Assessing The Renewable Energy Policy Paradox: A Scenario Analysis For The Italian Electricity Market

The renewable energy policy paradox states that the combination of liberalized markets with low marginal cost and intermittent technologies tends to reduce electricity prices and, hence, the profitability of new investments in wind and solar energy, thus rendering price-incentive policies less effective or more costly. Most simulation models are not suited to assess the feasibility of middle and long-term goals under the price policies already in place. To fill this gap, this study applies a novel hybrid top-down-bottom-up dynamic macrosimulation model to the Italian economy (2015-2040). To incorporate uncertainty about the future costs of generation and storage technologies, fossil fuel prices, demand elasticities, macroeconomic performance and price incentives, we rely on exploratory model analysis to build scenarios from three clusters out of the 1000 different simulations. Our results suggest a decreasing trend in electricity prices in contrast to the latest official projections. Accordingly, the expansion of renewable energy slows down and none of the 1000 simulations reach the 2030 target of 55% renewable energy in electricity supply. Despite the ineffectiveness of the price subsidy policy in the first ten years (2021-2030), it is still crucial to reach very high penetration of variable renewable energy sources by 2040.