Can carbon pricing counteract renewable energies' cannibalization problem?

Support payments for renewable energies (RE) are a key climate-change policy in many jurisdictions globally. However, RE feed-in lowers the wholesale electricity price, thus cannibalizing their own market values. Despite steep cost degression, cannibalization endangers the hopes that RE may eventually survive in the market independently from subsidies. We apply a flexible econometric model to quantify the cannibalization effect together with influential factors that may counteract the problem. Our data are for the German electricity market, which is characterized by a high and increasing share of intermittent RE. We show that wind and solar infeed significantly cannibalize their own market values and that a meaningful carbon price can substantially counteract this problem. Thus, market-based climate policy may significantly boost RE's integration. This is also relevant for other countries' climate agendas. However, once power generation is fully decarbonized, support from carbon pricing will lapse and the design of the energy market will need to be reconsidered.