Feed-in Tariffs and the Economics of Renewable Energy

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.

The similarity between feed-in tariffs (FITs) and carbon taxes is noted because both are price-based policy instruments, which makes it appropriate to model FITs similarly to carbon taxes when investigating renewable energy policy. However, generating electricity from renewable energy sources (RES-E) is fundamentally different from reducing greenhouse gas emissions, except for the difference between incentives and disincentives. Typically, whether to invest in renewable energy is much more relevant to FITs than is the quantity of RES-E to generate. Accordingly, we need to develop a model to investigate FITs, which may be different from the model used to investigate carbon taxes. The purpose of this chapter is to develop such a model. We consider solar photovoltaic (PV) power generation in the business sector and in the residential sector. The model pays particular attention to the heterogeneity among decision-makers: given a price of PV electricity under FITs, some decision-makers will invest in PV generation and others will not. Using the model, we examine the amount of PV electricity generated and address the problem of social welfare maximization. It is shown that while the amount of PV electricity increases as the price of PV electricity is set higher, there is a definite price at which social welfare is maximized.

To incentivize households to adopt a photovoltaic (PV) system, there are three types of feed-in tariffs with respect to what part of PV electricity is priced: all PV electricity, surplus PV electricity, and the difference between PV generation and electricity consumption. In this chapter, we refer to these as FITs for all PV electricity, FITs for surplus PV electricity, and net metering, respectively. This study aims to compare these mechanisms with respect to retail electricity rates, including the cost to an electric utility of purchasing PV electricity and with respect to social welfare. A simple microeconomic model is developed. The findings are as follows. First, the mechanism that yields the lowest surcharged electricity rate is not clear; it depends on the parameter values. If households are more homogeneous in terms of parameter values, the difference in the surcharged electricity rates will be small. Second, the mechanism that produces the largest social welfare is FITs for all PV electricity. These results are confirmed by means of a simulation. If we take account of some reductions in electricity consumption in the case of FITs for surplus PV electricity or net metering, the results for social welfare should be slightly modified. If the reduction is significantly large, FITs for surplus PV electricity or net metering may produce greater social welfare compared with FITs for all PV electricity.

Both feed-in tariffs (FITs) and capital subsidies have been widely employed to promote the adoption of renewable energy technologies. This chapter sheds light on the combined use of FITs and capital subsidies. The purpose is to clarify their optimal combinations to encourage households to adopt photovoltaic (PV) systems or to encourage firms to invest in PV generation. This study develops a microeconomic model embodying the idea of two-part tariffs. The most important findings concern the combination that maximizes social welfare for the residential sector: if FITs are applied to the total PV electricity generated, they should be set at the avoided cost per unit of PV electricity, and capital subsidies should be used to control the number of adopters; whereas, if FITs are applied to only surplus PV electricity, the previous principle is distorted to some extent. A similar result is obtained for the business sector. In the model for the business sector, the government aims to have a certain installed capacity of PV panels, whereas in the model for the residential sector, its aim is to have a certain number of households adopt PV systems. The problem of equity, that is, how to finance the cost of FITs and capital subsidies is also discussed.

In Chap. 5, we studied optimal combinations of feed-in tariffs (FITs) and capital subsidies. The theoretical investigation we developed through our microeconomic model provided some rigorous results as well as some unclear results. The purpose of this chapter is to confirm the results and develop new insights into those that were unclear in Chap. 5. To this end, we conduct simulations of the adoption of photovoltaic (PV) systems in the residential sector. At the same time, these simulations will help to clarify the theoretical model. Parameter values are set based on various sources of data. The simulations presented here have verified the theoretical results yielded in Chap. 5 and provided new findings with regard to the amount of PV electricity, the promotion cost, and social welfare. In particular, the promotion cost, which had been unclear in Chap. 5, showed a U–shaped curve, suggesting that there is a FIT level that minimizes the promotion cost. The comparison between the two cases, FITs for all PV electricity and FITs for surplus PV electricity, provided some reasonable results. Our simulation is intended to supplement the theoretical investigation in Chap. 5; it is not intended as an empirical investigation. More in-depth simulations should be conducted to obtain practical guidelines on setting FIT and capital subsidy levels.

In Chap. 5, we developed a microeconomic model to investigate optimal combinations of feed-in tariffs (FITs) and capital subsidies for the adoption of solar photovoltaic (PV) power generation systems in the residential sector. In that model, it was assumed that a household, a potential adopter, is characterized by several variables related to PV generation. Then, we determined the levels of FIT and capital subsidy at which a household would adopt a PV system. Accordingly, we can determine combinations of FITs and capital subsidies at which a certain number of households adopt. However, in reality, whether a particular household adopts may make little sense; what a government is concerned with is the total number of adopters, and it will control FIT and capital subsidy levels so that the target amount of adoption may be achieved. Hence, in this chapter, we develop a model constructed with continuous variables: the variables that characterize a household take continuous values so that a government considers solely the amount of adoption. By using this model, we consider three optimality criteria: maximization of PV electricity, minimization of promotion cost, and maximization of social welfare. The same results are obtained as in Chap. 5 with respect to the optimal combinations of FITs and capital subsidies.

Foreign direct investment in renewable energy projects, particularly where biomass is used as input, has been attracting increasing attention, partly due to the Clean Development Mechanism (CDM) of the Kyoto Protocol. In these situations, there may be an information gap between a host country’s government and the foreign firm that will invest: while the firm can collect information regarding the project, for example through a feasibility study, it will be difficult for the government to know whether the foreign firm is undertaking the project efficiently. It is supposed that the government will offer the foreign firm some remunerations, consisting of feed-in premiums (FIPs) and capital subsidies, to encourage investment in such a project. The purpose of this chapter is to determine an optimal combination of FIPs and capital subsidies that encourages investment in a CDM project by a foreign firm, while minimizing the cost of FIPs and capital subsidies. To this end, we develop a microeconomic model that accounts for this information gap. It is shown that a single combination of remunerations is determined to be optimal regardless of the existence of such an information gap. The model developed in this chapter may be considered an extension of the model developed in Chap. 5, this time applied to an investigation that accounts for uncertainty.

As an increasing amount of the electricity generated from renewable energy sources (RES-E) is fed into the power grid, various problems, such as frequency and voltage instability in the power system, occur more frequently. To address this problem, a system operator provides ancillary services such as balancing electricity supply and demand and procuring reactive power supply. Accordingly, the cost of ancillary services should be appropriately allocated to distributed generators of RES-E. This chapter proposes a method for solving this cost allocation problem. The method proposed is an application of the Aumann–Shapley (A–S) rule, which is one of cost sharing rules among multiple entities. If an ancillary service cost is expressed as a function of an electricity output vector, each element of which corresponds to each distributed generator, the cost share of a distributed generator will be computed based on the A–S rule. The difficulty of this method lies in how to obtain an ancillary service cost function. This chapter proposes that parametric linear programming be used to form that cost function, and we explain this computation method. The method may be useful for designing a new type of feed-in tariff system, which will be necessary after a diffusion goal is achieved under the current feed-in tariff system.

According to diffusion theory, opinion leaders—through interpersonal communication with potential adopters—play an important role in the diffusion of new technologies. The purpose of this chapter is to examine whether this is the case for a solar photovoltaic (PV) power generation system and to investigate the role and utility of opinion leadership in the diffusion of PV systems. Specifically, the study proposes, examines, and considers the implications of the hypothesis that there is a positive relationship between willingness to pay (WTP) for a PV system and opinion leadership on the adoption of PV systems in the residential sector. The study employed an internet-based questionnaire survey to assess the use of interpersonal communication in decision-making on adoption, to identify opinion leaders with respect to adoption and to characterize their WTP. The response pool consisted of 488 individuals who lived in detached houses in Japan, owned a residential PV system and were responsible for making the decision to adopt their PV system. The results support the hypothesis stated above. Considering that subsidization preferentially incentivizes households with greater WTP to adopt PV systems, the results suggest that subsidization is more effective than purchases of PV electricity under a feed-in tariff system in promoting the diffusion of PV systems in the residential sector through interpersonal communication.

Worldwide, an increasing number of projects have been implemented that use biomass discarded as waste—designated biomass waste in this chapter—as a renewable resource. Such projects, called biomass projects, involve various parties, including municipalities, private companies, consortia, and NGOs. The purpose of this chapter is to clarify the optimal organizational form of a biomass project. To begin, we survey examples of biomass projects in Japan to identify their typical features. Given that biomass projects have both public and commercial aspects, we are concerned with public-private partnership (PPP) as an organizational form for biomass projects. To examine the applicability of PPP to a biomass project, we review previous studies of PPP in the economics literature. The results are mixed: PPP is preferable under some conditions but not appropriate under others. These findings might be attributable to the method employed: the literature reviewed is only concerned with the contractual aspect of PPP, and our discussion is somewhat subjective. It may be useful for future research to take a different approach, recognizing that participants in a biomass project are all concerned with the affairs of the region and will thus collaborate on the project beyond making profits.

Many renewable energy (RE) cooperatives undertake local RE projects such as solar photovoltaic generation and wind-power generation, particularly in Europe. In contrast, in Japan, municipalities have recently become actively involved in setting up a type of company that will undertake such projects. This type of company will be called “a municipal RE company” in this chapter. The purpose of this chapter is to examine the effectiveness of this particular organizational form. A literature review, website surveys and an interview are conducted. The findings are as follows: first, the literature review on RE cooperatives reveals that one of the crucial factors for successful RE cooperatives is community involvement in the projects. Second, community involvement may be facilitated and achieved by public employees through public service motivation. Third, website surveys and an interview with a key figure at a municipal RE company confirm this view. It is suggested that a municipal RE company works, to some extent, in the same way as an RE cooperative and thus may be effective in undertaking local RE projects. Taking into account that the success of an RE cooperative will depend on historical, cultural, and legal conditions, a municipal RE company may be a potential alternative for a community that does not satisfy those conditions.