Readers Question: What effect it will have (on electricity market) if there is an introduction of subsidies to consumers who install green energy sources e.g. solar panels?
If there is a subsidy to green energy sources it will shift supply (of solar panels) to the right and therefore reduce the price of solar panels. The effect will be a slight reduction in demand for conventional electricity sources as some people now get energy from solar panels.
Diagram Showing Effect of a Subsidy
However, even with a subsidy solar panels would be an expensive investment. Generally consumers are unwilling to invest money now, if it requires several years to make a return. Therefore, demand for solar panels is quite inelastic. In the short term there will only be a very small reduction in demand for conventional electricity.
A more effective way to increase renewable energy sources would be government regulation to require new houses to be fitted solar panels.