Optimal design of feed-in-tariffs to stimulate renewable energy investments under regulatory uncertainty — A real options analysis

Ingmar Ritzenhofen and Stefan Spinler

Energy Economics, 2016, vol. 53, issue C, 76-89

Abstract: Feed-in-tariffs (FITs) are widely used as policy instruments to promote investments in renewable energy sources (RES). While FITs are often regarded as the most effective RES support scheme, regulators around the world continuously review their FIT schemes in the light of budget constraints and evolving policy goals. We assess the impact of adjustments to FIT schemes by quantifying the relationship between FIT levels, i.e., the guaranteed amount paid per quantity of electricity produced and the propensity to invest in RES. Through a regime switching model, we quantify the impact of regulatory uncertainty induced by regulators considering moves from a FIT scheme to a more market-oriented regulatory regime. Our focus is on market-independent, fixed FITs, the dominant scheme in Europe receiving increasing attention globally. We find that RES investment projects under market-independent, fixed FIT schemes become now-or-never decisions and derive FIT thresholds required to induce investment. We show that uncertainty regarding future regulatory regimes delays or even reduces investment activity for FIT levels near electricity market prices and high probabilities of an imminent regime switch.

Keywords: Feed-in-tariffs; Renewable energy; Power generation; Renewable energy support schemes; Regime switching; Real options (search for similar items in EconPapers)
JEL-codes: C44 D81 L94 Q42 Q48 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (75)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:eneeco:v:53:y:2016:i:c:p:76-89

DOI: 10.1016/j.eneco.2014.12.008

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