Some implications of design element choice when combining a green quota with a system of feed-in tariffs

Concerns about carbon emissions from fossil fuel-based electricity generation have led to interest in the promotion of “renewable energy.” Around the world, many countries now employ “renewable portfolio standards” or “green quotas,” which stipulate a minimum percentage of total electricity generation that must be derived from renewable sources. Among the many support mechanisms, Feed-In Tariffs (FITs) ― which provide direct technology-specific subsidies for generation from renewable sources ― are widely believed to be the most effective. In this paper, we study an electricity market operated under a mandated green quota combined with a system of differentiated FITs financed by an end-user tax on electricity. We provide a full characterization of the set of FIT equilibria and demonstrate that the FIT subsidies and the green quota cannot be employed simultaneously as exogenously specified policy instruments. We also examine the implications of this design element restriction on an important policy objective ― investor security/risk reduction. We show that employing the FIT subsidies as the exogenously specified policy instruments when attempting to enforce the green quota is likely to lead to greater investor security than the alternative of employing the level of the green quota and the end-user tax as the exogenously specified policy instruments.