Comparative analysis of support mechanisms for renewable energy technologies using probability distributions Irina Falconett * , Ken Nagasaka Graduated School of Engineering, Tokyo University of Agriculture and Technology, 2-24-16 Naka-cho, Koganei-shi, Tokyo 184 8588, Japan article info Article history: Received 27 October 2008 Accepted 6 November 2009 Available online 23 December 2009 Keywords: Feed in tariff Renewable energy certiﬁcate Certiﬁed emission reductions Support mechanisms Probability distribution, Monte Carlo simulation abstract In this paper, a probabilistic model is developed to assess the effects of different support mechanisms on the ﬁnancial return of small-scale hydroelectric, wind energy and solar PV systems. Besides, the results from this model are used to compare the economic effectiveness of each mechanism in increasing the proﬁtability of these projects. We focus on three renewable energy support mechanisms: governmental grants, feed in tariffs (FiT) and renewable energy certiﬁcates (RECs). We also consider the effect of the carbon credits on the net present value of renewable projects and compare it with the other support mechanisms. The simulation results demonstrate that the feed in tariffs is the best mechanism to increase the proﬁtability of solar PV systems and wind energy projects. Conversely, green certiﬁcate mechanism favors the most competitive technology as the hydropower. In addition, it is shown that the governmental grants and carbon credits are secondary support mechanisms compared to FiT and RECs. And, the carbon credits play a more important role than governmental grants as the energy output of the system increase. Finally, it can be concluded that the efﬁciency of the support mechanisms varies depending on stage of development of the renewable technologies that are implemented. Ó 2009 Elsevier Ltd. All rights reserved. 1. Introduction Nowadays, renewable energy technologies have received considerable attention as a possible contributor to solving some of the 21 century’s energy challenges as well as curbing the CO 2 emissions that come from the fossil fuel energies. However, at present most renewable energy technologies, solar in particular, are not mature enough yet to compete on their own against conventional technology [1]. In order to stimulate their develop- ment and secure their participation in the new restructured elec- tricity industry, additional support mechanisms have been created. These policy mechanisms intend to internalize the environmental externalities of electricity generation through taxes (quota obliga- tion), or economic incentive (feed in tariffs, net metering, govern- mental grants) or by creating property rights (Renewable energy certiﬁcates, certiﬁed emissions reductions) as well as market creation for trading of these environmental externalities. Although the policy support mechanisms for renewable energy technologies have become increasingly important in several coun- tries around the world, these policies differ in the way they are implemented in each country, the renewable energy targets to be pursued and their degree of success. Therefore, the comparison between support mechanisms has been complicated by the coexis- tence of these multiple objectives. However, it is important to note that the effectiveness of renewable support mechanisms depends on providing the right support for individual institutions that develop and ﬁnance projects. On this basis, this paper aims to evaluate the effect of different support mechanisms on the net present value of small scale renewable energy projects. In order to achieve this goal, a probabilistic model was formulated based on different policy scenarios. The results from this model were used to compare the efﬁciency of these support mechanisms in increasing the proﬁt- ability of small scale hydroelectric, wind power and solar PV projects. The cost-effectiveness and performance of the support mecha- nisms have been discussed by Agnolucci [2], Butler and Neuhoff [3], Meyer [4], Morthorst [5], Sijm [6], Toke [7] among others. Mainly, the technical literature has been focus on two of the most wide- spread employed support mechanisms. First, the Feed-in Tariff, this scheme has promoted very effectively the deployment of renew- able energy in several countries EU member states, especially in Germany, Spain and Denmark [8]. And more recently, it has been established in Australia, Canada and USA. Continuing with the trend towards more competitive electricity markets, several countries have adopted the renewable energy certiﬁcate 1 (RECs) * Corresponding author. E-mail address: irigi@hotmail.com (I. Falconett). 1 Renewable energy certiﬁcates (RECs) are also known as tradable green certiﬁ- cates (TGC), renewable portfolio standards (RPS) and green certiﬁcate. Contents lists available at ScienceDirect Renewable Energy journal homepage: www.elsevier.com/locate/renene 0960-1481/$ – see front matter Ó 2009 Elsevier Ltd. All rights reserved. doi:10.1016/j.renene.2009.11.019 Renewable Energy 35 (2010) 1135–1144