In this paper, we address the issue of how to finance the excess costs of electricity generation from currently installed renewable energy production capacity. We do so using a multi-sector and multi-household dynamic computable general equilibrium model of the Portuguese economy. We consider three issues: the effects of the existence of these excess-costs; the effects of annuitizing such costs; and, the effects of different financing mechanisms. Following the logic of the tariff deficit, we recommend the annuitizing of these excess costs. This strategy can be justified on distributional grounds. We also find that financing through carbon taxation is a better alternative than passing these excess costs through to electricity consumers in the form of higher future electricity prices. This is consistent with the idea that renewable electricity production is not an issue pertaining exclusively to the electricity market but rather a part of the national quest for decarbonization. Finally, we show that there is little reason from an environmental perspective to extend such preferential financing mechanisms to any future renewable capacity installation.

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