Risk-based assessment of the cost-efficiency and the effectivity of renewable energy support schemes: Certificate markets versus feed-in tariffs

• Published in: Energy policy 2013-04, Vol.55, p.648-661
• Main Authors: Fagiani, Riccardo, Barquín, Julián, Hakvoort, Rudi
• Format: Article
• Language: English
• Subjects: Alternative energy sources; Applied sciences; Benefits; Cash flow; Climate change; cost effectiveness; Economic data; Electric energy; Electric power; electricity; Electricity generation; emissions; Energy; Energy economics; Energy industry; Energy policy; Energy resources; Exact sciences and technology; Foreign direct investment; General, economic and professional studies; Global warming; International trade; Investments; Investors; issues and policy; Market share; Markets; Natural energy; oils; Petroleum industry; Prices; Renewable energy; Renewable energy sources; Renewable resources; Risk; Risk aversion; Risk management; Studies; Support schemes; Tariff; Tariffs
• ISSN: 0301-4215; 1873-6777
• DOI: 10.1016/j.enpol.2012.12.066

The introduction of renewable energy sources in the electricity generation mix has the potential to reduce power sector's emissions and countries' dependence on imported oil. Climate change concerns and highly volatile oil prices have attracted governments' interest and support to sustain investments in renewable energy capacity, and different support policies have been implemented in many countries around the world. This paper analyzes the effects of investors' risk aversion on the performance of support schemes. The analysis compares two policy options, a feed-in tariff mechanism with a certificate market system. Results show that while a tariff mechanism could obtain better results than a certificate market, its performance is strictly dependent on regulator choices. A certificate market instead, permits to obtain the desired level of renewable energy market share with good cost-efficiency as long as investors' risk aversion is moderate. Moreover, discounting future cash flows with higher social discount rates further benefits a certificate system making it preferable to feed-in tariffs. ► Paper analyzes the performance of feed-in tariffs and certificate markets. ► Model simulates the evolution of a power system considering investors' risk aversion. ► Tariffs could obtain better efficiency but also low effectiveness or over-investment. ► Barriers to entrance could result in higher certificates prices. ► Certificate performances benefit from higher social discount rates.