Pricing strategy for renewable energy source electricity in the competitive hybrid electricity market

Purpose: To promote the development of renewable energy, the Chinese Government adopts the policy of Feed-in Tariff and subsidy. However, the high purchase price and the intermittence limit the development of renewable energy source electricity (RES-E). The purpose of this paper is to discuss the pricing strategy for system operators to stimulate the development of the RES-E industry under the scenario of uncertain supply and demand. Design/methodology/approach: The authors establish a two-echelon supply chain investment model led by a power grid operator considering the uncertainties in both demand and supply, and study the impact of the power purchase price designed by a system operator using Stackelberg’s model. Findings: There is an optimal capacity for RES-E generators, that is, independent of the market demand. Besides, the optimal order of grid operators is independent of the uncertain RES-E supply and the purchase price of fossil fuel. By properly setting the purchase prices, the system operator can stimulate the capacity investment in renewable energy. Finally, increasing the punishment in power shortage can stimulate the capacity investment in RES-E under certain conditions. Practical implications: The result of this paper can mitigate the phenomenon of power abandonment in the RES-E industry and promote the grid integration of RES-E. Originality/value: Both uncertain demand and supply are considered in this paper. A heuristic algorithm is provided to compute the optimal purchase price combination.