Assessing the Strength and Effectiveness of Renewable Electricity Feed-In Tariffs in European Union Countries

Abstract

In the last two decades, feed-in tariffs (FIT) and renewable portfolio standards (RPS) have emerged as two of the most popular policies for supporting renewable electricity (RES-E) generation in the developed world. A few studies have assessed their effectiveness, but most do not account for policy design features and market characteristics that influence policy strength. In this paper, we employ 1992-2008 panel data to conduct the first analysis of the effectiveness of FIT policies in promoting solar photovoltaic (PV) and onshore wind power development in 26 European Union countries. We develop a new indicator for FIT strength that captures variability in tariff size, contract duration, digression rate, electricity price, and electricity generation cost to estimate the resulting return on investment. We then regress this indicator on added RES-E capacity using a fixed effects specification. We find that FIT policies have driven solar PV and onshore wind capacity development in the EU. However, this effect is overstated without controls for country characteristics and may be concealed without accounting for the unique design of each policy. We provide empirical evidence that the interaction of policy design and market dynamics are more important determinants of RES-E development than policy enactment alone.

Keywords: Renewable energy, Feed-in tariff, Panel data models

JEL Classification: C23, H23, Q42, Q48