Design Flaws in the United Kingdom Renewable Energy Support Scheme

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Abstract

Soon after the UK’s Feed-in Tariff (FiT) Scheme providing incentive prices for renewable energy was introduced in 2010, adjustments and modifications were made to eligibility criteria and in-centive prices. Prices paid for renewable energy (RE) under the scheme were cut, deployment caps were introduced, and preliminary accreditation and efficiency standards were imposed. Controversy ensued as supporters sought help for the nascent RE technologies, while detractors claimed that the scheme was a wasteful means of reducing greenhouse gases. In this research, we examine how RE was incentivized under the FiT Scheme and its wider impact upon various stakeholders to assess its compatibility with liberalized electricity markets of the UK. We employ a financial performance metric to measure the direct costs of RE in compensation to investors and financial option theory to analyze the externalities of RE generation. As a means of reducing atmospheric CO2, the FiT Scheme was expensive, and the externalities imposed upon stake-holders were large. Whilst the UK scheme was effective in delivering RE capacity, our findings show that the scheme was flawed because the compensation provided to investors was greater than required while large indirect costs were ignored. Although eventually reducing feed-in tar-iffs addressed direct costs in compensation to RE investors, the externalities arising from sto-chastic renewable output under dispatch prioritization remain. Given the magnitude of exter-nalities, large volumes of RE may be incompatible with the current design of electricity markets.
Original languageEnglish
Article number1657
Pages (from-to)1-26
Number of pages26
JournalEnergies
Volume14
Issue number6
DOIs
Publication statusPublished - 17 Mar 2021

Bibliographical note

© 2021 by the author.
Licensee MDPI, Basel, Switzerland.
This article is an open access article
distributed under the terms and
conditions of the Creative Commons
Attribution (CC BY) license (https://
creativecommons.org/licenses/by/
4.0/)

Keywords

  • renewable energy policy
  • Feed-in tariffs
  • financial option theory
  • Investor Returns

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