Implications of market liberalization and green energy regulation on power generation in Switzerland

This paper investigates how carbon taxes and feed-in tariffs as well as combinations of these regulations influence investment decisions in power generation under uncertainty. Moreover, we analyze the interactions between market power and regulation instruments. To this end, we numerically simulate a microeconomic investment model with a two-stage time structure, different kinds of uncertainty, market power settings and type-of-technology dependent cost structures for Switzerland using scenario analysis. Our results show that regulation instruments can significantly modify cost structures and change the respective profitability rankings of technologies. This alters the strategic behavior of the dominant market player and therewith overall investment patterns. The outcome of a policy regime is therefore strongly dependent on the degree of market liberalization and not only on the regulation instrument. Nevertheless, the share of electricity production derived from renewable energy sources is most effectively raised by a combination of political market interventions, including competition policy.