Comparing FeeddIn Tariffs and Renewable Obligation Certificates The Case of Repowering Wind Farms

Abstract

This paper compares support mechanisms for renewable energy with respect to their ex-ante effectiveness in promoting the adoption of innovative technologies. We analyse two stylized policy instruments in the context of the example of wind repowering: renewable quotas and feed-in tariffs. Quota systems, such as the British Renewable Obligation Certificates (ROCs), are based on mandatory renewable quotas. Feed-in tariffs (FITs), such as the German EEG tariffs, guarantee a certain, fixed price for ’green’ electricity over the economic lifetime of the investment. This paper focuses on one aspect of the difference between the two instruments: the allocation of uncertainty. While under ROCs both electricity price and capital cost risks are borne by the owner of the wind farm, under FITs only capital cost risks remain with the owner. The model is calibrated on data for German wind power plants. Our general result is that the owner is more likely to adopt a new technology under price certainty as provided by FITs. Another finding is that electricity price and capital cost volatility have different impacts on the propensity to invest under ROCs. While, even a small positive variation in electricity price volatility increases the propensity to invest, an increase in capital cost volatility does not affect the likelihood to repower wind farms. The last result also applies under FITs.