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Design of an economically efficient feed-in tariff structure for renewable energy development

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Author Info

  • Lesser, Jonathan A.
  • Su, Xuejuan

Abstract

Evidence suggests, albeit tentatively, that feed-in tariffs (FITs) are more effective than alternative support schemes in promoting renewable energy technologies (RETs). FITs provide long-term financial stability for investors in RETs, which, at the prevailing market price of electricity, are not currently cost-efficient enough to compete with traditional fossil fuel technologies. On the other hand, if not properly designed, FITs can be economically inefficient, as is widely regarded to have been the case under the Public Utility Regulatory Policies Act of 1978 (PURPA). Under PURPA, too high a guaranteed price led to the creation of so-called "PURPA machines"--poorly performing generating units that could survive financially only because of heavy subsidies that came at the expense of retail customers. Similarly, because of their adverse impacts on retail electricity rates, German FITs have been subject to increasing political pressure from utilities and customers. In this paper, we propose an innovative two-part FIT, consisting of both a capacity payment and a market-based energy payment, which can be used to meet the renewables policy goals of regulators. Our two-part tariff design draws on the strengths of traditional FITs, relies on market mechanisms, is easy to implement, and avoids the problems caused by distorting wholesale energy markets through above-market energy payments. The approach is modeled on forward capacity market designs that have been recently implemented by several regional transmission organizations in the USA to address needs for new generating capacity to ensure system reliability.

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Bibliographic Info

Article provided by Elsevier in its journal Energy Policy.

Volume (Year): 36 (2008)
Issue (Month): 3 (March)
Pages: 981-990

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Handle: RePEc:eee:enepol:v:36:y:2008:i:3:p:981-990

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Web page: http://www.elsevier.com/locate/enpol

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References

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  8. Rowlands, Ian H., 2005. "Envisaging feed-in tariffs for solar photovoltaic electricity: European lessons for Canada," Renewable and Sustainable Energy Reviews, Elsevier, vol. 9(1), pages 51-68, February.
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Citations

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Cited by:
  1. Jenner, Steffen & Groba, Felix & Indvik, Joe, 2013. "Assessing the strength and effectiveness of renewable electricity feed-in tariffs in European Union countries," Energy Policy, Elsevier, vol. 52(C), pages 385-401.
  2. Purkus, Alexandra & Gawel, Erik & Thrän, Daniela, 2012. "Bioenergy governance between market and government failures: A new institutional economics perspective," UFZ Discussion Papers 13/2012, Helmholtz Centre for Environmental Research (UFZ), Division of Social Sciences (ÖKUS).
  3. Bell, William & Foster, John, 2012. "Feed-in tariffs for promoting solar PV: progressing from dynamic to allocative efficiency," MPRA Paper 38861, University Library of Munich, Germany, revised 28 Apr 2012.
  4. Abdallah, Tarek & Diabat, Ali & Rigter, Jasper, 2013. "Investigating the option of installing small scale PVs on facility rooftops in a green supply chain," International Journal of Production Economics, Elsevier, vol. 146(2), pages 465-477.
  5. Becker, Bastian & Fischer, Doris, 2013. "Promoting renewable electricity generation in emerging economies," Energy Policy, Elsevier, vol. 56(C), pages 446-455.
  6. Yatchew, Adonis & Baziliauskas, Andy, 2011. "Ontario feed-in-tariff programs," Energy Policy, Elsevier, vol. 39(7), pages 3885-3893, July.
  7. Westner, Günther & Madlener, Reinhard, 2009. "The Benefit of Regional Diversification of Cogeneration Investments in Europe: A Mean-Variance Portfolio Analysis," FCN Working Papers 5/2009, E.ON Energy Research Center, Future Energy Consumer Needs and Behavior (FCN), revised Mar 2010.
  8. Vagliasindi, Maria, 2012. "The role of policy driven incentives to attract PPPs in renewable-based energy in developing countries : a cross-country analysis," Policy Research Working Paper Series 6120, The World Bank.
  9. Drechsler, Martin & Meyerhoff, Jürgen & Ohl, Cornelia, 2012. "The effect of feed-in tariffs on the production cost and the landscape externalities of wind power generation in West Saxony, Germany," Energy Policy, Elsevier, vol. 48(C), pages 730-736.
  10. Krajacic, Goran & Duic, Neven & Tsikalakis, Antonis & Zoulias, Manos & Caralis, George & Panteri, Eirini & Carvalho, Maria da Graça, 2011. "Feed-in tariffs for promotion of energy storage technologies," Energy Policy, Elsevier, vol. 39(3), pages 1410-1425, March.
  11. Stokes, Leah C., 2013. "The politics of renewable energy policies: The case of feed-in tariffs in Ontario, Canada," Energy Policy, Elsevier, vol. 56(C), pages 490-500.
  12. Altenburg, Tilman & Engelmeier, Tobias, 2013. "Boosting solar investment with limited subsidies: Rent management and policy learning in India," Energy Policy, Elsevier, vol. 59(C), pages 866-874.
  13. Martin, Nigel & Rice, John, 2013. "The solar photovoltaic feed-in tariff scheme in New South Wales, Australia," Energy Policy, Elsevier, vol. 61(C), pages 697-706.
  14. Fthenakis, Vasilis & Mason, James E. & Zweibel, Ken, 2009. "The technical, geographical, and economic feasibility for solar energy to supply the energy needs of the US," Energy Policy, Elsevier, vol. 37(2), pages 387-399, February.
  15. Felix Groba & Barbara Breitschopf, 2013. "Impact of Renewable Energy Policy and Use on Innovation: A Literature Review," Discussion Papers of DIW Berlin 1318, DIW Berlin, German Institute for Economic Research.
  16. Ayompe, L.M. & Duffy, A., 2013. "Feed-in tariff design for domestic scale grid-connected PV systems using high resolution household electricity demand data," Energy Policy, Elsevier, vol. 61(C), pages 619-627.
  17. Couture, Toby & Gagnon, Yves, 2010. "An analysis of feed-in tariff remuneration models: Implications for renewable energy investment," Energy Policy, Elsevier, vol. 38(2), pages 955-965, February.

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