Assessing the strength and effectiveness of renewable electricity feed‐in tariffs in European Union countries

In the last two decades, feed‐in tariffs (FIT) have emerged as one of the most popular policies for supporting renewable electricity (RES‐E) generation. A few studies have assessed the effectiveness of RES‐E policies, but most ignore policy design features and market characteristics (e.g. electricity price and production cost) that influence policy strength. We employ 1992–2008 panel data to conduct the first econometric analysis of the effectiveness of FIT policies in promoting solar photovoltaic (PV) and onshore wind power development in 26 European Union countries. We develop a new indicator for FIT strength that captures variability in tariff size, contract duration, digression rate, and electricity price and production cost to estimate the resulting return on investment. We regress this indicator on added RES‐E capacity using a fixed effects specification and find that FIT policies have driven solar PV development in the EU. However, this effect is overstated without controlling for country characteristics and is concealed without accounting for policy design. We do not find robust evidence that FIT policies have driven wind power development. Overall, we show that the interaction of policy design, electricity price, and electricity production cost is a more important determinant of RES‐E development than policy enactment alone.