Appraisal of the Efficiency of Subsidies Granted by Spanish Public Authorities for Generating Electricity Using Wind Energy

By Garcia-Cebrian, Lucia Isabel | Journal of Public Budgeting, Accounting & Financial Management, Summer 2003 | Go to article overview

Appraisal of the Efficiency of Subsidies Granted by Spanish Public Authorities for Generating Electricity Using Wind Energy


Garcia-Cebrian, Lucia Isabel, Journal of Public Budgeting, Accounting & Financial Management


ABSTRACT. This paper aims to analyze efficiency of the subsidies granted by the Spanish authorities. The case study focuses on wind-generated electricity. We will study what type of subsidy is most efficient considering the economic and technical data of an existing wind power installation in Spain. A sensitivity analysis is made in order to provide judgment elements to propose the form of the more convenient subsidy. In view of the results obtained, we will evaluate the efficiency of subsidies granted by Spanish authorities.

INTRODUCTION

In recent years, the electric sectors in most surrounding countries have been subject to reform processes; the most notable characteristics have been the introduction of competition, at least in electricity generation and commercialization activities. The Spanish electric sector has not been a stranger to this tendency: since the beginning of 1998, the electricity market has been in progress, with electricity generating companies as sellers and qualified consumers as buyers, the price is determined under conditions of competition. Certainly this is nothing more than the beginning of a reform that endeavors to go much farther and-reach all consumers.

Conversely, among the reforms that have been undertaken, there is concern lor the environment and repercussions that the use of different primary energies could have on the environment. The absence of polluting effects by renewable energies (solar, wind, biomass, etc.) has directed more attention to them lately, and they have been considered more as an alternative for electric energy. Nevertheless, from a strictly economic point of view, electricity obtained using renewable energies has high generating costs, which would limit the possibility of their use in a competitive environment.

In an attempt for feasible use of energies that require high generation costs and given the existence of an electricity market that places a premium on competitiveness, authorities can use subsidies as an incentive to encourage the use of renewable energies. Evidently, in an ideal competition, subsidies would have no place, but it is also true that faced with the presence of externalities, the assignment of resources through the market presents consistent failures, basically in that the decisions that agents would take by attending exclusively to the private criteria of cost and benefit are not best from a social point of view. In situations like the one described, the use of subsidies is justified, and what should be attempted is that they be efficient, meaning that they achieve their objective without squandering resources, at a minimum cost.

The present work has a double objective. First, it attempts to analyze which type of subsidy is the most efficient, and, second, in view of the obtained results, it evaluates the efficiency of the subsidies that Spanish authorities offer, specifically, those designed for installations owned by private individuals that use the wind as the source of primary energy for generating electricity. To do so, the reasoning followed by agents of the groups that are affected by the use of wind energy is going to be presented in the second section, and we will assume that they base their decisions on the cost-benefit analysis. In the third section, starting with the economic and technical data of a small-sized wind power installation, the amount of the subsidy granted by authorities is calculated so that installations of this same type would be used in the generation of electric energy by private individuals, keeping in mind the various forms that a subsidy can adopt; additionally, a sensitivity analysis performed on the results obtained in order to have enough evidence to allow appraising which is the most efficient form of subsidy, meaning the one that achieves the proposal of the authorities (the use of wind energy) at the lowest cost. The fourth section is dedicated to conclusions; there, we will give recommendations about which subsidies mean an efficient use of the resources, and we will qualify as efficient the subsidies granted in Spain if authorities follow these recommendations.

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