A two-part feed-in-tariff for intermittent electricity generation

- Conventional feed-in-tariffs for intermittent energy sources such as sun and wind are insufficiently differentiated.
- Optimal pricing reflects correlations with electricity demand and the supply from other intermittent power producers.
- An optimal incentive system consists of a feed-in-tariff and a capacity-augmentation-tariff that are differentiated across different types and locations of intermittent power.
- Data from wind and solar farms in Ontario demonstrates that the magnitude of optimal price differentiation is economically significant.
- The emergence of grid-scale electricity storage emphasizes the need to develop capacity pricing structures.

As electricity generation from intermittent energy sources (wind, sun, tides) is gaining momentum, it becomes increasingly important to price these electricity sources efficiently. Conventional flat feed-in-tariffs ignore the heterogeneity of these sources. Taking into account the degree of substitutability or complementarity of these sources with respect to each other and with respect to stochastic demand variations, this paper derives optimal pricing instruments composed of a feed-in-tariff (FIT) and a capacity-augmentation-tariff (CAT). An empirical analysis looks at wind and solar farms operating in Ontario in order to determine the optimal use of FIT-CAT pricing. The magnitude of optimal price differentiation turns out to be economically significant. Furthermore, the emergence of grid-scale electricity storage underscores the need to price energy and capacity separately.