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Feed-in tariffs for promoting solar PV: progressing from dynamic to allocative efficiency

Bell, William and Foster, John (2012): Feed-in tariffs for promoting solar PV: progressing from dynamic to allocative efficiency.

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Abstract

The International Energy Association has observed that nearly all countries now offer or are planning feed-in tariffs (FiTs) for solar PV but debate has shifted from ‘if or how to implement a FiT’ to ‘how to move to a self-sustaining market post FiT’. The aim of this paper is to explain how a sustainable FiT can be designed for residential solar PV installations, focusing on the case of ‘solar rich’ Australia. Solar PV is approaching price parity at the retail level where the electricity price charged includes both transmission and distribution costs, in addition to the wholesale price. So the economic rationale for paying a FiT premium above market rates to achieve dynamic efficiency is no longer warranted. Socially, FiTs can be a problem because they tend to exacerbate social inequality by providing a transfer of wealth from poorer to richer households. Environmentally, FiTs can also fall short of their full potential to cut emissions if they lack ‘time of day’ price signals that reflect movements in the wholesale price.

In this paper, we provide a framework in which a sustainable FiT can be designed that positively addresses all three areas of concern: social, environmental and economic. This framework identifies the market failures that exist in the residential solar PV electricity market, which include exacerbating inequity, poorly targeting myopic investment behaviour, inadequate transmission and distribution investment deferment price signals and inappropriate infant industry assistance. We argue that these market failures require addressing before the market can operate in an allocatively efficient manner.

The sustainable FiT that we propose would lead to improvements in environmental, social and economic factors. The resultant transmission and distribution investment deferment would meet both environmental and economic objectives. Directly providing finance for solar PV installations would address both social equity and investment myopia. We argue that introducing appropriate pricing signals for solar PV installations via would be in the ongoing interest of all stakeholders. It is time to progress from FiTs focused on dynamics efficiency to a sustainable FiT that emphasises allocative efficiency as an explicit goal.

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