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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
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    References listed on IDEAS

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    Cited by:

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    2. 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.
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    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. Peio Alcorta & Maria Paz Espinosa & Cristina Pizarro-Irizar, 2024. "Right and Duty: Investment Risk Under Different Renewable Energy Support Policies," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 87(12), pages 3163-3204, December.
    6. Farrell, Niall & Devine, Mel T. & Soroudi, Alireza, 2018. "An auction framework to integrate dynamic transmission expansion planning and pay-as-bid wind connection auctions," Applied Energy, Elsevier, vol. 228(C), pages 2462-2477.
    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.

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    Keywords

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    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

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