Authors: Niall Farrell
,
Mel Devine
,
William T Lee
,
James P. Gleeson
,
Seán Lyons
The Energy Journal , Vol. 38 , No. 2
Commonly-employed Feed-in Tariff (FiT) structures result in either investors or
policymakers incurring all market price risk. This paper derives efficient pricing
formulae for FiT designs that divide market price risk amongst investors and
policymakers. With increasing deployment and renewable energy policy costs, a
means to precisely apportion this risk becomes of greater importance. Option
pricing theory is used to calculate efficient FiT prices and expected policy cost
when investors are exposed to elements of market price risk. Expected remuneration
and policy cost is equal for all FiTs while policymaker and investor exposure
to uncertain market prices differs. Partial derivatives characterise sensitivity to
unexpected deviations in market conditions. This sensitivity differs by FiT type.
The magnitudes of these effects are quantified using numerical examples for a
stylised Irish case study. Based on these relationships, we discuss the conditions
under which each policy choice may be preferred.
