Promoting Solar Panel Investments: Feed-in-Tariff vs. Tax-Rebate Policies

Abstract

Problem definition: Governments have adopted various subsidy policies to promote investment in renewable energy sources such as rooftop solar panels. The German government uses a feed-in-tariff policy that provides a guaranteed stream of payments for each unit of electricity generated by a household. In contrast, the U.S. government uses a tax-rebate policy that reduces the initial investment cost, and the household receives the retail price for the generated electricity. In this paper, we study the key practical factors that favor one policy over the other from the perspective of the government. These factors are the heterogeneity in the generating efficiency, the variability in the electricity price, and the variability in the investment cost. Academic relevance: Unlike the previous literature on the feed-in-tariff and tax-rebate policies, we focus on the effects of variability on a household’s investment timing. We identify the optimal policy for the government to manage the aggregate household investment, accounting for the heterogeneity in efficiency. Methodology: We consider an infinite-horizon, continuous-time model where the government moves first and announces either a feed-in tariff or a tax rebate. Then each household dynamically decides if and when to invest in a unit of solar panels. The objective of the government is to maximize the expected value of a subsidy policy, that is, the difference between the societal benefit of solar panel investments and the subsidy cost over time. Results: We characterize the timing of the investment decision of the households and the optimal subsidy parameters for the government. We identify which practical factors favor the feed-in-tariff or the tax-rebate policy. Policy implications: Our results suggest that a government should prefer the feed-in-tariff policy when the electricity price is highly uncertain. Intuitively, feed-in-tariff policy eliminates the price variability; thus, it removes the strategic delay in the investment. The tax-rebate policy should be adopted if the households are heterogeneous in generating efficiency, if the investment cost is highly variable, or if the price and cost uncertainty are positively correlated.