Evaluation and optimization of feed-in tariffs

Abstract

Feed-in tariff program is an incentive plan that provides investors with a set payment for electricity generated from renewable energy sources that is fed into the power grid. As of today, FIT is being used by over 75 jurisdictions around the world and offers a number of design options to achieve policy goals. The objective of this paper is to propose a quantitative model, by which a specific FIT program can be evaluated and hence optimized. We focus on payoff structure, which has a direct impact on the net present value of the investment, and other parameters relevant to investor reaction and electricity prices. We combine cost modeling, option valuation, and consumer choice so as to simulate the performance of a FIT program of interest in various scenarios. The model is used to define an optimization problem from a policy maker's perspective, who wants to increase the contribution of renewable energy to the overall energy supply, while keeping the total burden on ratepayers under control. Numerical studies shed light on the interactions among design options, program parameters, and the performance of a FIT program.