RENEWABLE ENERGY AT WHAT COST? ASSESSING THE EFFECT OF FEED-IN TARIFF POLICIES ON CONSUMER ELECTRICITY PRICES IN THE EUROPEAN UNION

Abstract

In the last two decades, feed-in tariffs (FIT) have emerged as the dominant policy instrument for supporting electricity from renewable sources in the European Union. This paper examines the effect of such feed-in tariffs on consumer prices for electricity. While a multitude of studies examine the effects of FIT policies on electricity prices within individual countries or across countries using complicated ex-post computer simulations, there are a dearth of rigorous ex-post, cross-country econometric analyses. Using 1992-2009 panel data across 20 European countries and a dynamic panel data model estimation, this paper analyzes the effect of FIT policies for electricity generated from wind and solar photovoltaic (PV) on electricity prices at the household consumer level. The analysis finds a mild association of the support level for wind energy with higher retail prices, but no price increase for solar PV support. This finding points toward the existence of a `merit order effect' and, in particular, a strong `time of day' effect, where solar PV is able to replace more costly natural gas and petroleum generation because it is generated during times of peak demand, whereas electricity from wind is mostly generated at night when demand is low. However, the shares of solar PV electricity generated under the FIT are still very low; as the share of electricity generation that is covered by the FIT rises, adverse price effects may become more apparent. The paper also finds that feed-in tariffs for wind only increase retail prices in the presence of retail regulation, indicating that regulatory bodies may allow utility companies to charge higher prices in the presence of FIT payments, whereas utility companies that are subject to retail competition are not able to pass on their additional costs to customers. In addition, the paper further finds that larger shares of electricity generated from hydro and nuclear power decrease retail rates, suggesting that, due to their similar cost profile, the same could be true for wind and solar PV in the long term, once a fleet of generation capacity from wind and solar PV is established and the initial capital costs are recovered.