Comparing feed-in tariffs and renewable obligation certificates: the case of repowering wind farms

This paper compares support mechanisms for renewable energy with respect to their ex-ante effectiveness in promoting the adoption of innovative technologies. We analyse two stylized policy instruments in the context of wind repowering: quotas and feed-in tariffs (FITs). Quota systems, like the British Renewable Obligation Certificates (ROCs), are based on mandatory targets. FITs, like the German Erneuerbare-Energien-Gesetz tariffs, guarantee a certain, fixed price for’green’ electricity. This paper focuses on one aspect of the difference between the two instruments: the allocation of uncertainty. While under ROCs both electricity price and capital cost risks are borne by the wind farm owner, under FITs only capital cost risks remain with the owner. Our approach relies on a dynamic programming model, calibrated on German data. Our general result is that a risk-neutral plant owner is by far more likely to adopt a new technology under price certainty as provided by FITs. While an increase in capital cost volatility does not affect the likelihood to repower under both schemes, a small positive variation in electricity price volatility increases the propensity to adopt the new technology under ROCs. However, this latter effect is negligible, and does not undermine the robustness of the general result. © 2017, Associazione Amici di Economia e Politica Industriale.