Optimal regulation of renewable energy: A comparison of Feed-in Tariffs and Tradable Green Certificates in the Spanish electricity system

Incentives for renewable energy based on Feed-in-Tariffs have succeeded in achieving high levels of renewable installed capacity. However, these incentives have not been responsive to market conditions or price signals, imposing in some cases a great financial burden on consumers when Renewable Energy Sources reached significant levels. A way out of this problem could be a market mechanism where incentives respond to the level of investment on renewables. We explore this issue comparing a regulatory system based on Tradable Green Certificates, able to react to market changes, to a Feed-in-Tariffs incentive scheme. We model the strategic interaction between participants in the electricity pool and the Tradable Green Certificates market and focus on the optimal regulation for the retailer segment, which generates the desired demand for green certificates as a decreasing function of the certificate price. We then calibrate our theoretical model with data from the Spanish electricity system for the period 2008–2013. Simulations show that a green certificate scheme could both achieve the 2020 targets for renewable electricity and reduce regulatory costs. However, the role of regulators is still important, since setting the right target for renewable electricity affects the cost burden of the system.