Climate change, caused by excess green house gas (GHG) emissions from human activities is becoming a pressing problem as the Earth's mean surface temperature has increased by about 0.8 °C since the early 20th century (America's Climate Choices, 2011). It is now widely accepted that investment in renewable energy sources is one of the most effective solutions to amend the emission of GHGs. Yet renewable energy technologies only account for a small fraction of the world's primary energy supply. Several technical, economical and behavioral reasons hinder market diffusion of these technologies; among these we note the lack, inadequacy or instability of the governmental policies to promote sustainable energy solutions. Various policies such as subsidies and tax reductions have been implemented to facilitate the diffusion of renewable energy systems. Yet, there is limited research on which policy is optimal, taking into account the complexities and externalities in the supply chain of such renewables as Photovoltaic (PV) systems. Using a stylized economical model, this research aims at identifying optimal policies for adoption of PV systems. We develop a model with a 3-player environment, which includes a grid operator responsible for meeting electricity demands, a PV manufacturer, and customers who are sensitive about their investment payback time with heterogeneous 'discount rate', reflecting their attitude toward the time value of money. The grid operator is responsible to meet all electricity demand, while aiming at increasing PV penetration. The PV manufacturer as well as the customers seeks to maximize their own profit/utility. The decision variable for the customers is whether or not to adopt the system, affecting profit of the two other parties by determining the demand as well as the amount and variation of the electricity fed into the grid using the PV systems. The decision variable for the PV manufacturer is the price to charge for each PV unit, while the grid operator decides on the incentive schemes for adoption including feed-in tariffs and subsides. We investigate the equilibrium outcome in this intertwined decision environment as a sequential game, where the manufacturer determines the price of PV units given the governmental incentive systems, and the customers determine demand. Using this equilibrium outcome, we then investigate the effectiveness of various incentive policies to maximize supply chain profit as well as PV penetration.


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