Effectiveness of Feed-In Tariff and Renewable Portfolio Standard Under Strategic Pricing in Network Access

Abstract

Although some policy schemes are intended to promote production from renewable energy sources (RES), strategic pricing in network access possibly offsets the effectiveness of these policies. This study compares the effectiveness of fixed-price and premium-price feed-in tariffs (FIT) and renewable portfolio standards (RPS) for promoting production from RES, explicitly considering strategic pricing in network access. The effects of vertical structure, i.e., vertical integration and separation, are also investigated. An analytical model consists of a monopolist and a competitive fringe, where the fringe firm produces from RES. The vertically integrated monopolist is able to set the access price incurred by the fringe and its own output. Under vertical separation, in contrast, the access price is set by an independent operator in the network sector. It is shown that under vertical integration, the effectiveness of both FIT policies are fully offset by strategic pricing in network access, whereas RPS does not create an incentive for the manipulation. This is because a higher access price induces a higher cost for the vertically integrated monopolist to meet the purchase obligation under RPS. Consequently, RPS is potentially more effective than FIT policies under vertical integration. It is also shown that vertical separation improves the effectiveness of both FIT policies but adversely reduces that of RPS.