Specifying An Efficient Renewable Energy Feed-in Tariff

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

MPRA Paper from University Library of Munich, Germany

Abstract: This paper derives efficient pricing formulae for renewable energy Feed-in Tariff (FiT) designs that incorporate exposure to uncertain market prices by using option pricing theory. Such FiT designs are presented as a means to delineate market price risk amongst investors and policymakers when designing renewable energy support schemes. Sequential game theory provides the theoretical framework through which we model the strategic interaction of policymakers and investors during policy formulation. This model is solved using option pricing theory when a FiT is comprised of market prices combined with a guaranteed element. This solution also allows for an analytical formulation of the policy cost of subsidisation. Partial derivatives characterise sensitivity of policy cost and investor remuneration to deviations in market conditions beyond those expected. Analytical derivations provide a set of tools which may guide more efficient FiT policy and investment decisions. Numerical simulations demonstrate application for a stylised Irish case study, with a scenario analysis providing further insight into the relative sensitivity of policy cost and investor remuneration under different market conditions.

Keywords: Renewable Energy; Feed-in Tariff; Option Pricing; Renewable Energy Support Schemes � (search for similar items in EconPapers)
JEL-codes: G13 L94 Q4 Q48 Q5 (search for similar items in EconPapers)
Date: 2013-09
New Economics Papers: this item is included in nep-ene and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Related works:
Journal Article: Specifying An Efficient Renewable Energy Feed-in Tariff (2017)
Journal Article: Specifying An Efficient Renewable Energy Feed-in Tariff (2017)
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