Renewable energy cost modeling: a toolkit for establishing cost-based incentives in the United States
Policymakers across the United States continue to explore and consider a wide range of renewable energy (RE) incentive structures. Consideration of these policy alternatives is typically driven by either proposed or adopted legislative or regulatory mandates and often draws on input from diverse stakeholder groups. One of the key policy questions is the approach to setting the incentive level.
Different approaches to setting incentive levels include:
- competitive policies (such as requests for proposals and auctions),
- value-based policies (in which incentive payments may differ by time of production or location), and
- cost-based policies (which may be performance- or capacity-based and are sized relative to the cost to install and operate a particular subcategory of renewable energy assets).
The advantages and disadvantages of each type of incentive must be considered with the applicable jurisdiction’s policymakers’ objectives in mind. This report focuses on renewable energy cost modeling and possible techniques, tools, and approaches for establishing cost-based incentives in the United States.
From an historic and international perspective, the feed-in tariff (FIT) is one of the most commonly used cost-based incentive tools. A FIT is a policy that typically provides eligible renewable generators with guaranteed access to a predictable, long-term revenue stream from a creditworthy buyer. FITs are generally cost-based in design and performance-based in execution (i.e., the FIT payment is sized to cover both installation and operating costs, but the tariff is only paid for actual energy production). FITs and other cost-based incentives are currently offered in over 50 countries worldwide.
The paper identifies key renewable energy cost modeling options, highlighting the policy implications of choosing one approach over the other, and presenting recommendations on the optimal characteristics of a model to calculate rates for cost-based incentives, FITs, or similar policies. These recommendations are to be utilized in designing CREST. Three CREST models will be publicly available and capable of analyzing the cost of energy (COE) associated with solar, wind, and geothermal electricity generators.