Guaranteed Tariffs and Renewable Energies

Abstract

As we confront climate change, renewable energies represent a “clean” alternative to fossil fuels. The implementation of feed-in tariffs (FITs), financed by governments, has made new technologies more attractive to investors and clients. To avoid wasting public funds, however, these tariffs need to be set at appropriate levels. Three researchers at HEC Paris and at the University of Texas in Austin demonstrate the importance of taking into account and anticipating the behavior of different players in the market to determine the optimal level of FITs.Sam Aflaki, Andrea Masini et Shadi Goodarzi, Optimal Feed-In Tariff Policies : The Impact of Market Structure and Technology Characteristics, Production and Operations Management, Vol. 28, No. 5, May 2019.

3 Questions for Andrea Masini, Associate Dean, MBA Program, HEC Paris

Why did you focus your research on the effectiveness of feed-in tariffs?

Several European countries have made FITs their main tool for accelerating the development of solar and wind energies. Detractors of this approach believe that we should let the market decide rather than supporting these sectors with public funds. It’s almost an ideological issue. In fact, feed-in tariffs don’t always work well as a regulatory tool. In Spain, for instance, a very advantageous feed-in tariff system was put into place to support the development of photovoltaic-generated electricity. This offer attracted institutional investors who financed solar-energy farms that they could sell off in segments while benefiting from subsidies. The costs to the government were too high, though, and the program was cancelled overnight, which resulted in a crisis in Spain’s photovoltaic-energy sector. In spite of a high feed-in tariff, the project ended in failure.

You used game theory to model relations among the state, networks and industrial enterprises…

Game theory allows us to simulate choices, with the understanding that each player’s choices influence others. If the government believes that industrial enterprises will generate economies of scale, it will prefer degressive feed-in tariffs. Similarly, manufacturers of solar power plants who believe that feed-in tariffs will gradually decrease will adapt their prices accordingly. In some European countries, public authorities haven’t been prepared for the success of this kind of incentive, which has cost the state more than originally anticipated.

Has any country done a better job than others in setting feed-in tariffs that take the future behavior of industrial enterprises into account?

In Germany, the government implemented a system of feed-in tariffs that decreased by 5%, then 6.5% per year to take into account the impact of technological progress on production costs. The administration benefited from in-depth knowledge of the sector and a long-term vision, which allowed it to provide sustainable state support over the long term. This system, which favored a gradual transition to renewable energies, was supported by the public, even though it resulted in higher electricity bills.

Andrea Masini
Associate Dean of the HEC Paris MBA program since 2016, he focuses his research on the operational and organizational impacts of innovative technologies.