Optimal Design of Feed-in-Tariffs to Stimulate Renewable Energy Investments Under Regulatory Uncertainty - A Real Options Analysis

40 Pages Posted: 5 May 2013

See all articles by Ingmar Ritzenhofen

Ingmar Ritzenhofen

WHU - Otto Beisheim School of Management

Stefan Spinler

WHU-Otto Beisheim School of Management

Date Written: April 29, 2013

Abstract

Feed-in-tariffs (FITs) are widely used as policy instruments to promote investments in renewable energy sources (RES). While FITs are often regarded the most effective RES support scheme, regulators around the world continuously review their FIT schemes in the light of budget constraints and evolving policy goals. We assess the impact of adjustments to FIT schemes by quantifying the relationship between FIT levels, i.e. the guaranteed amount paid per quantity of electricity produced, and the propensity to invest in RES. Through a regime switching model, we quantify the impact of regulatory uncertainty induced by regulators considering moves from a FIT scheme to a more market-oriented regulatory regime. Our focus is on market-independent, fixed FITs, the dominant scheme in Europe receiving increasing attention globally. We find that RES investment projects under market-independent, fixed FIT schemes become now-or-never decisions and derive FIT thresholds required to induce investment. We show that uncertainty regarding future regulatory regimes only alters investment behavior for FIT levels near electricity spot market prices and high probabilities of an imminent regime switch.

Keywords: Feed-in-tariffs, Renewable energy, Power generation, Renewable energy support schemes, Regulatory uncertainty, Regime switching, Real options

JEL Classification: Q42, Q48

Suggested Citation

Ritzenhofen, Ingmar and Spinler, Stefan, Optimal Design of Feed-in-Tariffs to Stimulate Renewable Energy Investments Under Regulatory Uncertainty - A Real Options Analysis (April 29, 2013). Available at SSRN: https://ssrn.com/abstract=2260934 or http://dx.doi.org/10.2139/ssrn.2260934

Ingmar Ritzenhofen (Contact Author)

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

Stefan Spinler

WHU-Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany
+49-261-6509430 (Phone)

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