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Feed-in tariff contract schemes and regulatory uncertainty


Alberto SardinhaArtur RodriguesCláudia NunesLuciana Barbosa


(2020) European Journal of Operational Research , 287

Subsidised tariffs and regulatory uncertainty

The authors of this study analysed the situation where a guarantee or subsidy is given to the tariffs, which a company receives for investing in renewable energy production.

The most common subsidised tariffs are: guaranteed price, whatever the market conditions; a guaranteed, fixed premium above the market price; guaranteed minimum price, even if the market price falls beyond this established minimum; and a situation where the minimum price is combined with a maximum price, in which the State, the grantor, receives extra when things go well.

The energy producers considered in this specific case were those who typically submit tenders for energy production licences, tendering procedures in which the prices are defined a priori or through an auction. In a context which considers that Government policy may unexpectedly change in the future, the impact of this risk on the behaviour of firms was analysed for the four schemes already mentioned. These policy changes occurred, for example, in some European countries following the sovereign debt crisis.

The results of the study show that investment is accelerated when a tariff reduction is more likely.  And the greater the tariff reduction, the greater the incentive to invest earlier. These effects have different magnitudes in each of the tariff types.

Changes in contract conditions have important effects on their value, which can only be correctly estimated using more sophisticated valuation tools, since traditional valuation methodologies produce valuation errors in these circumstances.  The grantor does not always use these sophisticated valuation tools, unlike the large companies of this sector.