Abstract
Feed-in tariffs are the most popular policy tool to support electricity from renewable energy sources in Europe. I introduce a simple investment decision model to explain how different policy design features influence the incentive to invest in renewable energy systems. The theoretical tool captures tariff amount, contract duration, electricity price, system lifetime, price uncertainty, generation cost, discount rate, and an alternative investment option. In a fixed effects model, I regress technology-specific generation on the resulting covariate. Using a sample of 26 EU member countries between 1990 and 2010, I find that FIT policies have effectively supported biomass, geothermal, and solar photovoltaic electricity generation. However, there is no such link between FIT policies and onshore wind generation. I show that alternative measures of FIT policies, such as binary and nominal variables, can yield misleading results. The paper provides country-specific recommendations for policymakers on how to increase the overall effectiveness of their existing feed-in tariffs.
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