A Principal-Agent model for optimal Incentives in renewable investments

We analyze the optimal regulatory incentives to foster the development of non-emissive electricity generation when the demand for power is served either by a one firm (monopoly) or by two interacting firms (competition). The regulator wishes to encourage green investments to limit carbon emissions, while simultaneously reducing intermittency of the total energy production. We find that the regulation of competing interacting firms is more efficient than the regulation of the monopoly situation as measured with the certainty equivalent of the principal’s value function. This higher efficiency is achieved thanks to a higher degree of freedom of the incentive mechanisms which involves cross-subsidies between firms. Joint work with Annika Kemper (Bielefeld University) and Nizar Touzi (Ecole Polytechnique).