THE UNITED-KINGDOM DEMAND FOR RENEWABLE ELECTRICITY IN A LIBERALIZED MARKET

This paper analyses how the liberalisation of the UI( electricity mark et in 1998 may encourage demand for renewable electricity through pric ing and informational incentives. The analysis argues that prices and beliefs will be crucial for influencing customers' willingness to pay for environmental costs associated with electricity generation, as wel l as their decision to not just buy the cheapest electricity. In 1998, when UK electricity markets are liberated, a small price differential between renewable and standard electricity - certainly less than 20% - and clear, credible and captivating information about the external c osts of electricity generation could create a considerable demand for renewable electricity. But, because renewable generating capacity will initially be small and slow to adjust to incentives, initially high d emand may drive up prices, discouraging customers from wanting to buy renewable electricity. Low demand, on the other hand, will not provide the incentives to invest new capacity, which probably means that rene wable technology will not be able to reduce its unit costs of electric ity generation and compete in a liberalised market without continued f inancial support. To avoid either scenario, this paper recommends that Government should extend the non-fossil fuel obligation (NFFO) to pro mote investment in renewable technology, provide tax incentives to min imise the price differential between renewable and standard electricit y, encouarge non-governmental organisations to develop schemes for pro viding customers with clear, consistent and reliable information about sources of renewable electricity, and stagger the introduction of ele ctricity liberalisation. While the analysis is of a speculative nature , such policies may create incentives for markets to reduce environmen tal damage associated with electricity generation. (C) 1998 Elsevier S cience Ltd. All rights reserved.