Policy Instruments & Market Uncertainty: Exploring the Impact on Renewables Adoption

About the Project

This project explores how different policy instruments perform under varying market conditions. We focus on most popular instruments such as feed-in tariffs, feed-in premiums and investment credits. These policy instruments have a different impact on private investor’s behavior, resulting in different levels deployment of renewable technology, different speeds of adoption and different costs to taxpayers and ratepayers. The objective is to understand how private investors make decisions on renewable energy to help policymakers to choose the best policy to achieve their objectives.

Key Points

Policymakers have a variety of financial tools to foster the deployment of renewables. Our study explores how these policy instruments impact a private investor’s behavior, and the resulting differences in the adoption of renewable technology as well as costs to taxpayers and ratepayers. 

Success of a renewable support scheme is typically measured by the cost involved, amount of chosen technology deployed, and speed of adoption. 

All policy instruments (including feed-in tariffs, feed-in premiums and investment credits) can be designed to achieve the same amount of total renewable technology deployment. But each is likely to have a distinct societal cost, which is allocated differently between taxpayers and ratepayers. 

Investment credit is the cheapest policy option for taxpayers because renewable technologies are capital intensive. However, if the objective is to expedite the maximum deployment of renewables in a short period of time, without regard to costs, then a contract-for-difference feed-in tariff is the preferred instrument. 

We found that cheap loans increase the expected profits for private investors and also lead to slower adoption because it gives investors an incentive to wait. Finally, there are doubts over the common perception that investors prefer feed-in tariffs over investment credits and feed-in premiums due to the lower risks inherent in the former.