We analyze the interaction between a reliable source of electricity production and intermittentsources such as wind or solar power. We first characterize the optimal energy mix, emphasizing the availability of the intermittentsource as a major parameter for the optimal investment in capacity.
We then analyze decentralization through competitive market mechanisms. We show that decentralizing the efficient energy mix requires electricity to be priced contingently on the availability of the intermittentsource. By contrast, traditional meters impose uniform pricing, which distorts the optimal mix of energysources. Decentralizing the efficient energy mix with uniform prices requires either cross-subsidies from the intermittentsource to the reliable source of energy or structural integration of the two types of technology.
