 References
policy effects. This paper examines from a theoretical point of
view, the differences of price level, output level and social welfare [1] EU: ‘Directive 2009/28/EC of the European Parliament and of the Council of
23 April 2009 on the promotion of the use of energy from renewable sources
by comparing these three kinds of subsidy policies. and amending and subsequently repealing Directives 2001/77/EC and
On the basis of comparison of the three different ways of 2003/30/EC’, Off. J. Eur. Union L, 2009, 140, (16)
subsidies, we found that under the premise that social welfare [2] Coase, R.H.: ‘The problem of social cost’, J. Law Econ., 1996, 3, (1), pp. 1–
maximisation is the goal of the government, no matter what the 44
[3] Fattouh, B., El-katiri, L.: ‘Energy subsidies in the Arab world’, Arab Human
situation is, mixed subsidy policy can bring the highest level of Development Report Research Paper Series, 2012
social welfare. However, when the negative externality coefficient [4] Trevor, M., Menecon Consulting: ‘Energy subsidies: their magnitude, how
of environment is small, that is to say, when the environmental they affect energy investment and greenhouse gas emissions, and prospects
protection problem is unheeded, mixed subsidy policy will bring a for reform’, UNFCCC Secretariat Financial and Technical Support
Programme, 2007
relatively higher price of energy products. Although the increase in [5] Mosadeghi, M., Mohammadi, J., Rahimi-Kian, A.: ‘Effects of energy
the degree of attention to the environment can not only make the subsidies removal on distributed generation investment in Iran’. 2011 10th
drop of price of energy products, but also can bring the decline of Int. Conf. Environment and Electrical Engineering (EEEIC), 2011, pp. 1–4
output level of renewable energy enterprise, as the premise that the [6] Lin, B.Q., Jiang, Z.J.: ‘Estimates of energy subsidies in china and impact of
energy subsidy reform’, Energy Econ., 2011, 33, (2), pp. 273–283
size of the market remain unchanged in the short term. The output [7] Iwaro, J., Abraham, M.: ‘Towards energy sustainability in the world: the
of conventional energy enterprise is bound to increase which is not implications of energy subsidy for developing countries’, Int. J. Energy
conducive to the development of renewable energy, but also cause Environ., 2010, 1, (4), pp. 705–714
greater pressure for environmental protection. [8] Nwafor, M., Ogujiuba, K., Asogwa, R.: ‘Does subsidy removal hurt the poor?
Evidence from computable general equilibrium analysis’, African Institute for
From the perspective of promoting the development of Applied Economics (AIAE), Research Paper 2, 2006
renewable energy, when the environment pollution caused by
energy enterprise is slight, mixed forms of subsidy policy seems to
1420 IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421
© The Institution of Engineering and Technology 2016
 17521424, 2016, 9, Downloaded from https://ietresearch.onlinelibrary.wiley.com/doi/10.1049/iet-rpg.2015.0307, Wiley Online Library on [12/12/2024]. See the Terms and Conditions (https://onlinelibrary.wiley.com/terms-and-conditions) on Wiley Online Library for rules of use; OA articles are governed by the applicable Creative Commons License
[9] Vitalis, V.: ‘Agricultural subsidy reform and its implications for sustainable [20] Hu, Z., Wang, J.H., Byrne, J., et al.: ‘Review of wind power tariff policies in
development: the New Zealand experience’, Environ. Sci., 2007, 4, (1), pp. China’, Energy Policy, 2013, 53, pp. 41–50
21–40 [21] Zhao, Z.Y., Yan, H.: ‘Assessment of the biomass power generation industry in
[10] Jiang, Z.J., Tan, J.J.: ‘How the removal of energy subsidy affects general price China’, Renew. Energy, 2012, 37, (1), pp. 53–60
in China: A study based on input–output model’, Energy Policy, 2013, 63, pp. [22] Zhang, P.D., Yang, Y.L., Shi, J., et al.: ‘Opportunities and challenges for
599–606 renewable energy policy in China’, Renew. Sustain. Energy Rev., 2009, 13,
[11] Solaymani, S., Kari, F.: ‘Impacts of energy subsidy reform on the Malaysian (2), pp. 439–449
economy and transportation sector’, Energy Policy, 2014, 70, pp. 115–125 [23] Zhao, X.G., Wang, J.Y., Liu, X.M., et al.: ‘China's wind, biomass and solar
[12] Nie, P.Y., Yang, Y.C.: ‘Effects of energy price fluctuations on industries with power generation: what the situation tells us?’, Renew. Sustain. Energy Rev.,
energy inputs: An application to China’, Appl. Energy, 2016, 165, pp. 329– 2012, 16, (8), pp. 6173–6182
334 [24] Wang, F., Yin, H.T., Li, S.H.: ‘China's renewable energy policy: commitment
[13] Eichner, T., Runkel, M.: ‘Subsidizing renewable energy under capital sand challenges’, Energy Policy, 2010, 38, (4), pp. 1872–1878
mobility’, J. Public Econ., 2014, 117, pp. 50–59 [25] Zhang, S.F., He, Y.X.: ‘Analysis on the development and policy of solar PV
[14] Böhringer, B., Keller, A., van der Werf, E.: ‘Are green hopes too rosy? power in China’, Renew. Sustain. Energy Rev., 2013, 21, pp. 393–401
Employment and welfare impacts of renewable energy promotion’, Energy [26] Zhao, X.G., Wang, J.Y., Liu, X.M., et al.: ‘Focus on situation and policies for
Econ., 2013, 36, pp. 277–285 biomass power generation in China’, Renew. Sustain. Energy Rev., 2012, 16,
[15] Pillai, I.R., Banerjee, R.: ‘Renewable energy in India: status an potential’, (6), pp. 3722–3729
Energy, 2009, 34, (8), pp. 970–980 [27] Kang, J.J., Yuan, J.H., Hu, Z.G., et al.: ‘Review on wind power development
[16] Wohlgemuth, N., Madlener, R.: ‘Financial support of renewable energy and relevant policies in China during the 11th Five-Year-Plan period’, Renew.
systems: investment vs operating cost subsidies’. Proc. of the Norwegian Sustain. Energy Rev., 2012, 16, (4), pp. 1907–1915
Association for Energy Economics (NAEE) Conf. Bergen/Norway, 31 [28] Zeng, M., Li, C., Zhou, L.S.: ‘Progress and prospective on the police system
August–2 September 2000 of renewable energy in China’, Renew. Sustain. Energy Rev., 2013, 20, pp.
[17] Kalkuhl, M., Edenhofera, O., Lessmanna, K.: ‘Renewable energy subsidies: 36–44
Second-best policy or fatal aberration for mitigation?’, Resour. Energy Econ., [29] Bowles, S., Hwang, S.H.: ‘Social preferences and public economics:
2013, 35, (3), pp. 217–234 mechanism design when social preferences depend on incentives’, J. Public
[18] Wang, Z.Y., Qin, H.Y., Lewis, J.I.: ‘China's wind power industry: policy Econ., 2008, 92, (9-8), pp. 1811–1820
support, technological achievements, and emerging challenges’ Energy [30] Poyago-Theotoky, J.A.: ‘The organization of R&D and environmental
Policy, 51, (Joanna: Lewis, 2012), vol. 51, pp. 80–88 policy’, J. Econ. Behav. Organ, 2007, 62, (1), pp. 63–75
[19] Liu, D.W., Shiroyama, H.: ‘Development of photovoltaic power generation in [31] Sun, P., Nie, P.Y.: ‘A comparative study of feed-in tariff and renewable
China: a transition perspective’, Renew. Sustain. Energy Rev., 2013, 25, pp. portfolio standard policy in renewable energy industry’, Renew. Energy, 2015,
782–792 74, pp. 255–262

IET Renew. Power Gener., 2016, Vol. 10 Iss. 9, pp. 1413-1421 1421
© The Institution of Engineering and Technology 2016