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Specifying An Efficient Renewable Energy Feed-in Tariff

Niall Farrell, Mel T. Devine, William T. Lee, James P. Gleeson, and Sean Lyons

Year: 2017
Volume: Volume 38
Number: Number 2
DOI: 10.5547/01956574.38.2.nfar
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Abstract:
Commonly-employed Feed-in Tariff (FiT) structures result in either investors or policymakers incurring all market price risk. This paper derives efficient pricing formulae for FiT designs that divide market price risk amongst investors and policymakers. With increasing deployment and renewable energy policy costs, a means to precisely apportion this risk becomes of greater importance. Option pricing theory is used to calculate efficient FiT prices and expected policy cost when investors are exposed to elements of market price risk. Expected remuneration and policy cost is equal for all FiTs while policymaker and investor exposure to uncertain market prices differs. Partial derivatives characterise sensitivity to unexpected deviations in market conditions. This sensitivity differs by FiT type. The magnitudes of these effects are quantified using numerical examples for a stylised Irish case study. Based on these relationships, we discuss the conditions under which each policy choice may be preferred.





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