A Two-Part Feed-in-Tariff for Intermittent Electricity Generation

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.