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Specifying An Efficient Renewable Energy Feed-in Tariff

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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Energy Specializations: Energy and the Environment – Policy and Regulation; Renewables – Policy and Regulation; Electricity – Transmission and Network Management; Electricity – Local Distribution; Electricity – Distributed Generation; Energy Modeling – Energy Data, Modeling, and Policy Analysis

JEL Codes: Q42: Alternative Energy Sources, Q20: Renewable Resources and Conservation: General, Q41: Energy: Demand and Supply; Prices, Q54: Climate; Natural Disasters and Their Management; Global Warming, Q28: Renewable Resources and Conservation: Government Policy

Keywords: Efficient Environmental Policy, Feed-in Tariff, Option Pricing, Renewable Energy, Renewable Energy Support Schemes

DOI: 10.5547/01956574.38.2.nfar

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Published in Volume 38, Number 2 of The Quarterly Journal of the IAEE's Energy Economics Education Foundation.