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Feed-in tariffs with minimum price guarantees and regulatory uncertainty


Abstract The feed-in tariff (FIT) program is a popular policy for incentivizing new renewable energy projects because it establishes a long-term contract with renewable energy investors. This paper presents a novel model to analyze a FIT contract with a minimum price guarantee (i.e., a price-floor regime) from an investor's perspective. The results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk-free investment opportunity. In contrast, the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost. When an investor faces a scenario with regulatory uncertainty, a higher and more likely reduction in the price floor induces earlier investment. For all cases, investors postpone an investment decision when market conditions present a higher price volatility.
Year 2018
Keywords Real options, Feed-in tariff, Price-floor regime, Regulatory uncertainty;Miscellaneous;
Authors Luciana Barbosa, Paulo Ferrão, Artur Rodrigues, Alberto Sardinha
Journal Energy Economics
Volume 72
Pages 517 - 541
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@article { barbosa18, abstract = {The feed-in tariff (FIT) program is a popular policy for incentivizing new renewable energy projects because it establishes a long-term contract with renewable energy investors. This paper presents a novel model to analyze a FIT contract with a minimum price guarantee (i.e., a price-floor regime) from an investor's perspective. The results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk-free investment opportunity. In contrast, the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost. When an investor faces a scenario with regulatory uncertainty, a higher and more likely reduction in the price floor induces earlier investment. For all cases, investors postpone an investment decision when market conditions present a higher price volatility.}, journal = {Energy Economics}, keywords = {Real options, Feed-in tariff, Price-floor regime, Regulatory uncertainty;Miscellaneous;}, pages = {517 - 541}, title = {Feed-in tariffs with minimum price guarantees and regulatory uncertainty}, volume = {72}, year = {2018}, author = {Luciana Barbosa and Paulo Ferrão and Artur Rodrigues and Alberto Sardinha} }

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