3. Modeling of Feed-in Tariffs

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.