Chapter Five: Electricity and How Politics can Incentivize a Shift to Renewable Energy Sources

Overview of the Episode

Episode 5 of the podcast focuses on a specific economic policy initially implemented in Germany: the feed-in tariff (FiT). The FiT incentivizes citizens to invest in renewable energy sources by providing an above-market price for producers. That price is achieved by letting electricity consumers pay an extra tariff on their electricity bills. In that sense, it works as a stick for people who are not investing in renewable energy and a carrot for those who do.

Evaluating the Success of Economic Policies

There are various methods to evaluate the success of economic policies. In a comparative analysis of the OECD countries, the absolute majority showed a strong commitment to policy evaluation. Some countries, among them Germany, anchored policy evaluation as a constitutional duty, which is evidence of an intention to consistently evaluate policies (Jacobzone, 2020). There are various ways to do it — one way is to use randomized controlled trials (RCT) to evaluate interventions. The issue with that is that it takes time, and it may not have the market impact which the FiT was meant to have. Meaning, the goal with FiTs was to bring down costs of renewable energy, and the long-term effect of economies of scale may not appear in a small-scale RCT. Instead, natural experiments can be used when randomization is not possible or desirable, in combination with economic theory and empirical evidence (Kraay, 2020). For the FiT to be successful, it was critical to have a long-term impact on lower prices of renewable energy and adaptation of such.

Research on Causes of Cost Reduction of Solar Cells

Over the past 40 years, the cost of solar PV (solar cells) has dropped by around 99 percent (Roberts, 2018). It’s a dramatic decline- but it is essential to understand what contributed to this drop. Again, following the idea of green premiums, cost reductions to the point that solar cell-generated electricity is cheaper than coal-generated will drastically increase investments and adaptation. Kavlak et al. (2018) looked specifically at what drove the cost decrease of solar cells. They used a method that can quantify how “each change to a feature of the technology or manufacturing process contributes to cost reductions when many changes occur simultaneously” (Roberts, 2018). The team at MIT used a dynamic model that can quantify and distinguish the component causes of the drastic price decline.

Figure 1: Kavlak et al. (2018) show the drastic decrease of costs of solar PV since the mid-70s at a logarithmic scale.
Figure 2: Kavlak et al. (2018) show the components contributing to the cost decrease.

The Remaining Issues with FiT

The FiT has had some unintended consequences. For example, because of technological improvements and amendments to the law, the surcharge on Germany’s electric bills has been increasing. Germany is one of the European countries with the highest electricity bills (Amelang, 2019). This can have secondary effects on the environment. Higher prices can make it more expensive for electric cars manufacturers or green technology companies, moving production to low-cost countries using coal-generated electricity. It can also become a burdensome expense for some German citizens (as discussed in the episode). People may look for other, less effective policies that do not decrease the well-being of poorer people.

Policy Innovation: Using FiT in Other Industries to Drive Development

There are opportunities to learn from FiT and induce the concept into other industries. Kavlak et al. (2018) talk about how the decreasing cost in the early years is attributed to solving engineering challenges and improvements in the supply chain. There are simply many knobs to turn in new industries, which allows for simultaneous solutions (Figure 3). The same goes for other early-stage technologies, such as fuel cells cars.

Figure 3: At the beginning of cost declines, there are many “knobs to turn,” while later cost declines are attributed to economies of scale. Public policies can speed this up (Roberts, 2018).


AEE Podcast. (2020). S1 E10: The future of (community) renewables.



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Johannes Frosteman

Johannes Frosteman

Publishing my book on “Green Premiums”, analyzing the podcast episodes in Green Premiums Podcast. Student at Minerva University. Contact me: