Renewable electricity support system: Design of a variable premium system based on the Spanish experience

Abstract

The most widespread support system for renewable-energy-sourced electricity (RES-E) is the feed-in tariff (FIT). FITs can be divided into fixed-FIT and premium systems. The latter type may also include a cap and floor option, turning it into a variable premium system. The cap value (upper limit) aims to avoid windfall profits for the RES-E investor if the electricity price rises quickly, while the floor value (lower limit) ensures minimum revenue, reducing the risk caused by low electricity prices. This paper examines the performance of the variable premium system as established in Spain (hourly-based) and investigates the possibility of alternative novel designs. For this purpose, an analysis was undertaken of the cap & floor system established in Spain based on real market data over a three year period and its performance compared to the fixed premium system (no cap & floor limitations) and two novel cap & floor designs (monthly- and yearly-based). Two other novel alternatives were also considered: daily- and weekly-based. It is shown that the hourly-based cap & floor system did not result in a reduction of the overall RES-E revenue compared to the fixed premium system over the three year period, though revenue was more evenly distributed from year-to-year. The paper concludes that variable premium systems should be based on monthly or yearly cap & floor mechanism as opposed to an hourly one.