Many nations around the world face an energy challenge. Meeting rising demand for electricity, enabling stable and secure supplies, and avoiding or offsetting greenhouse gas emissions are all factors in this challenge. Increasingly, renewable sources like wind and solar power are seen as important ways to reach these goals. Policymakers have used a wide variety of support schemes to drive market deployment of renewable energy, with varying degrees of success in terms of effectiveness and cost-efficiency Feed-in tariff (FiT) schemes are the most commonly used incentive policy to spur renewable energy: By early 2012, FiTs were in place in at least 65 countries.

In this study, we analyze one FiT implemented in Brazil in the early 2000s to extract lessons for Brazil and other countries as they refine their renewable energy policies. We look specifically at the 20-year contracts between wind farms and a government-owned utility in Brazil as part of the Incentive Program to Alternative Sources (PROINFA).

While PROINFA was successful in deploying energy to meet its goals – it accounted for much of the growth from 29 MW to 2,010 MW in installed wind capacity in Brazil between 2004 and 2012 – our analysis suggests that issues with the design of PROINFA’s contracts reduced the program’s cost-effectiveness.

Our key findings are as follows:

• We find systematic differences between reported and realized capacity factors (see box), indicating misreporting by project developers. The design of PROINFA’s contracts, coupled with costly monitoring of wind data, led to this widespread misreporting.
• Misreporting was detrimental in two ways: It increased the cost of the policy, and reduced the amount of energy delievered.
• We simulate the effect of simple changes to the PROINFA contracts and suggest that a small alteration in their design – specifically, a 1% interest rate penalty to overpayments – would cause misreporting to vanish altogether, making the policy more cost-effective.

More generally, our analysis underlines that the details of policy design and implementation, not just the choice of policy type, are of first-order importance to renewable energy policy and can have serious implications for planning of electricity supply and energy security.