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Feed-in tariffs with minimum price guarantees and regulatory uncertainty

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  • Barbosa, Luciana
  • Ferrão, Paulo
  • Rodrigues, Artur
  • Sardinha, Alberto

Abstract

The feed-in tariff (FIT) program is a popular policy for incentivizing new renewable energy projects because it establishes a long-term contract with renewable energy investors. This paper presents a novel model to analyze a FIT contract with a minimum price guarantee (i.e., a price-floor regime) from an investor's perspective. The results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk-free investment opportunity. In contrast, the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost. When an investor faces a scenario with regulatory uncertainty, a higher and more likely reduction in the price floor induces earlier investment. For all cases, investors postpone an investment decision when market conditions present a higher price volatility.

Suggested Citation

  • Barbosa, Luciana & Ferrão, Paulo & Rodrigues, Artur & Sardinha, Alberto, 2018. "Feed-in tariffs with minimum price guarantees and regulatory uncertainty," Energy Economics, Elsevier, vol. 72(C), pages 517-541.
    • Handle: RePEc:eee:eneeco:v:72:y:2018:i:c:p:517-541
    DOI: 10.1016/j.eneco.2018.04.028
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    More about this item

    Keywords

    Real options; Feed-in tariff; Price-floor regime; Regulatory uncertainty;
    All these keywords.

    JEL classification:

    • L94 - Industrial Organization - - Industry Studies: Transportation and Utilities - - - Electric Utilities
    • Q42 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Alternative Energy Sources
    • Q28 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Government Policy

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