Feed-in tariffs with minimum price guarantees and regulatory uncertainty

Highlights: • Perpetual guarantee is not economically sound. • Finite guarantee may induce investment with a negative NPV. • Higher and more likely reduction in the price floor induces earlier investment. • Policymakers can calculate a price floor interval. - Abstract: The feed-in tariff (FIT) program is a popular policy for incentivizing new renewable energy projects because it establishes a long-term contract with renewable energy investors. This paper presents a novel model to analyze a FIT contract with a minimum price guarantee (i.e., a price-floor regime) from an investor's perspective. The results show that a perpetual guarantee only induces investment for prices below the price floor when offering a risk-free investment opportunity. In contrast, the finite guarantee may induce investment even when the revenue from the guarantee is lower than the investment cost. When an investor faces a scenario with regulatory uncertainty, a higher and more likely reduction in the price floor induces earlier investment. For all cases, investors postpone an investment decision when market conditions present a higher price volatility.