Power Market Equilibrium under the Joint FIP-RPS Renewable Energy Incentive Mechanism in China

Abstract

In order to support the development of renewable energy, countries around the world have adopted certain renewable energy incentive mechanisms, including feed-in tariff (FIT) and renewable portfolio standard (RPS). Based on the official report concerning renewable energy consumption issued by the Chinese government in 2018, FIT is no longer an ideal renewable incentive mechanism for China. The increasing financial burden of renewable subsidies on the government has prompted a transition from FIT to a more market-based RPS mechanism. However, the abrupt transformation from FIT to RPS without any transitions might potentially cause problems, including a lack of incentives for market participants and a high market risk. Feed-in premium (FIP), which is a transformation based on FIT, can increase the flexibility of the mechanism and play an important role in the transitional period. However, to date, there has only been limited research work that has explored the effect of implementing FIP-RPS in the development of renewable energy in China. It is still not clear how this transition could be carried out smoothly. Therefore, this research was aimed to devise a joint FIP-RPS mechanism and further develop the optimal combination ratio of the two, so as to obtain a socially optimal mechanism design. The simulation results showed that, at different stages of renewable energy development, FIP and RPS should be implemented according to their distinct characteristics, and the joint FIP-RPS mechanism should be combined with different ratios. It could be indicated that the proposed joint FIP-RPS mechanism not only excels at promoting renewable energy, but is also capable of maintaining desirable market prices and social welfare in this transitional period, as compared to FIP and RPS implemented alone. In the future, a certain degree of FIP-RPS implementations to this type of energy transition would be one of the preferred methods that could be implemented to have a considerable influence on China’s national energy plan. This is because the combination of the two mechanisms not only reduces the financial burden of the government, but also plays an active role in the renewable energy market.