Effects of Feed-In Tariffs on Renewable Energy Generation

Feed-in tariffs (FITs) have become a widely used instrument to seek to drive market penetration of renewable energy sources. A recent study concluded that FITs have been implemented in 63 countries and 26 regional jurisdictions. In the United States, FITs have been adopted in twelve states and numerous municipalities. However, the impacts of FITs remain contested. A new study on the effects of FITs would make a good student reading in graduate courses with students with good quantitative skills.

The study used instrumental variables to estimate the causal effect of FITs on renewable electricity generation in 26 industrialized countries in the period of 1979-2005. The study employed two different instruments, a spatial instrument based on average FIT in neighboring countries (argued to be a strong predictor of a country’s FIT) and a 4-year lag of a country’s own FIT (argued to be a strong predictor of a country’s current FIT).

The researchers concluded that increasing the FIT by one cent U.S. per kilowatt hour increases the percentage change of renewable energy’s share in the electricity mix by 0.11%. Over a decade, a FIT of 10 cents would thus increase a country’s renewable energy share of electricity production by approximately 12%, with this share exceeded in several studies countries, including Austria and Portugal.

Among the in-class discussion questions that would be pertinent to this study include the following:

  1. Are the results here pertinent to developing countries?
  2. Are FITs the optimal instrument to incentivize renewable energy market penetration? How do we compare the instrument’s effectiveness vis-a-vis other approaches, e.g. renewable portfolio standards or net metering?;
  3. Some countries have begun to scale back FITs on the grounds of costs and maturation of some renewable energy technologies. How does society engage in the cost-benefit analysis to determine optimal levels of FITs?

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