Feed-in Tariffs, Intermittency, and Inefficient Investment

Halvor Briseid Storrøsten ()
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Halvor Briseid Storrøsten: Statistics Norway, http://www.ssb.no/en/forskning/ansatte

Discussion Papers from Statistics Norway, Research Department

Abstract: Feed-in tariffs (FiTs) have been instrumental in expanding renewable electricity generation but can distort investment by insulating producers from market price volatility. This paper develops a two stage model of electricity markets with stochastic demand and supply shocks, showing that a higher share of intermittent renewable generation increases electricity price volatility and lowers the market value of intermittent output. FiTs create a volatility externality, because investors are insulated from the negative covariance between intermittent generation and market prices. The resulting misallocation of investment, both across intermittent technologies and in total intermittent capacity, leads to an inefficient electricity mix causing excessively volatile electricity prices and welfare losses. The model’s predictions are tested using hourly and quarter-hourly data from the German electricity market (Jan.~2015--Dec.~2025). ARX and ARIMAX--GARCH estimates indicate that a one–percentage point increase in renewable market share raises short-run realized price volatility by about 2% for wind and 6% for solar, while significantly lowering unit revenues. A proxy for the volatility externality suggests marginal investment costs roughly 10--25\% above the socially optimal level under the German FiT.

Keywords: Feed-in tariffs; intermittent renewables; investment; externalities; energy policy; electricity markets (search for similar items in EconPapers)
JEL-codes: C32 H23 Q42 Q48 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2026-02
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