Feed-in Tariffs in Comparison with the Renewables Portfolio Standard

Abstract

Feed-in tariffs (FITs) and the renewables portfolio standard (RPS) are two major policy instruments for promoting the development of the electricity generated from renewable energy sources (RES-E). On the one hand, FITs are a price-based policy tool in that a government sets a price at which RES-E can be sold for a set period of years. On the other hand, RPS is a quantity-based policy tool in that a government forces electricity retailers to sell a set amount of RES-E. Recall that a carbon tax is a price-based tool, whereas tradable emission permits are a quantity-based tool for reducing greenhouse gas emissions. In this regard, it is often argued that FITs and RPS are comparable to carbon taxes and tradable emission permits, respectively. Accordingly, they may be modeled similarly to carbon taxes and tradable emission permits. Based on this conjecture, FITs and RPS are modeled in this chapter in terms of marginal conditions, optimization, and linear programming, one by one. However, we should note two features of generating RES-E that are distinct from reducing greenhouse gases. First, the amount of RES-E output cannot be controlled; it depends, to a large extent, on natural conditions. Second, fixed investment costs are much more important than variable operating costs. Hence, we need to develop an alternative model to investigate FITs and RPS.