Economic Analysis of Feed-in Tariff Policy in Iran: Fresh Results from a Real Options Model for Solar Energy Promotion

Given the 95% share of electricity generation from non-renewable energies, implementing effective policies to motivate electricity generation from sustainable energy resources is essential. Since the current Feed-in Tariff (FiT) policy increases the government’s expenditures to support renewable energies, a real options (RO) model is proposed to estimate solar power generation incentive subsidy. Moreover, establishing a carbon emission trading (CET) scheme under uncertainty is proposed, and sensitivity analysis is conducted for the project value, threshold value, and subsidy. Our results show that establishing a CET market could significantly reduce the economic costs of achieving renewable energy promotion goals. Based on the net present value (NPV) and RO criteria, in the case “with the possibility of CET,” the amount of incentive subsidy that should be paid to electricity generation from a solar project (case of a 5 kW plant) are 37.49 and 42.42 million Rials/kW, indicating 20% and 12% reduction compared to the base case (without the possibility of CET), respectively. The results also indicate that more electricity price volatility can increase the incentive subsidy while enhancing the market price of electricity can slightly decrease the required subsidy, which triggers solar investment.