Economics of subsidies in Estonian electricity market

As of today, subsidies for electricity generated from renewable energy sources (RES) is being used by over 75 countries around the world and offers a number of design options to achieve policy goals. Premium fixed feed-in tariff (Premium FIT) and Contract for Differences (CfD) are one of the most used instruments for the promotion of renewable energies in electricity production. However the cost-efficiency of tariffs for society decreases when policy makers overestimate the cost of producing renewable electricity. The objective of this paper is to propose methodology for quantitative analysis under uncertain future developments, in order to find the optimal solution that takes into account the interest of consumers and producers. The consumer´s costs and producers profit were estimated under different uncertain variables with two subsidy schemes, and methodology, using the decision making theory is proposed. As an example the ranges of optimal subsidy tariff were defined for Estonia. The optimum solution was determined by using the profit-to-cost ratio.