IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/49777.html
   My bibliography  Save this paper

Specifying An Efficient Renewable Energy Feed-in Tariff

Author

Listed:
  • Farrell, Niall
  • Devine, Mel
  • Lee, William
  • Gleeson, James
  • Lyons, Seán

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.

Suggested Citation

  • Farrell, Niall & Devine, Mel & Lee, William & Gleeson, James & Lyons, Seán, 2013. "Specifying An Efficient Renewable Energy Feed-in Tariff," MPRA Paper 49777, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:49777
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/49777/1/MPRA_paper_49777.pdf
    File Function: original version
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. del Río, Pablo & Bleda, Mercedes, 2012. "Comparing the innovation effects of support schemes for renewable electricity technologies: A function of innovation approach," Energy Policy, Elsevier, vol. 50(C), pages 272-282.
    2. Siddiqui, Afzal S. & Maribu, Karl, 2009. "Investment and upgrade in distributed generation under uncertainty," Energy Economics, Elsevier, vol. 31(1), pages 25-37, January.
    3. Markus Burger & Bernhard Klar & Alfred Muller & Gero Schindlmayr, 2004. "A spot market model for pricing derivatives in electricity markets," Quantitative Finance, Taylor & Francis Journals, vol. 4(1), pages 109-122.
    4. Kitzing, Lena, 2014. "Risk implications of renewable support instruments: Comparative analysis of feed-in tariffs and premiums using a mean–variance approach," Energy, Elsevier, vol. 64(C), pages 495-505.
    5. Fagiani, Riccardo & Barquín, Julián & Hakvoort, Rudi, 2013. "Risk-based assessment of the cost-efficiency and the effectivity of renewable energy support schemes: Certificate markets versus feed-in tariffs," Energy Policy, Elsevier, vol. 55(C), pages 648-661.
    6. Butler, Lucy & Neuhoff, Karsten, 2008. "Comparison of feed-in tariff, quota and auction mechanisms to support wind power development," Renewable Energy, Elsevier, vol. 33(8), pages 1854-1867.
    7. Bürer, Mary Jean & Wüstenhagen, Rolf, 2009. "Which renewable energy policy is a venture capitalist's best friend? Empirical evidence from a survey of international cleantech investors," Energy Policy, Elsevier, vol. 37(12), pages 4997-5006, December.
    8. Tsitakis, D. & Xanthopoulos, S. & Yannacopoulos, A.N., 2006. "A closed-form solution for the price of cross-commodity electricity derivatives," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 371(2), pages 543-551.
    9. Eduardo Schwartz & James E. Smith, 2000. "Short-Term Variations and Long-Term Dynamics in Commodity Prices," Management Science, INFORMS, vol. 46(7), pages 893-911, July.
    10. Kalkuhl, Matthias & Edenhofer, Ottmar & Lessmann, Kai, 2012. "Learning or lock-in: Optimal technology policies to support mitigation," Resource and Energy Economics, Elsevier, vol. 34(1), pages 1-23.
    11. Fleten, S.-E. & Maribu, K.M. & Wangensteen, I., 2007. "Optimal investment strategies in decentralized renewable power generation under uncertainty," Energy, Elsevier, vol. 32(5), pages 803-815.
    12. Karsten Neuhoff & Stefan Bach & Jochen Diekmann & Martin Beznoska & Tarik El-Laboudy, 2013. "Distributional Effects of Energy Transition: Impacts of Renewable Electricity Support in Germany," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    13. Wickart, Marcel & Madlener, Reinhard, 2007. "Optimal technology choice and investment timing: A stochastic model of industrial cogeneration vs. heat-only production," Energy Economics, Elsevier, vol. 29(4), pages 934-952, July.
    14. Conor Devitt & Laura Malaguzzi Valeri, 2011. "The Effect of REFIT on Irish Wholesale Electricity Prices," The Economic and Social Review, Economic and Social Studies, vol. 42(3), pages 343-369.
    15. Derek M. Lemoine, 2010. "Valuing Plug-In Hybrid Electric Vehicles' Battery Capacity Using a Real Options Framework," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 113-144.
    16. Albanese, Claudio & Lo, Harry & Stathis, Tompaidis, 2006. "A Numerical Method for Pricing Electricity Derivatives for Jump-Diffusion Processes Based on Continuous Time Lattices," MPRA Paper 5245, University Library of Munich, Germany.
    17. Gallego-Castillo, Cristobal & Victoria, Marta, 2015. "Cost-free feed-in tariffs for renewable energy deployment in Spain," Renewable Energy, Elsevier, vol. 81(C), pages 411-420.
    18. 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.
    19. Mallika Chawla & Michael G. Pollitt, 2013. "Energy-efficiency and Environmental Policies & Income Supplements in the UK: Evolution and Distributional Impacts on Domestic Energy Bills," Economics of Energy & Environmental Policy, International Association for Energy Economics, vol. 0(Number 1).
    20. M. T. Barlow, 2002. "A Diffusion Model For Electricity Prices," Mathematical Finance, Wiley Blackwell, vol. 12(4), pages 287-298.
    21. Fell, Harrison & Linn, Joshua, 2013. "Renewable electricity policies, heterogeneity, and cost effectiveness," Journal of Environmental Economics and Management, Elsevier, vol. 66(3), pages 688-707.
    22. Somayeh Heydari & Nick Ovenden & Afzal Siddiqui, 2012. "Real options analysis of investment in carbon capture and sequestration technology," Computational Management Science, Springer, vol. 9(1), pages 109-138, February.
    23. Doherty, Ronan & O'Malley, Mark, 2011. "The efficiency of Ireland's Renewable Energy Feed-In Tariff (REFIT) for wind generation," Energy Policy, Elsevier, vol. 39(9), pages 4911-4919, September.
    24. Eric Pickles & James L. Smith, 1993. "Petroleum Property Valuation: A Binomial Lattice Implementation of Option Pricing Theory," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-26.
    25. Keppo, Jussi & Rasanen, Mika, 1999. "Pricing of electricity tariffs in competitive markets," Energy Economics, Elsevier, vol. 21(3), pages 213-223, June.
    26. Siddiqui, Afzal & Fleten, Stein-Erik, 2010. "How to proceed with competing alternative energy technologies: A real options analysis," Energy Economics, Elsevier, vol. 32(4), pages 817-830, July.
    27. Rigter, Jasper & Vidican, Georgeta, 2010. "Cost and optimal feed-in tariff for small scale photovoltaic systems in China," Energy Policy, Elsevier, vol. 38(11), pages 6989-7000, November.
    28. Conrad, Jon M., 2000. "Wilderness: options to preserve, extract, or develop," Resource and Energy Economics, Elsevier, vol. 22(3), pages 205-219, July.
    29. Drew Fudenberg & Jean Tirole, 1991. "Game Theory," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061414, January.
    30. Robert S. Pindyck, 1999. "The Long-Run Evolutions of Energy Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 1-27.
    31. James L. Smith, 2005. "Petroleum Prospect Valuation: The Option to Drill Again," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4), pages 53-68.
    32. Mc Garrigle, E.V. & Deane, J.P. & Leahy, P.G., 2013. "How much wind energy will be curtailed on the 2020 Irish power system?," Renewable Energy, Elsevier, vol. 55(C), pages 544-553.
    33. Kim, Kyoung-Kuk & Lee, Chi-Guhn, 2012. "Evaluation and optimization of feed-in tariffs," Energy Policy, Elsevier, vol. 49(C), pages 192-203.
    34. Carlo Andrea Bollino, 2009. "The Willingness to Pay for Renewable Energy Sources: The Case of Italy with Socio-demographic Determinants," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 81-96.
    35. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    36. Chambers, Catherine M. & Chambers, Paul E. & Whitehead, John C., 1994. "Conservation organizations and the option value to preserve: an application to debt-for-nature swaps," Ecological Economics, Elsevier, vol. 9(2), pages 135-143, February.
    37. Maria Kopsakangas-Savolainen & Rauli Svento, 2013. "Promotion of Market Access for Renewable Energy in the Nordic Power Markets," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 54(4), pages 549-569, April.
    38. Woo, Chi-Keung, 1988. "Optimal electricity rates and consumption externality," Resources and Energy, Elsevier, vol. 10(4), pages 277-292, December.
    39. Lyle, Matthew R. & Elliott, Robert J., 2009. "A 'simple' hybrid model for power derivatives," Energy Economics, Elsevier, vol. 31(5), pages 757-767, September.
    40. James A. Overdahl & H. Lee Matthews, 1988. "The Use of NYMEX Options to Forecast Crude Oil Prices," The Energy Journal, International Association for Energy Economics, vol. 0(Number 4).
    41. Sensfuß, Frank & Ragwitz, Mario & Genoese, Massimo, 2008. "The merit-order effect: A detailed analysis of the price effect of renewable electricity generation on spot market prices in Germany," Energy Policy, Elsevier, vol. 36(8), pages 3076-3084, August.
    42. Fred Espen Benth & Lars Ekeland & Ragnar Hauge & BjøRn Fredrik Nielsen, 2003. "A note on arbitrage-free pricing of forward contracts in energy markets," Applied Mathematical Finance, Taylor & Francis Journals, vol. 10(4), pages 325-336.
    43. Krozer, Yoram, 2013. "Cost and benefit of renewable energy in the European Union," Renewable Energy, Elsevier, vol. 50(C), pages 68-73.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Farrell, Niall & Devine, Mel, 2015. "How do External Costs affect Pay-as-bid Renewable Energy Connection Auctions?," Papers WP517, Economic and Social Research Institute (ESRI).
    2. Patrice Bougette & Christophe Charlier, 2017. "Antidumping and Feed-In Tariffs as Good Buddies? Modeling the EU-China Solar Panel Dispute," GREDEG Working Papers 2017-17, Groupe de REcherche en Droit, Economie, Gestion (GREDEG CNRS), University of Nice Sophia Antipolis.
    3. Curtis, John & Devitt, Niamh & di Cosmo, Valeria & Farrell, Niall & FitzGerald, John & Hyland, Marie & Lynch, Muireann & Lyons, Sean & McCoy, Daire & Malaguzzi Valeri, Laura & Walsh, Darragh, 2014. "Irish Energy Policy: An Analysis of Current Issues," Research Series, Economic and Social Research Institute (ESRI), number rs37 edited by FitzGerald, John & Malaguzzi Valeri, Laura.
    4. Curtis, John & Lynch, Muireann Á. & Zubiate, Laura, 2016. "The impact of the North Atlantic Oscillation on electricity markets: A case study on Ireland," Energy Economics, Elsevier, vol. 58(C), pages 186-198.
    5. Farrell, Niall & Devine, Mel & Soroudi, Alireza, 2016. "An Auction Framework to Integrate Dynamic Transmission Expansion Planning and Pay-as-bid Wind Connection Auctions," Papers WP523, Economic and Social Research Institute (ESRI).
    6. repec:aen:journl:ej38-si1-argentiero is not listed on IDEAS
    7. Jeon, Chanwoong & Lee, Jeongjin & Shin, Juneseuk, 2015. "Optimal subsidy estimation method using system dynamics and the real option model: Photovoltaic technology case," Applied Energy, Elsevier, vol. 142(C), pages 33-43.

    More about this item

    Keywords

    Renewable Energy; Feed-in Tariff; Option Pricing; Renewable Energy Support Schemes �;

    JEL classification:

    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q4 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy
    • Q48 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Government Policy
    • Q5 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:49777. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Joachim Winter). General contact details of provider: http://edirc.repec.org/data/vfmunde.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.