The impact of differentiated feed-in tariffs on the resource misallocation of wind power: From the perspectives of the intensive and extensive margins

Abstract

The widespread implementation of feed-in tariff (FIT) policies has played a crucial role in fostering the development of wind power, with their positive effects firmly established in numerous studies. However, the impact of regionally differentiated FIT policies on the misallocation of wind power resources remains a topic of contention, with limited research dedicated to this area. This paper aims to address this gap by examining the implications of such policies on the intensive and extensive margins of wind power installed capacity in China, shedding light on the underlying mechanisms driving resource misallocation. Empirical findings indicate that, concerning the intensive margin, the policy amplifies the concentration of wind power investments in regions characterized by abundant wind resources but low electricity demand. These regions present favorable conditions for large-scale wind farms with cost advantages, consequently exacerbating the misallocation of wind power resources. However, on the extensive margin, the policy promotes the likelihood of locating small and medium-sized wind farms in regions with poor wind resources but higher tariff rates, thus partially mitigating resource misallocation. In summary, China's policy hampers wind power investments in regions characterized by high electricity demand but limited wind resources. This suggests that the negative impact on the intensive margin outweighs the positive impact on the extensive margin. The findings of this study bear significant implications for the development of renewable energy support policies, particularly in countries grappling with substantial regional disparities in renewable energy resources.