The Discussion Papers series presents results from ongoing research projects and other research and analysis by SSB staff, intended for international journals or books. The views and conclusions in this document are those of the author(s).
FiTs create a volatility externality, because investors are insulated from the negative covariance between intermittent generation and market prices. The resulting misallocation of investment, both across intermittent technologies and in total intermittent capacity, leads to an inefficient electricity mix causing excessively volatile electricity prices and welfare losses.
The model’s predictions are tested using hourly and quarter-hourly data from the German electricity market (Jan.~2015--Dec.~2025). ARX and ARIMAX--GARCH estimates indicate that a one–percentagepoint increase in renewable market share raises short-run realized price volatility by about 2% for wind and 6% for solar, while significantly lowering unit revenues. A proxy for the volatility externality suggests marginal investment costs roughly 10--25\% above the socially optimal level under the German FiT.