Does a combined strategy outperform independent policies? Impact of incentive policies on renewable power generation

Abstract

Incentives for renewable energy based on feed-in-tariffs (FITs) and the renewable portfolio standard (RPS) have succeeded in reducing greenhouse gas (GHG) emissions from the power generation sector. Although numerous countries have adopted a strategy combining both approaches, few studies compare its performance with either the individual FITs or RPS approach. To evaluate the effects of these three policy instruments, this study takes market transactions into account, such as net transfers to the renewable and non-renewable sectors, RPS allocation, and renewable certificate/credit (RECs) exchange. It proposes central planning, bi-level regulation, and regulation under screening as the three market structure scenarios to construct its cases and includes social welfare in the incentive performance index. Further, this study extends to cases of asymmetric information by means of optimal control to reflect market reality for comparison. The numerical examples and counterfactual analyses reach the following conclusions. First, a combined incentive policy performs best when renewable power is in its early stage of development. Second, an integrated incentive policy may neutralize the drastic volatility of FITs or the RPS. Third, the RPS is a favorable approach when the levelized cost of renewable energy is lower than that of non-renewable, while FITs do well when the costs of renewable and non-renewable energy differ slightly. The key policy implication is that along with the reduction in renewable energy generation costs, an RPS and RECs exchange mechanism or combined strategy might be adopted for social welfare benefits, the benefit of the power plants or the TSOs, respectively.