Electricity price subsidy or carbon-trading subsidy: which is more efficient to develop photovoltaic power generation from a government perspective?

Abstract

Photovoltaic (PV) power generation has high investment costs and long payback periods. Therefore, during early deployment, subsidies are fundamental and necessary to accelerate its development. We consider the question of how to promote PV industry development and which supporting policy is more efficient in accelerating adoption. Based on real options method, we establish a subsidy efficiency model for electricity price subsidies and carbon-trading subsidies under two sources of uncertainty power demand for PV and the investment cost-reduction probability. This study aims to compare the two forms of subsidies from the perspective of promoting immediate investment and maximizing the subsidy policy efficiency for the government (minimizing the unit carbon-mitigation cost) and advance relevant policy proposals. An example of China is provided to test the effectiveness of the model and to illustrate the implications of the solutions. The results show that a carbon-trading subsidy is better than an electricity price subsidy and that it is essential to improve the demand for the power produced by the PV power-generation projects. Lower market risk and driving technology progress are both conducive to improving the subsidy efficiency. This study also provides a meaningful reference for governments worldwide to formulate subsidy programs to support PV power-generation projects.