Choice of policy instruments under feed-in tariff regimes for renewable energy promotion
Concerns about carbon emissions from fossil fuel based electricity generation have led to interest in the promotion of “renewable energy”. Around the world, many countries now employ “renewable portfolio standards” or “green quotas” which stipulate a minimum percentage of total electricity generation that must be derived from renewable sources. Among the many support mechanisms for electricity generation from renewable sources, Feed in Tariffs (FIT) - which provide direct technology specific subsidies for generation from renewable sources - are widely believed to be the most effective. In this paper, we study an electricity market operated under a system of FITs financed by an end user tax on electricity. We provide a full characterization of the set of FIT equilibria and demonstrate that which equilibria are actually attainable will depend on the precise choice of policy instruments. For example, the FITs themselves can be the policy instruments, with the green quota and the end user tax endogenously determined; or, the green quota and the end user tax can be the policy instruments with the FITs endogenously determined etc. We demonstrate that, if the primary concern of the policy maker is ensuring the viability of the renewables producers, then employing the FITs as the policy instruments is most efficacious. This is due to the fact that under endogenously determined FITs, increases in the green quota can reduce the profits of some green producers(s). However, if the policy maker’s objective is welfare maximization, other combinations of policy instruments may perform better. We also provide a numerical example that yields additional insights regarding the choice of policy instruments.