International Advances in Economic Research

, Volume 24, Issue 1, pp 65–78 | Cite as

Grid Parity and Cost Reduction Incentives for “Green Producers” in Electricity Markets

  • Kevin M. Currier
  • Susanne Rassouli-Currier


In an electricity market, a feed-in tariff promotes attainment of a so-called “green quota” through a system of subsidies designed to ensure renewable energy investors a “normal rate-of-return”. However, the subsidies should track technological advances closely with the expectation that they will be phased out when the renewable technology reaches an appropriate “maturity threshold” (i.e., grid parity). Grid parity is typically defined as the point where the levelized cost of electricity equals the price of purchasing electricity from the grid. However, it has been recognized that this definition of grid parity is flawed due to the intermittent nature of many renewable resources. We propose a definition which allows us to distinguish between grid parity and least-cost grid parity. We demonstrate that under a green quota and an emissions cap, welfare may be higher if the policy maker forgoes least-cost grid parity and phases out the feed-in system sooner rather than later. We show that while green producer cost reduction incentives under the feed-in tariff are perverse, they can be restored by offering a “menu” of values of the policy variables and allowing full discretion in terms of the decision to engage in cost-padding, pure waste, etc.


Cost Efficiency Feed-in Tariff Green Quota Grid Parity Incentives 

JEL Classification

L50 P60 Q00 



The authors wish to thank Donna Anderson and the participants in the “Ecosystems, Electricity and Sustainability” session at the International Atlantic Economic Conference in Montréal, Canada, October 5-8, 2017, for insightful discussion. We are also deeply indebted to an anonymous referee for a number of extremely useful comments and suggestions on an earlier version of this manuscript.


  1. Alizamir, S., de Véricourt, F., & Sun, P. (2016). Efficient feed-in tariff policies for renewable energy technologies. Operations Research, 64(1), 52–66.CrossRefGoogle Scholar
  2. Bergek, A., & Jacobsson, S. (2010). Are tradable green certificates a cost-efficient policy driving technical change or a rent-generating machine? Lessons from Sweden 2003–2008. Energy Policy, 38(3), 1255–1271. CrossRefGoogle Scholar
  3. Böhringer, C., & Rosendahl, K. E. (2010). Green promotes the dirtiest: On the interaction between black and green quotas. Journal of Regulatory Economics, 37, 316–325. CrossRefGoogle Scholar
  4. Choi, D. G., Park, S. Y., Park, N., & Hong, J. C. (2015). Is the concept of ‘grid parity’ defined appropriately to evaluate the cost-competiveness of renewable energy technologies? Energy Policy, 86, 718–728. CrossRefGoogle Scholar
  5. Couture, T., & Gagnon, Y. (2010). An analysis of feed-in tariff remuneration models: Implications for renewable energy investment. Energy Policy, 38, 955–965. CrossRefGoogle Scholar
  6. Couture, T., Cory, K., & Williams, E. (2010). A policymaker’s guide to feed-in tariff policy design. NREL technical report NREL/TP-6A2–44849. Available at:
  7. Currier, K. (2016a). Incentives for cost reduction and cost padding in electricity markets with overlapping “green” regulations. Utilities Policy, 38, 72–75.CrossRefGoogle Scholar
  8. Currier, K. (2016b). Cost reduction incentives in electricity markets with overlapping regulations. Electricity Journal, 29, 1–6.CrossRefGoogle Scholar
  9. Currier, K., & Rassouli-Currier, S. (2017). “Green” producers’ cost reduction incentives in electricity markets employing tradable green certificates. Oklahoma State University working paper. Available at:
  10. Department of Energy (2015). The levelized cost of energy. Available at:
  11. European Commission (2014). 2030 framework for climate and energy policies. Available at:
  12. Institute for Energy Research (2014). Why grid parity is a meaningless concept. Available at:
  13. International Renewable Energy Agency (2012). Renewable energy technologies: cost analysis series. Power Sector Issue: Solar photovoltaics 1(4/5). IRENA working paper. Available at: .
  14. Laffont, J., & Tirole, J. (1996). Creating competition through interconnection: Theory and practice. Journal of Regulatory Economics, 10(3), 227–256.CrossRefGoogle Scholar
  15. Mendonça, M., Jacobs, D., & Sovacol, B. (2009). Powering the green economy: The feed-in tariff handbook. London: Earthscan.Google Scholar
  16. Meneguzzo, F., Ariminna, R., Albanese, L., & Pagliaro, M. (2015). The great solar boom: A global perspective into the far-reaching impact of an unexpected energy revolution. Energy Science and Engineering, 3, 499–509.CrossRefGoogle Scholar
  17. Ritchie, E. (2017). Despite claims of grid parity, wind and solar are still more expensive than fossil fuels. Forbes (April). Available at:
  18. Schmitz, H., Johnson, O., & Altenburg, T. (2013). Rent management: the heart of green industrial policy. 2013 IDS working paper 2013 number 418.
  19. Schneider, M., Biel, K., Pfaller, S., Schaede, H., Renderknecht, S., & Glock, C. (2015). Optimal sizing of electrical energy storage systems using inventory models. Energy Procedia, 73, 48–58.CrossRefGoogle Scholar
  20. Simon, C., & Blume, L. (1994). Mathematics for economists. Mountain View: Norton.Google Scholar
  21. Thompson, P. (2010). Learning by doing. In B. Hall & N. Rosenberg (Eds.), Handbook of the economics of innovation vol. 1 issue 10 (pp. 429–476). Amsterdam: Elsevier.CrossRefGoogle Scholar

Copyright information

© International Atlantic Economic Society 2018

Authors and Affiliations

  1. 1.Department of Economics and Legal Studies in Business, Spears School of BusinessOklahoma State UniversityStillwaterUSA
  2. 2.Department of Economics, College of BusinessUniversity of Central OklahomaEdmondUSA

Personalised recommendations