The intermittent nature of wind and solar means renewable sources are less efficient compared with the near-constant stream of electricity from thermal power plants. An essential ingredient to overcoming these shortcomings is public policy.
Production tax credits, rebates, loan programs, subsidies, and results-based mechanisms (RBM) are some of the tools that can aid in spurring investment in the renewable field. An example of one widespread instrument is the subsidy, which can be directed into renewable energy capacity or on renewable energy output. On the one hand, subsidies on installed capacity stimulate supply but not demand for renewable electricity and can be unfairly distributed.
On the other hand, subsidies on output (e.g. premium tariff) have been granted seeking for a successful deployment of renewable energy; nonetheless, there is not a strong incentive for investors to drive down cost by improvement of operation and efficiency. (Schaeffer, Boots, Martens, & Voogt, 1999) In the European Union, the increase in solar PV installations has been achieved to a big extent thanks to feed-in tariffs, which help to provide a stable source of income for renewable energy projects, thus lowering the risks of the project. In some cases, these tariffs were not adjusted swiftly to reflect the actual costs of solar PV, which have been dropping very fast in recent times, thereby leading to a huge investment in solar PV installations. Also, China is steering its policy from a feed-in-tariff (FIT) programme to a more flexible system comprising a Green Certificate Scheme (GCS), along with a power market reform, new transmission lines and the expansion of distributed generation. This strategy intends to reduce renewable energy projects exposure to reduced wholesale prices when the demand is low and renewable energy production is available and more abundant.
(International Energy Agency (IEA), 2017) A GCS, also known as Renewable Energy Certificate (REC) scheme, Renewables Obligation (RO) scheme, Quota Model, among other names, is a RBM where the utilities or electricity retailers must comply with a minimum percentage of electricity generated from renewable energy sources, which they can fulfil by delivering a proper amount of certificates. (Schaeffer, Boots, Martens, & Voogt, 1999)