Which is a Better Second Best Policy, the Feed-in Tariff Scheme or the Renewable Portfolio Standard Scheme?

Author Name HIBIKI Akira  (Sophia University) /KURAKAWA Yukihide  (Tokyo Institute of Technology)
Creation Date/NO. October 2013 13-J-070
Research Project Economic Analysis of Environmental, Energy, and Resource Strategies Following the Great East Japan Earthquake
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Much attention has been paid to the feed-in tariff (FIT) scheme and the renewable portfolio standard (RPS) scheme to promote the usage of renewable energy recently. When a non-renewable generator, which is a monopolist in the retail market, is a dominant firm and renewable generators are competitive fringes in the renewable electric market, under the FIT scheme, a non-renewable generator utilizes its market power only in the retail market. Under the RPS scheme, a non-renewable generator utilizes its market power in both the retail market and the renewable electricity market. In addition, a non-renewable generator needs to purchase a certain percentage of its electricity production from renewable generators. Thus, it has an incentive to reduce production due to higher marginal cost. The main findings of this article are that the RPS scheme: (1) is more socially desirable when marginal external cost is high and (2) is able to achieve the first best by appropriate initial deductions for the purchase of electricity from renewable generators.