Who bears the risk? Analyzing the strategic interaction between regulators and investors when setting incentives for renewable electricity

Abstract

Energy policies for promoting investment in renewable energy sources have become crucial for deploying different green energy technologies. Depending on their design, the conventional incentive systems assign the risk to either the policymaker or the investor, affecting the strategic interaction between them when setting a price for the subsidy. Moreover, Feed-in Tariffs, which were the principal subsidy scheme used in Spain, were removed in 2013, mainly because their design led to an unbearable deficit. Farrell et al. (2017), combining option pricing theory and game theory, propose an incentive system for Irish Feed-in Tariffs in which both parties would share the risk. Building on this approach, we develop a methodology to evaluate different optimal incentive schemes for Spain and present an application for 2013 and 2019. We perform an extensive numerical analysis to determine how the different proposals would work for Spain.