Evaluation and Optimization of Feed-In Tariffs

Energy Policy, vol. 49, 2012, 192-203

Posted: 3 Jan 2014

See all articles by Kyoung-Kuk Kim

Kyoung-Kuk Kim

Korea Advanced Institute of Science and Technology

Chi-Guhn Lee

University of Toronto

Date Written: May 19, 2012

Abstract

Feed-in tariff program is an incentive plan that provides investors with a set payment for electricity generated from renewable energy sources that is fed into the power grid. As of today, FIT is being used by over 75 jurisdictions around the world and offers a number of design options to achieve policy goals. The objective of this paper is to propose a quantitative model, by which a specific FIT program can be evaluated and hence optimized. We focus on payoff structure, which has a direct impact on the net present value of the investment, and other parameters relevant to investor reaction and electricity prices. We combine cost modeling, option valuation, and consumer choice so as to simulate the performance of a FIT program of interest in various scenarios. The model is used to define an optimization problem from a policy maker’s perspective, who wants to increase the contribution of renewable energy to the overall energy supply, while keeping the total burden on ratepayers under control. Numerical studies shed light on the interactions among design options, program parameters, and the performance of a FIT program.

Keywords: Feed-in Tariff; Renewable Energy; Real Option

Suggested Citation

Kim, Kyoung-Kuk and Lee, Chi-Guhn, Evaluation and Optimization of Feed-In Tariffs (May 19, 2012). Energy Policy, vol. 49, 2012, 192-203, Available at SSRN: https://ssrn.com/abstract=2374312

Kyoung-Kuk Kim

Korea Advanced Institute of Science and Technology ( email )

Dept of Industrial and Systems Engineering
KAIST
Daejeon, 305-701
Korea, Republic of (South Korea)

Chi-Guhn Lee (Contact Author)

University of Toronto ( email )

105 St George Street
Toronto, Ontario M5S 3G8
Canada

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