Optimal subsidy in promoting distributed renewable energy generation based on policy benefit

Distributed renewable energy generation via micro-grid plays a strategic role in defining energy policy for mitigating the pressure of global climate changes and energy reservation. As the initial installation of the renewable generation equipment is costly, it is necessary that the government provides incentive schemes to private investors aiming at mobilizing private capital to support distributed renewable energy generation. This paper brings forward optimal subsidy to stimulate private investment and focuses more on the government’s expected policy benefit. We formulate principal–agent model in which the private investor’s preference toward renewable generation is described as asymmetric information. We analyze the optimal subsidy with the purpose of maximizing the expected policy benefit; besides, this paper reveals benefit conflicts between the policymakers and the private investors, and examines the parameters’ effect on the government’s purpose under the condition of asymmetric information. Finally, a numerical example is presented to test the effectiveness of the model. The results shed new light on the role of investor’s preference in determining the share of renewable energy generation; moreover, it has important implication for policymakers: the results suggest that radically innovative systems will get down the cost curve and may display higher long-term potentials, but in the short run, the government should eliminate asymmetric information as far as possible and improve the investors’ environment-friendly awareness.