5. Feed-in Tariffs Combined with Capital Subsidies

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.