A framework for renewable energy policy modeling

Abstract

The renewable energy generation is often encouraged with policies like subsidies, fiscal incentives, renewable purchase obligation (RPO) and feed-in tariffs (FiTs). The impact of these policies on harnessing renewable energy sources is influenced by resource endowments, access to technology, grid connectivity, cost and taxation structure, as well as overall investment climate in the country. The design of such policies is not given its due, leading to suboptimal policies that either lead to the failure of such policies or giving away too much advantage to investors for a long time. Due to inadequate care in policy design and regulatory framework obligated entities in most of the states in India failed to meet their RPO targets. Apart from faulty policy design, these policies disregard economic efficiency. There is little incentive to deploy cost-effective technology to develop the most cost-effective sources first. In a multistate nation like India, the State Electricity Regulatory Commissions (SERCs) set the RPO and the technology-specific preferential FiT to be paid for the renewable energy procurement by the obligated distribution utilities. Renewable Energy Certificates (RECs), introduced in 2009, have been introduced in India to encourage cross country trade for meeting the renewable purchase obligation. The relative importance and efficacy of alternate policy measures such as FITs and RECs have not been duly addressed in the literature in an applied framework. This chapter develops a modelling framework for evaluating such alternate policy measures under different market environments. We evaluate economic efficiency in terms of cost of compliance and welfare impacts of alternate policies in state-specific and national market contexts. The chapter develops a generic modeling framework that can be used by a country to evaluate alternate renewable energy policy options.