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Investment in Renewables under Uncertainty: Fitting a Feed-in Scheme into ETS

Abstract:
We analyze incentives to invest in renewable energy technologies induced by the overlap of two types of policies: feed-in schemes and carbon mitigation instruments. We find that results differ markedly depending on the specific types of policies in place, reflecting different impacts of uncertainty. As a result, the recent reform to the EU-ETS system that has established the Market Stability Reserve (MSR), effective in 2019, requires to appropriately fine-tune the direct RES-E support schemes. We show that this may involve moving away from feed-in tariffs towards feed-in premia. Our results suggest that the schemes currently adopted in Germany and in Italy, broadly based on feed-in premia for large generators and on feed-in tariffs for the small ones, could well fit also the post-MSR EU carbon mitigation policy. To the contrary, other countries (e.g. France and the U.K.) may have to modify their support schemes as the MSR will become operational.

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Keywords: carbon tax, cap and trade, technology adoption, uncertainty, feedin- tariff; feed-in-premium, market stability reserve

DOI: 10.5547/01956574.37.SI2.fbof

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Published in Volume 37, Bollino-Madlener Special Issue of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.