Applied Energy 100 (2012) 205–217

Contents lists available at SciVerse ScienceDirect

Applied Energy
journal homepage: www.elsevier.com/locate/apenergy

Using a system dynamics model to assess the effects of capital subsidies

and feed-in tariffs on solar PV installations
Chiung-Wen Hsu ⇑
Graduate Institute of Management of Technology, Feng Chia University, Taichung, Taiwan

a r t i c l e i n f o a b s t r a c t

Article history: To achieve national CO2 emission reduction targets, the Taiwanese government is planning to adopt pol-
Received 17 December 2011 icies, such as feed-in tariffs (FITs) and capital subsidies, in order to attract the public as well as companies
Received in revised form 13 February 2012 to invest in and use solar photovoltaic (PV) systems. However, a huge budget is necessary for the govern-
Accepted 16 February 2012
ment to implement such policies. Therefore, it is important that it fully recognizes which policy, or com-
Available online 18 March 2012
bination of policies, promoting solar PV applications has the greatest economic benefit. This study uses
the system dynamics approach to develop a simulation for assessing these promotion policies. Using this
Keywords:
simulation system, policymakers can carry out cost/benefit analyses for different combinations of promo-
Solar PV
Feed-in tariffs
tion policies, CO2 emission reduction goals, and budget limitations. In addition, the simulation scenarios
Capital subsidies include different FIT prices, subsidies, and upper limits of annual ROI (return of investment). The simu-
System dynamics lation period is from 2011 to 2030. We find that when adopting only FITs or capital subsidies with a fixed
upper limit of ROI, increasing the FIT price or subsidy is a good approach. When the upper limit of ROI is
fixed, the effect of different combinations of FIT prices and subsidies on the accumulation of solar PV
applications is insignificant. Nevertheless, the promotion policy with the higher subsidy and lower initial
FIT price has a lower average cost of CO2 emission reduction.
Ó 2012 Elsevier Ltd. All rights reserved.

1. Introduction
In order to slow global climate change, many nations have
considered the need to reduce CO2 emissions and establish an envi-
ronment for sustainable development. Governments have set
domestic energy conservation objectives and agreed the policies
to achieve them. In Taiwan, CO2 emissions levels are predicted to
reach 467 million tons by 2020 if energy conservation policies are
not implemented. The government has set a goal of reducing this
to the 2005 level of 257 million tons; this equates to a decrease of
210 million tons, or 45% [1]. Therefore, the government has planned
a variety of policies, measures, and programs to achieve this, and
assessing the effectiveness of energy conservation has become an
important issue.
To achieve this CO2 emission reduction, Taiwan has been aggres-
sively promoting renewable energy applications, such as wind
power, solar energy, and biomass energy. Solar energy is one of
the cleanest energy resources, because it does not cause or exacer-
bate global warming, which makes it a viable alternative to fossil
fuel energy sources such as oil and coal. Nevertheless, the cost of
solar power is still much higher than that of fossil fuels or nuclear
power. In order to encourage the public as well as companies to
⇑ Fax: +886 4 3507 2145.
E-mail address: cwenhsu@fcu.edu.tw
invest in and use solar photovoltaic (PV) systems, and to increase
the applications of solar PV systems, Taiwan must adopt the neces-
sary policies or measures. For instance, Taiwan hopes to meet the
target of 2500 MW of solar PV installations by 2030 [2]. However,
by the end of 2010, the accumulation capacity of solar PV systems
installed in Taiwan was just 20.8 MW [3]. Because there is a large
gap between the present installation volume and the government’s
long-term goal, finding an effective and feasible policy for promot-
ing solar PV applications has become an important issue for the Tai-
wanese government.
Solangi et al. [4] reviewed the solar energy policies adopted in
different countries around the world. Based on previous studies,
feed-in tariffs (FITs), subsidies of capacity or R&D expenses, renew-
able portfolio standards, and incentives comprise the most benefi-
cial energy policies for the development of renewable energy
technologies. Even though policies such as FITs and capital subsi-
dies can effectively improve public willingness to invest in and
install solar PV systems, a huge budget is required for the govern-
ment to adopt them. The heavy policy cost not only financially bur-
dens the government but also reduces public faith in implementing
these policies, which adversely affects the promotion of solar PV
applications.
Therefore, policymakers must carefully consider a number of
questions when designing and establishing their policies for pro-
moting solar PV applications to meet the goal of CO2 emission
reduction. For example, when various such policies are available,

0306-2619/$ - see front matter Ó 2012 Elsevier Ltd. All rights reserved.
doi:10.1016/j.apenergy.2012.02.039
206 C.W. Hsu / Applied Energy 100 (2012) 205–217
which policy or combination of policies is most likely to meet the
goal for solar PV installations and CO2 emission reduction? Given
the limited annual budget for policies promoting solar PV applica-
tions, which policy or combination of policies has the greatest eco-
nomic benefit (in other words, the lowest cost of CO2 emission
reduction)? What effect do different policies promoting solar PV
installation have on CO2 emission reduction?
Thus, the main objective of this study is to develop an assess-
ment model to evaluate the ability of policies promoting solar PV
applications, such as FITs and capital subsidies, to achieve the goals
of solar PV installations and CO2 emission reduction under differ-
ent conditions. In the assessment model, we construct a simulation
to estimate the value of important indices such as solar PV cost,
willingness to use, solar PV installations, total number of solar PV
systems, level of CO2 emission reduction, and average cost of CO2
emission reduction under different combinations of promotion
policies. Using this simulation system, policymakers can carry
out cost/benefit analyses for CO2 emission reduction under differ-
ent scenarios. These scenarios can include combinations of promo-
tion policies, CO2 emission reduction goals, and budget limitations.
In practice, the national or regional installation of solar PV sys-
tems depends on factors such as solar PV cost, FIT price, and the
installation subsidies provided [5–7]. For example, when solar PV
installations have reached a certain economic scale, the cost of
individual installations will decrease. This decrease in installation
costs will increase the return on investment (ROI) and public will-
ingness to install solar PV systems, further enhancing installation
levels. Because this chain reaction is caused by several positive
and negative factors, this study uses the concept of system dynam-
ics to model the appropriate simulation system.
In this paper, the literature review discusses previous studies
that investigate policies promoting solar PV in different countries
as well as the learning curve of solar PV applications. Based on
the discussion, we explain the methods we used to build the sim-
ulation system. Finally, we present the results of the simulation for
certain scenarios.
2. Literature review
Compared to traditional fossil fuel power generation, the cost of
solar PV is still high. Different countries have adopted various pol-
icies to develop solar PV. These support policies include FITs, trad-
able green certificates, capital subsides, tax credits, and net
metering [8]. The main purpose of this study is to discuss the influ-
ence of FIT and capital subsidies on solar PV installation volumes in
Taiwan. In the literature review, we illustrate these two policy
measures to define their meaning, intention, and real application
situations. In addition, we also illustrate how these two solar PV
policy measures are applied in Taiwan.
For solar PV, the system cost is the key factor that influences
installation volume. According to related studies of learning
curves, an increase in solar PV accumulated generation volume will
decrease the cost. In this study, the relationship is a connection
between government policy measures (solar PV cost) and
increased installation volume. Therefore, we also explore the
learning curve of solar PV-related studies in the literature review.
2.1. Policies promoting solar PV
2.1.1. Capital subsidy
Capital subsidies, grants, and rebates are some of the most com-
monly used supporting measures for investing in PV systems and
other renewable energy technologies [9]. Various direct and indi-
rect subsidies have been used over the past two decades to pro-
mote renewable technologies. Many countries have used direct
subsidies to cover a proportion of the capital investment in renew-
able technologies, for example in $/kW of installed capacity. Com-
pared to FITs, capital subsidies pay for hardware and generation.
Furthermore, with capital subsidies, there is an incentive to install
hardware at inflated costs [10].
Dusonchet and Telaretti [8] described the different support pol-
icies in PV technology in western EU countries. Twelve western EU
countries have used capital subsides to promote solar PV installa-
tions. For instance, in Belgium a maximum subsidy of 50% on solar
PV system installations is provided to private households (max.
3 €/Wp) as well as companies (max. €200,000) [8].
In Japan, the ‘‘New Sunshine Project’’ offered capital subsidies
for solar PV installations. This project provided consumer subsidies
to offset the initial cost of residential PV systems. In 1994, a typical
3 kW PV system cost approximately ¥5 million ($50,000), and
more than half the cost was subsidized [11]. In 2005, subsidies pro-
vided by the government of Japan were on average ¥60,000 ($773)
to ¥70,000 ($902) per household. Owing to this subsidy policy, Ja-
pan became the leader in global PV deployment over this period.
However, household PV subsidies at the national level were re-
moved in 2006, causing domestic solar power demand growth to
fall substantially [11].
2.1.2. FITs
Feed-in tariffs (FITs) are more effective than alternative support
schemes in promoting renewable energy technologies (RETs). FITs
provide long-term financial stability for investors in RETs [12]. FIT
refers to the regulatory minimum guaranteed price per kWh that
an electricity utility has to pay to a private independent producer
of renewable power fed into the grid. However, the FIT can also
be the total amount per kWh received by an independent producer
of renewable electricity [13]. FITs might be the most appropriate
and cost-effective way to support solar energy generation as an
attractive alternative to mainstream energy generation systems
[14].
The major benefit of FITs is that private independent producers
receive a long-term, minimum guaranteed price for the electricity
they generate. For this reason, FITs can provide a certain degree of
financial reliability for the producers of renewable electricity, such
as solar PV, to soften any future price fluctuations in the energy
market. Consequently, it reduces the investment risks of renewable
electricity producers and increases their willingness to invest.
Although FITs have several advantages, they have some drawbacks.
For example, a long-term, stable, and higher asking price will neg-
atively affect the actual energy market. Moreover, when the FIT
price is too high, the pace of renewable energy growth may exceed
the goal anticipated by policymakers.
FITs have been the primary mechanism for supporting the
development of renewable energy sources in both Europe and
the US. Until 2009, they were applied in 20 EU member countries
[15]. The FITs offered in the German Renewable Energy Sources
Act (Erneuerbare Energien Gesetz) have been especially successful
at promoting PV and other renewable energy technologies. How-
ever, the long-term implementation of FITs by Germany has re-
sulted in huge government spending and high rewards for the
public, raising concerns in political and academic circles about
the economic efficiency and distribution effects of renewable en-
ergy technologies [5].
When offering FITs, the FIT value has to be high enough to re-
cover the investment cost within a reasonable timeframe to ensure
that the production of PV installations increases [8,15]. Rüther and
Zilles [16] studied grid-connected PVs in Brazil. They argued that
governments in developing countries should act promptly for their
energy industry to accumulate enough experience in grid-con-
nected PV systems and that an FIT scheme should be limited in
time and size. In other words, the scheme should be large enough
 C.W. Hsu / Applied Energy 100 (2012) 205–217
to stimulate the establishment of a local market, but small enough
to prevent imposing a large financial burden.
Couture and Gagnon [17] gave an overview of seven different
ways to structure the remuneration of an FIT policy, divided into
two broad categories: those in which remuneration is dependent
on the electricity price, and those that remain independent from
it. Market-independent policies with fixed price policies that offer
remuneration that is independent from prevailing electricity prices
can help lower investment risks, and premium price policies create
incentives to generate electricity when it is needed most, which
can alleviate peak supply pressures and improve the market inte-
gration of RE sources.
2.1.3. Study area and development background of solar PV in Taiwan
In Taiwan, the area with highest solar energy resource is east
Taiwan, for example Taitung. The solar energy is 4.26 kW/m2/
day. However, the area with the lowest solar energy resource is
north Taiwan, using just 2.16 kW/m2/day. In general, the solar
energy resource decreases from north to south Taiwan. As a result,
the area in east and south Taiwan is more suitable for solar PV
applications [18].
To support the installation of solar PV systems in Taiwan and
promote solar PV applications, the Ministry of Economic Affairs
(MOEA) implemented the Photovoltaic Generation Demonstration
System Installation Subsidy Guidelines between 2000 and 2004.
According to these guidelines, the maximum subsidy per kWp out-
put for the grid-connected solar PV system was 110,000 NTD
($3667) and that for the stand-alone solar PV system was
150,000 NTD ($5000). The maximum subsidy could not exceed
50% of the installation cost.
In 2006, the MOEA introduced the Photovoltaic Standard Sys-
tem Installation Subsidy Guideline Principles, which offered subsi-
dies to newly installed solar PV systems with capacities above
1 kWp. The maximum subsidy per kWp of installed capacity was
150,000 NTD ($5000) and the subsidy could not exceed the 50%
of the installation cost. In addition, for national institutions,
schools, and hospitals located in remote areas and on off-shore is-
lands, the maximum subsidy per kWp output for the installation of
emergency-use, stand-alone solar PV systems was 350,000 NTD
($11,667). In addition, the maximum subsidy for emergency
disaster prevention systems (so-called mix-type systems was
400,000 NTD ($13,333). Mixed-type systems are solar PV systems
equipped with an inverter that has a reverse power function and
power storage batteries that can be operated in a grid-connected
mode or in a stand-alone mode.
The Renewable Energy Development Act in Taiwan was passed
in 2009 [19]. Subsequently, a 20-year FIT price guideline was pro-
posed by the MOEA. The guideline stated that a subsidy of
50,000 NTD/kW would be provided to newly installed PV systems
with output capacities of 1–10 kW and that electricity utilities
would pay 8.1243 NTD to independent producers for every kWh
of electricity generated. A subsidy would not be provided to newly
installed PV systems with output capacities above 10 kW, and elec-
tricity utilities would pay 9.027–9.3279 NTD to independent pro-
ducers for every kWh of electricity generated. However, because
most of the public and solar PV system investment companies felt
that the FIT price was too low, the MOEA agreed to increase it.
According to rules announced in January 2011, capital subsidies
of 50,000 NTD/kW will now be provided to newly installed PV sys-
tems with output capacities of 1–10 kW and electricity utilities
will pay 11.1883 NTD to independent producers for every kWh of
electricity generated. For independent producers that do not qual-
ify for capital subsidies, electricity utilities will pay 14.603 NTD for
every kWh of electricity generated. Furthermore, a subsidy will not
be provided to newly installed PV systems with output capacities
above 10 kW. For installation capacities of 10–500 kW, electricity
207
utilities will pay 12.9722 NTD to independent producers for every
kWh of electricity generated, while 11.1190 NTD will be paid for
installation capacities above 500 kW. For solar PV systems that
have been financially supported by the MOEA according to the
Photovoltaic Standard System Installation Subsidy Guideline Prin-
ciples, an FIT price of 9.1099–2.7555 NTD/kWh will be offered by
the electricity utility. The price depends on the previous subsidy
(from 70,000 to 120,000 NTD/kW) that solar PV users had ob-
tained. The higher the subsidy amount, the lower the FIT price.
In contrast, an FIT price of 2.0615 NTD/kWh will be offered by
the electricity utility if the installed solar PV systems have been
fully supported by the MOEA.
2.2. Learning about solar PV systems
The variety of products, processes, and technologies in the sev-
eral industrial fields has led to learning-by-doing and the existence
of learning curves. Moore’s principle is a process used to predict
innovation cycles or cost reductions for high-tech products. Rau
et al. [20] stated that the process of cost reductions is the same
for most important energy industries, such as wind and solar PV
power. Ferioli et al. [21] used learning curves to observe cost reduc-
tions for a variety of energy technologies. They found that PV cells
and wind turbines are significantly more suitable for realizing
industry-wide learning to reduce forecasted energy technology
costs. This study further assumed that the growing number of PV
installations enables cost reductions or technology improvements.
Over time, many studies have investigated how country, year,
and cumulative PV installations affect the learning curve for solar
PV systems [22–27]. These studies have shown that when cumula-
tive PV installations double, the cost of solar PV systems reduces by
approximately 11.6–23%. However, Schaeffer et al. [28] found that
the learning curve value for Germany and the Netherlands is only
approximately 10%.
3. Methods
3.1. System dynamics simulation
System dynamics is an approach used to understand the behav-
ior of a complex system as determined from its components. In
other words, a change in each component will affect the final behav-
ior of the complex system. System dynamics is a social system-
related management concept and the approach was developed by
Jay W. Forrester at the Massachusetts Institute of Technology (MIT).
System dynamics became a powerful methodology for analyz-
ing and simulating complex feedback systems. Simulating different
scenarios promotes the understanding of dynamic behavior of sys-
tems over time. The main elements of the system dynamic method
are variables in mathematic equations, presenting stocks and flows
as well as causal relations. They are represented by the use of
short-, medium-, and long-term causal loops. In this way, variables
are connected together in feedback loops [29]. Moreover, using
computer simulations, the real influence of the social system on
a policy can be observed in the laboratory to understand the im-
plied casual feedback in the system [30]. Therefore, a ‘‘policy labo-
ratory’’ can be constructed from system dynamics. This allows
decision makers to simulate possible scenarios for different poli-
cies, and the results can be used to improve their decisions. Thus,
the systems dynamics formulation is appropriate for this study.
System dynamics is often used in organization management or
policy analysis. For example, Gupta et al. [31] built a system
dynamics model to analyze the productivity of Just-In-Time
systems. Lomi et al. [32] constructed a system dynamics model
to investigate how a firm’s management policy affects its growth
208 C.W. Hsu / Applied Energy 100 (2012) 205–217
and how an organization can achieve its profit target. System
dynamics has also been used in the communications industry to
predict supply and demand in the mobile phone market [33]. The
System Dynamics Group at MIT adopted a micro-modeling concept
to construct its System Dynamics National Model [34]. In this mod-
el, the system framework is divided into sectors, such as govern-
ment, financial, household, capital, consumer goods and services,
and labor. The interactions between decisions at the micro-level
are then used to investigate the macroeconomic problems of the
industry. As a result, business cycle and long wave theory can be
explained effectively. System dynamics was also used by Elhance
and Lakshmanan [35] to build a quantity and economy model to
predict the correlation between agricultural product demand and
fluctuation. Thus, system dynamics has often been used satisfacto-
rily to explain long-term social and corporate behavior, thereby
making it suitable for assessing the energy saving and CO2 emis-
sion reduction policy investigated in this study. Hence, this study
adopts system dynamics to construct a quantity model to simulate
the effect of applying an energy saving and CO2 emission reduction
policy in the real world.
3.2. Model framework
The major objective of this study is to use system dynamics to
construct a model to simulate the long-term variation of indices
such solar PV installation, CO2 emission reduction, and government
budget when pursuing different policies. Moreover, the benefits of
these policies were assessed. First, the overall causal feedback dia-
gram of the system (see Fig. 1) was drawn using key levels and
auxiliary parameters.
(1) Policies promoting solar PV applications can be categorized
into two types: those that encourage the public to use solar
PV and those that limit the application of other power gen-
erating technologies so that solar PV can provide the unful-
filled electricity demand. The promotion policy considered
in this study belongs to the first type. Hence, the key factor
is to enhance public willingness to install solar PV systems.
+ -
+ cost of policy
Total
+
Total cost for FITs
Total cost for installation subsidy
+
+ Total power generation
FIT price
Installation subsidies
+
+
Loan interest +
- Return on investment
-
+
Cost of solar PV installation
+ +
Maintenance cost
+ Willingness to use
Cost of solar PV system
- +
+
Effect of learning
Fig. 1. Casual feedback diagram for solar PV system installations.
As this willingness increases, the total number of solar PV
system installations will increase. This increase means man-
ufacturers will produce more solar PV systems, thereby low-
ering solar PV system costs. If the profit remains unchanged,
ROI will increase, leading to greater public willingness and
willingness to use the system. This is the major causal feed-
back for this system model.
(2) The total cost of installing and using solar PV systems,
besides the system cost, includes maintenance costs and
the interest on bank loans for the purchase of system equip-
ment. Although maintenance costs and interest are not as
significant as the system cost, lowering them improves ROI
for the public.
(3) The major profit from installing solar PV systems comes
from the FIT mechanism offered by the government. There-
fore, as the FIT price increases, ROI for the public improves.
Moreover, if the annual production of electricity from solar
PV systems increases (which means higher power generat-
ing capacity), independent producers earn more profits and
receive higher levels of ROI. Power generating capacity is
the annual daily average time for full power loading per
kW of solar PV system. This varies depending on the instal-
lation location, installation position and method, sunlight
condition, and characteristics of the solar PV system.
(4) If the government provides a subsidy for installing a solar PV
system, this reduces the total cost of installing and using the
system. This will also enhance ROI for the users of solar PV
systems.
(5) As the total number of solar PV systems grows, the electric-
ity originally produced by fossil fuels can be replaced by
solar PV electricity. This will lower the emissions of CO2,
thereby reducing total CO2 emissions.
(6) Huge government spending is required to implement the FIT
mechanism and to offer subsidies for solar PV installations.
Two factors contribute to the total cost of promoting solar
PV applications: installation subsidy and FIT cost. As the
total number of solar PV systems grows, both the installation
subsidy and FIT cost will increase. As the amount of the
Average cost of CO2 emission reduction
Total CO2 emission reduction
+
+ +
+
+
-
Power generating capacity
+
+
Installation capacity
 C.W. Hsu / Applied Energy 100 (2012) 205–217
subsidy increases, the total cost of the installation subsidy
also increases. Similarly, as the FIT price increases, the cost
of implementing the FIT mechanism increases.
(7) Based on the total cost of promoting solar PV applications
and the total CO2 emission reduction, we can calculate the
cost of the CO2 emission reduction (policy cost per unit of
CO2 emission reduction). As the total cost of promoting solar
PV applications increases, the cost of CO2 emission reduction
also increases, thereby leading to lower CO2 emission reduc-
tion costs.
(8) In the causal feedback diagram of the system, ROI is the driv-
ing force behind the continual growth in solar PV system
installations. As the cost of installing solar PV systems con-
tinues to drop, if the installation subsidy and FIT price
offered by the government remain unchanged, ROI will keep
increasing. This will lead to an increase in the total number
of solar PV system installations, which will eventually
increase the policy cost to an unaffordable level for the gov-
ernment. A more practical scenario is that when ROI has
reached a certain level, the government will try to reduce
it by lowering the installation subsidy or FIT price to reduce
the total cost of the policy. This will also reduce the growth
in the number of annual solar PV system installations.
The system dynamics model built in this study did not take into
account the land property cost required for installing the solar PV
system when considering the total cost. The reason for this was
that land cost can vary significantly depending on the types of
investors, particularly in Taiwan. The land cost in the north of Tai-
wan is significantly different from that in the south of Taiwan, even
though both are suburban areas. In contrast, we can ignore the land
cost factor for private independent producers who install solar PV
systems on rooftops of buildings or in factories and offices.
3.3. Model flow diagram
Below are the descriptions of a model that explains the correla-
tion between solar PV installations and CO2 emission reduction in
Taiwan. The model was established using the system dynamics
simulation software called Vensim (Vensim DSS for Windows Ver-
sion 5.9c).
3.3.1. FIT price for solar PV installation
According to Taiwan’s FIT policy for solar PV systems, each year
the government determines the FIT price based on the power gen-
erating cost. This annual price is applied to all newly installed solar
PV systems and remains unchanged for 20 years. Since the costs of
solar PV installations drop almost every year, the FIT price for new-
ly installed solar PV systems is also likely to decrease each year. As
the cost of solar PV installations drops, if the FIT price remains un-
changed, the ROI for the solar PV users will increase. Although this
increase in ROI might enhance the public willingness to install so-
lar PV systems, a high FIT price may generate more subsidies, and
hence higher government spending, which will not benefit most
people in the country. Therefore, some countries, such as Germany,
that have implemented an FIT policy reduce their FIT prices once
ROI is too high to maintain a reasonable level [12] (see items 1
and 2 in Table 1).
3.3.2. Number of solar PV installations
In the simulation system, the number of solar PV installations is
defined as the sum of initial installations plus the annual installa-
tion capacity of PV (see item 3 in Table 1):
(1) Annual installation capacity of PV: the annual installation
capacity of PV is correlated with public willingness and will-
209
ingness to use. This study assumes that the installation
capacity of a specific year is proportional to the installation
capacity of the previous year. The installation capacity of the
year before the first year of the simulation (the year the sim-
ulation started) is equivalent to the initial solar PV system.
The installation capacity of the year before the second year
of the simulation is equivalent to the installation capacity
of the first year of the simulation, and so on (see items 4
and 5 in Table 1).
(2) Willingness to use: this study assumes that the public willing-
ness to install solar PV, or willingness to use, is directly pro-
portional the ratio between annual ROI and the base value of
ROI (see items 6 and 7 in Table 1).
(3) Total cost of PV installations: the total cost of PV installations
is derived from three aspects: the cost of PV systems after
deducting government subsidies, the interest on bank loans,
and the maintenance costs of solar PV systems (see items 8,
9, and 10 in Table 1).
(4) Cost of PV system: the cost of the PV system is calculated by
subtracting the accumulated cost reductions from the initial
cost of the solar PV system. The initial cost of the solar PV
system is defined as the total cost of purchasing and install-
ing the solar PV system in the first year of the simulation
(see item 11 in Table 1).
3.3.3. Accumulated cost reductions for solar PV systems
In the simulation system, the accumulated cost reductions for
solar PV systems are the sum of annual cost reductions. The rea-
sons for the gradual decrease in solar PV system costs include
the continuous improvements in solar PV systems by manufactur-
ers, the expanding of production scale, the accumulation of pro-
duction experiences, and the competition between solar PV
system manufacturers. It is difficult to determine the effect of each
factor on the cost reductions for solar PV systems. However, previ-
ous studies have shown that the cost reductions for solar PV sys-
tems can be estimated from the usage of new products. Some
studies [19–24] have shown that as the installation of solar PV sys-
tems doubles, costs will be reduced by 10–23% (this percentage is
referred to as the learning curve factor). As a result, this study as-
sumes that the annual cost reductions for solar PV systems are di-
rectly proportional to the ratio between annual installation
capacity and the number of solar PV systems, learning curve factor,
and the cost of PV systems (see items 12 and 13 in Table 1).
3.3.4. Accumulation of CO2 emission reduction
In the simulation system, the accumulation of CO2 emission
reduction that results from the use of solar PV systems is the
sum of annual CO2 emissions. Annual CO2 emission reduction is
directly proportional to annual installation capacity, the capacity
factor of PV systems, and the electricity emission factor (kgCO2/
kWh) (see items 14 and 15 in Table 1).
3.3.5. Total cost of PV policy
In the simulation system, the total cost of the PV policy is
defined as the sum of the cumulative cost of the FITs and the cumu-
lative subsidy of the solar PV systems (see item 16 in Table 1).
(1) Accumulation cost of FITs: in the simulation system, the
cumulative cost of FITs paid by the government to promote
solar PV is the sum of the annual cost of FITs. The annual cost
of FITs is correlated with the annual installation capacity of
PV, the capacity factor of PV system, and FIT price. Further-
more, the electricity purchased from independent producers
can be regarded as an income for the government once it is
sold (see items 17 and 18 in Table 1).
210 C.W. Hsu / Applied Energy 100 (2012) 205–217

Table 1
System dynamics modeling parameters and formulas.

Item Parameter Formula

1 FIT price = Initial FIT price INTEG(annual reduction of FIT price)a
2 Annual reduction of FIT price = 0 [if annual ROI < upper limit of ROI]
= FIT price-(base value of ROI  total cost of PV installation)/(365  capacity factor of PV system) [if annual ROI > upper limit of
ROI]b
3 Accumulation of PV system = Initial accumulation of PV system + INTEG(annual installation capacity of PV)c
4 Annual installation capacity = Willingness to use  installation of previous year
of PV
5 Installations of previous year = DELAY FIXED(annual installation capacity of PV, 1, initial solar PV system)
6 Willingness to use = Annual ROI/Base value of ROI
7 Annual ROI =(Capacity factor of PV system  FIT price)  365(day)/total cost of PV installationd
8 Total cost of PV installations = (Cost of PV system subsidy)+loan interest + maintenance coste
9 Subsidy = Cost of PV system  proportion of subsidyf
10 Maintenance cost = Cost of PV system  0.05g
11 Cost of PV system = Initial cost of PV system accumulation of cost reduction
12 Accumulation of cost = INTEG(annual cost reduction)
reduction
13 Annual cost reduction = IF THEN ELSE(cost of PV system > 67993, cost of PV system  ((accumulation of solar PV + annual installation capacity of PV/
1000)/accumulation of solar PV)^( 3.32193),0)
14 Accumulation of CO2 emission = INTEG(annual CO2 emission reduction)
reduction
15 Annual CO2 emission = Annual installation capacity of PV  Capacity factor of PV system  Electricity emission factor  365(day)  20(year)h
reduction
16 Total cost of PV promotion = Accumulation cost of FIT + accumulation subsidy of PV system
policy
17 Accumulation cost of FIT = INTEG(annual cost of FIT)
18 Annual cost of FIT = Annual installation capacity of PV  capacity factor of PV system  (FIT price – electricity price)  365(day)  20(year)i
19 Accumulation subsidy of PV = INTEG(annual subsidy of PV system)
system
20 Annual subsidy of PV system = Subsidy  annual installation capacity of PV
21 Average cost of CO2 emission = Total cost of PV promotion policy/accumulation of CO2 emission reduction
reduction
22 Electricity price = Electricity price table (time)
a
Initial FIT price is the FIT price in the first year of the simulation (NT$/kWh). INTEG is an operation in the Vensim software used to integrate the parameters inside the
parentheses of each time step.
b
When annual ROI is above the upper limit of ROI, FIT will be adjusted automatically so that annual ROI is approximately equal to the base value of ROI.
c
The initial accumulation of PV system represents the sum of PV systems already installed in Taiwan prior to the simulation.
d
The capacity factor of PV systems represents the daily average time for a solar PV system with 1 kW of capacity to reach full loading in 1 year. The capacity factor of PV
systems will vary depending on its location, position, and method of installation.
e
Loan interest is calculated based on the sum of loans, annual interest rate, and loan period.
f
The subsidy offered by the government is calculated based on the cost of PV systems and the proportion of the subsidy.
g
This study assumes that each solar PV system has an operational lifetime of 20 years and that the maintenance cost is 0.05 of the cost of PV system.
h
The electricity emission factor is the average weight of CO2 produced per kWh of electricity generated in Taiwan (kgCO2/kWh).
i
In the system model of this study, the annual cost of FITs is the total cost of FITs for solar PV systems from the period of installation to the next 20 years.

(2) Accumulation subsidy: in the simulation system, the cumula-
tive cost of subsidies paid by the government is the sum of
the annual subsidies of the PV systems. The annual subsidies
of the PV systems are correlated with the annual installation
capacity of PV and subsidies (see items 19 and 20 in Table 1).
3.3.6. Average cost of CO2 emission reduction
In the simulation system, the average cost of CO2 emission
reduction is equal to the total cost of the PV policy divided by
the accumulation of CO2 emission reduction. It represents the cost
paid by the government for reducing 1 kg of CO2 emission using so-
lar PV systems (see item 21 in Table 1).
Fig. 2 shows the complete system dynamics model with levels,
flows, and auxiliary parameters, as mentioned above.
3.4. Validation of the system model
3.4.1. Compared to historical results
Historical data on solar PV installations between 2001 and 2010
in Taiwan [3,36] were used to validate the results of the system
dynamics model developed in this study. The initial cost for solar
PV installations was set as 300,000 NTD/kW, which was the aver-
age cost of solar PV systems purchased in Taiwan in 2001[37].
In order to promote solar PV installations, a 50% subsidy to-
wards the system cost, a 20-year fixed FIT price, and a premium
bank loan package were offered by the government of Taiwan
[36]. Therefore, in this study the parameter values shown in
Table 2 were adopted for the simulation system. For the FIT
price, the value 6.2 NTD/kWh remained constant in each year
[38]. In the simulations, the exact values of the base value of
the ROI and the learning curve factor are unknown. In the pres-
ent study, we established suitable values for these two variables
by comparing the simulation results and historical data of accu-
mulation installation and the cost of solar PV. According to the
simulation, a suitable base value for the ROI is 0.0295 (2.95%),
and the value of the learning curve factor is 0.1. A comparison
of the simulation results with the historical data on solar PV
installations is shown in Fig. 3. It is noted that the simulation
results are close to the historical data, which suggests that this
model is valid. In the case of solar PV costs, according to the
data gave by MOEA in 2010, the cost of roof-top type solar PV
from 1 to 10 kW is changed from 133,000 to 172,500 NTD/kW
and the average cost is 151,000 NTD/kW. However, the average
cost is 188,750 NTD/kW in 2008 [39]. In the simulation, the cost
of solar PV is 177,267 NTD/kW in 2008 and 148,532 NTD/kW in
2010. The simulation results are lower than the historical data
by 6.1% and 1.6%, respectively.
 C.W. Hsu / Applied Energy 100 (2012) 205–217 211

Electricity
price Electricity Average cost of
Total cost of PV
priceTable CO2 emission
<Time> promotion policy

Accumulation cost of FIT Accumulation subsidy

Annual cost of Annual subsidy of of PV system
FIT PV system
Capacity factor of
Accumulation of
PV system
Annual CO2 CO2 emission
Proportion of emission
subsidy Electricity
FIT price
Annual reduction of emission factor
Installation of
FIT price previous year
Subsidy Accumulation of Solar PV
Annual installation
Base value of capacity of PV
ROI
Annual ROI
Willingness to Accumulation of
use Annual cost cost reduction
Learning curve
factor reduction
Upper limit of Total Cost of PV
ROI installation Cost of PV
system
Interest rate
Cost of
maintenance

Fig. 2. System dynamics model for simulating solar PV installations and CO2 emission reduction.

price, the number of solar PV systems in 2010 increases by

Table 2
Parameters for simulating solar PV installations in Taiwan from 2001 to 2010. 2090 kW. When the initial FIT price increases to 6.3 NTD/KWh,
the number of solar PV systems in 2010 changes to 21,110 kW,
Parameter Value
suggesting that a 0.1 NTD increase in the initial FIT price increases
Initial number of 110 kW (installation accumulated the number of solar PV systems by 2300 kW (Fig. 4).
solar PV systems in 2001) [36]
For the proportion of subsidy variable, we used three different
Initial solar PV systems 125 kW [36]
Loan interest Annual interest 0.0445 (4.45%)a values (49%, 50%, and 51%) to check the sensitivity. The values of
Initial cost of solar PV systems 300,000 NTD/kW [37] the other variables remain the same as in Section 3.4.1. If the pro-
Capacity of solar PV systems 3.46 kWh/d/kWpb portion of subsidy is 49%, the predicted number of solar PV systems
Subsidy 50%c in 2010 is 16,640 kW. When the proportion of subsidy increases to
FIT price 6.2 NTD/kWhd
50%, the number of solar PV systems in 2010 changes to
a
According to the announcement of ‘‘Concessional Loans for the Purchase and 18,810 kW. For every 1% increase in the proportion of subsidy,
Installation of Energy-Saving Equipment’’ by MOEA in 1999, an interest rate to be the number of solar PV systems in 2010 increases by 2170 kW.
highest does not exceed the annual floating rate of postal 2 years time regular
When the proportion of subsidy increases to 51%, the number of
savings plus 2.45% annual floating interest for the public to install energy-saving
equipment such as solar PV power system is provided. The value of this interest rate solar PV systems in 2010 changes to 21,290 kW, suggesting that
floated between 3.45% and 5.45% between 2001 and 2010, and we adopted the a 1% increase in the proportion of subsidy increases the number
mean value of 4.45% in this study. http://www.moeaboe.gov.tw/opengovinfo/Laws/ of solar PV systems by 2480 kW (Fig. 5).
saveenergy/LSaveMain.aspx?PageId=l_save_10
b
According to [38], the daily average power capacity from the north to the south
of Taiwan in 10 different regions is around 2.66–3.98 kWh/d/kWp; we adopted the 4. Results and discussion
mean value of 3.46 kWh/d/kWp in this study.
c
According to the announcement of regulation for grants by BOE in 2000 and In this chapter, we applied the system dynamics model to sim-
2006, the upper limit of grants for each kW equipment capacity is 150 thousands
NTD, and does not exceed 50% of the total system installation fee.
ulate Taiwan’s solar power policy measures. To do so, we analyzed
d
According to [38], the obtained grant for solar PV power system FIT is around the relationship between solar PV installation volume and carbon
3.3–9.1 NTD/kWh; we adopted the mean value of 6.2 NTD/kWh in this study. reduction, comparing the benefits from different policy measures
based on carbon reduction cost from 2011 to 2030. Simulations
were conducted in different scenarios using policy measures of
3.4.2. Sensitivity analysis FIT price, the value of a subsidy for a solar PV system, and the
In present study, the initial FIT price and the proportion of the upper limit of annual ROI. We also studied combinations of FIT
subsidy are two of the more important variables in the simulation. price and subsidy, including calculating solar PV annual and accu-
Figs. 4 and 5 show the results of a sensitivity analysis for these two mulated ion volume, chance of cost, annual and accumulated car-
variables. For the initial FIT price, three different values, 6.1, 6.2, bon reduction, annual and accumulated policy cost, and average
and 6.3 NTD/kWh, are used to check the sensitivity. In the case of carbon reduction cost.
the proportion of the subsidy, the values are the same as the case
in Section 3.4.1. 4.1. Scenario setting
The initial FIT price is 6.1 NTD/kWh, and the predicted number
of solar PV systems in 2010 is 16,720 kW. When the initial FIT price Solar PV applications in Taiwan grew rapidly from 2009 to
increases to 6.2 NTD/KWh, the number of solar PV systems in 2010 2010. By the end of 2010, the total number of solar PV installations
changes to 18,810 kW. For every 0.1 NTD increase in the initial FIT reached 20.8 MW. Therefore, in the following simulation, the initial
212 C.W. Hsu / Applied Energy 100 (2012) 205–217

25000

20000

15000

kW
10000

5000

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Historical data 110 235 500 800 1,002 1,500 2,200 4,300 8,100 20,800
Simulation results 110 273 485 766 1,151 1,729 2,701 4,580 8,717 18,810

Year

Fig. 3. Simulation results of solar PV installations in Taiwan from 2001 to 2010.

25,000

20,000

15,000
kW

10,000

5,000

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Initial FIT price = 6.1 NTD/kWh 110 270 475 742 1,104 1,636 2,517 4,195 7,851 16,720
Initial FIT price = 6.2 NTD/kWh 110 273 485 766 1,151 1,729 2,701 4,580 8,717 18,810
Initial FIT price = 6.3 NTD/kWh 110 275 494 788 1,200 1,826 2,897 4,994 9,658 21,110

Year

Fig. 4. The sensitivity testing result of initial FIT price.

25,000

20,000
kW

15,000

10,000

5,000

- 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Proportion of Subsidy = 49% 110 270 475 741 1,102 1,633 2,510 4,180 7,818 16,640
Proportion of Subsidy = 50% 110 273 485 766 1,151 1,729 2,701 4,580 8,717 18,810
Proportion of Subsidy = 51% 110 276 495 790 1,204 1,834 2,912 5,027 9,733 21,290

Year

Fig. 5. The sensitivity testing result of proportion of subsidy.

number of solar PV systems was set as 20.8 MW. After considering
historical installation values, the initial solar PV system in this
study was also set as 20.8 MW.
To calculate the annual cost of FITs, we need to deduct the tra-
ditional power generation cost. The 2010 average power genera-
tion cost in Taiwan was 2.76 NTD/kWh [40]. According to a
Taiwan Power Company report, the long-term power generation
cost increases 1% annually. As a result, we revised the original 4–
2.7876 NTD/kWh in 2011 with a 1% increase each year until it
reaches 3.3677 NTD/kWh in 2030.
To estimate the CO2 emission reduction owing to solar PV
installations, the electricity emission factor is important. Taiwan’s
electricity emission factor in 2010 was 0.612 kgCO2/kWh [41], so
we used this in the simulation. Table 3 shows the parameters used
to carry out the subsequent simulation.
4.2. Effect of initial FIT price
Variations in initial FIT price directly affect public willingness to
install solar PV systems. A high initial FIT price means greater gov-
ernment spending. Therefore, if the effect of initial FIT price varia-
tion on solar PV installations and CO2 emission reduction can be
understood, the government can optimize the initial FIT price. In
2011, the FIT prices are in the range 7.9701–10.3185 NTD/kWh
 C.W. Hsu / Applied Energy 100 (2012) 205–217 213

Table 3
Parameters for simulating solar PV installations in Taiwan from 2011 to 2030.
Parameter Value
Initial number of solar PV systems 20,800 kW (20.8 MW) [3]
Initial solar PV systems 20,800 kW (20.8 MW)
Loan interest Annual interest 0.0445 (4.45%)
Initial cost of solar PV systems 145,000 NTD/kW [39]
Learning curve factor 0.12 (12%)
Capacity of solar PV systems 3.46 h/day [38]
Electricity emission factor 0.612 kgCO2/kWh [41]
Electricity price 2.76 NTD/kWh [40]
for different capacity of roof-top solar PV systems [42]. In this
study, in order to study the effect of the initial FIT price on accumu-
lation of solar PV, we selected three initial FIT prices without any
subsidy, namely 7.97 (Case A1), 9.15 (Case A2), and 10.32 (Case
A3) NTD/kWh. The values are the lowest, average, and highest
FIT prices in 2011 in Taiwan, respectively. In the simulation, the
annual ROI (6.65%) for Case A2 (with the average FIT price) in the
first year is used as the base value of ROI. The annual ROI (7.5%)
for Case A3 (with the highest FIT price) in the first year is used
as the upper limit of ROI.
The simulation results show that, as the initial FIT price
increases, the total number of solar PV systems also increases.
However, their correlation is not linear (Fig. 6). When the initial
FIT price is 7.97 NTD/kWh, the predicted number of solar PV
systems in 2030 is 1924 MW. If the initial FIT price increases to
9.15 NTD/KWh, the number of solar PV systems in 2030 grows to
3165 MW. For every 1 NTD increase in the initial FIT price,
the number of solar PV systems after 20 years increases by
1052 MW. However, when the initial FIT price increases from
9.15 to 10.32 NTD/KWh, the number of solar PV systems in 2030
only increases to 3687 MW, suggesting that a 1 NTD increase in
the initial FIT price only increases the 20-year number of solar
PV systems by 446 MW.
This study shows that a proper FIT price can accelerate the
application of solar PV, which corresponds with the Germany and
Spain experiences. After 2000, according to Renewable Energy
Sources Act (EEG), Germany implemented FIT to encourage the
public to adopt renewable energy. The price of FIT in 2000 for solar
PV was 50.62 €cents/kWh, after which the price decreased because
the cost of solar PV went down. After 2010, the price went down to
39.57 €cents/kWh. The 2002 solar PV increase volume in Germany
is only 63 MW. By 2006, it had increased to 643 MW [43]. How-
ever, Spain increased its solar PV power generation capacity from
the 18 GWh in 2004 to 427 GWh in 2007 by revising the mecha-
nism of FIT in 2004 [44].
In terms of the average cost of CO2 emission reduction, Case A2
exhibits the lowest average cost of 1.7 NTD/kgCO2 (Fig. 7). In gen-
eral, increasing the initial FIT price while keeping other conditions
constant will increase government spending and increase pubic
willingness to install solar PV systems. This leads to a substantial
improvement in solar PV installations and CO2 emission reduction,
which will eventually reduce the average cost of CO2 emission
reduction. However, in our study cases, the lowest average cost
of CO2 emission reduction is not given by highest initial FIT price
(10.32). This means that careful analysis is necessary to find the
optimum value that will yield the accumulation target of solar
PV and reduce the average cost of CO2 emission reduction.
4.3. Effect of subsidy
Similar to initial FIT price, the subsidy offered by the govern-
ment directly affects public willingness to install solar PV systems.
A high subsidy means more government spending. In this study,
we selected three subsidy percentages for the simulation, namely

4,000
Initial FIT price = 7.97 NTD/kWh (Case A1)
3,500
Initial FIT price = 9.15 NTD/kWh (Case A2)
3,000
Initial FIT price = 10.32 NTD/kWh (Case A3)
2,500
MW

2,000
1,500
1,000
500
-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Year

Fig. 6. Accumulation of PV system under different FIT prices.

14
Initial FIT price = 7.97 NTD/kWh (Case A1)
12
Initial FIT price = 9.15 NTD/kWh (Case A2)
10
NTD/kgCO2

Initial FIT price = 10.32 NTD/kWh (Case A3)

8

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Year

Fig. 7. Average costs of CO2 emission reduction under different FIT prices.
214 C.W. Hsu / Applied Energy 100 (2012) 205–217

10% (Case B1), 20% (Case B2), and 30% (Case B3). We set the upper
limit of ROI equal to 7.5% and the initial FIT price to 8.3 NTD/KWh.
The simulation results show that, as the subsidy increases, the
number of solar PV systems increases. However, their correlation
is not linear (Fig. 8). This trend is similar to that observed for the
FIT price. When the subsidy is 10%, the predicted number of solar
PV systems in 2030 is 3161 MW. If the subsidy increases to 20%,
the number of solar PV systems in 2030 grows to 3623 MW. For
every 1% increase in the subsidy, the number of solar PV systems
after 20 years increases by 46.2 MW. However, when the subsidy
increases from 20% to 30%, the number of solar PV systems in
2030 increases to 3977 MW, suggesting that a 1% increase in the
subsidy only increases the 20-year number of solar PV systems
by 35.4 MW.
In terms of the average cost of CO2 emission reduction in 2030,
the values obtained for Cases B1, B2, and B3 are 1.42 (10%), 1.75
(20%), and 1.72 (30%) NTD/kgCO2, respectively. This means that,
although increasing the subsidy while keeping other conditions
constant increases government spending, this also increases public
willingness to install solar PV systems. This leads to a substantial
improvement in solar PV installations and CO2 emission reduc-
tions, but the average cost of CO2 emission reduction also increases
(Fig. 9).
ROI for the simulation, namely 7% (Case C1), 7.5% (Case C2), and 8%
(Case C3), with an FIT price of 9.15 NTD/KWh and without a subsidy.
The simulation results show that, as the upper limit of ROI
increases, the number of solar PV systems increases. However,
their correlation is not linear (Fig. 10). When the upper limit of
ROI is 7%, the predicted number of solar PV systems in 2030 is
1598 MW. If the upper limit of ROI increases to 7.5%, the number
of solar PV systems in 2030 increases to 3165 MW. For every
0.1% increase in the upper limit of ROI, the number of solar PV sys-
tems after 20 years increases by 313 MW. However, when the
upper limit of ROI increases from 7.5% to 8%, the number of solar
PV systems in 2030 increases to 6387 MW, suggesting that a 0.1%
increase in the upper limit of ROI only increases the 20-year num-
ber of solar PV systems by 644 MW. This means that as the upper
limit of the ROI increases, there is more of an impact on the accu-
mulation of solar PV.
In terms of the average cost of CO2 emission reduction, the val-
ues obtained for Cases C1, C2, and C3 are 1.34 (7%), 1.7 (7.5%), and
2.08 (8%) NTD/kgCO2, respectively (Fig. 11). In general, increasing
the upper limit of the ROI while keeping other conditions constant
increases both solar PV installations and government spending.
When the upper limit of ROI is higher, the average cost of CO2
emission reduction is also higher.

4.4. Effect of the upper limit of ROI 4.5. Combination of initial FIT price and subsidy

The upper limit of ROI affects how the government adjusts the
FIT price. A high upper limit of ROI implies that the public will earn
a higher ROI as the cost of solar PV systems continues to drop.
Although this increases public willingness to install solar PV sys-
tems, more government spending is required. In contrast, if the
upper limit of ROI is too low, ROI and willingness to use solar PV de-
creases, making it more difficult to achieve the installation goal set
by the government. In this study, we selected three upper limits of
In practice, governments usually adopt a policy that combines a
subsidy and initial FIT mechanism. Thus, analyzing the effect of dif-
ferent policy combinations on solar PV installations and policy cost
is important to find out the optimum policy combination. Analyses
for three different scenarios (Cases D1–D3) were carried out in this
study with an upper limit of ROI equal to 7.5% and an annual ROI
for the first year of the simulation equal to 7.5%. The FIT price
and subsidy for each scenario are shown in Table 5.

4,500
Proportion of Subsidy = 10% (Case B1)
4,000
Proportion of Subsidy = 20% (Case B2)
3,500
Proportion of Subsidy = 30% (Case B3)
3,000
MW

2,500
2,000
1,500
1,000
500
-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Year

Fig. 8. Accumulation of PV system under different subsidies.

14
Proportion of Subsidy = 10% (Case B1)
12
Proportion of Subsidy = 20% (Case B2)
NTD/kg CO2

10
Proportion of Subsidy = 30% (Case B3)
8
6
4
2
0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Proportion of Subsidy = 10% (Case B1) 9.9 9.83 9.7 8.39 6.58 5.07 4.16 3.55 3.11 2.78 2.51 2.3 2.12 1.97 1.83 1.71 1.61 1.51 1.42
Proportion of Subsidy = 20% (Case B2) 10.79 10.68 10.07 8.67 6.86 5.38 4.48 3.87 3.43 3.1 2.84 2.62 2.44 2.29 2.16 2.04 1.93 1.84 1.75
Proportion of Subsidy = 30% (Case B3) 11.68 10.81 9.93 8.49 6.7 5.26 4.39 3.8 3.37 3.04 2.79 2.58 2.4 2.25 2.12 2.01 1.9 1.81 1.72
Year

Fig. 9. Average costs of CO2 emission reduction under different subsidies.

 C.W. Hsu / Applied Energy 100 (2012) 205–217 215

7,000 Upper Limmit of ROI = 7.0% (Case C1)

Upper Limmit of ROI = 7.5% (Case C2)
6,000
Upper Limmit of ROI = 8.0% (Case C3)
5,000

MW
4,000

3,000

2,000

1,000

-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Year

Fig. 10. Accumulation of PV system under different upper limits of ROI.

12
Upper Limmit of ROI = 7.0% (Case C1)
Upper Limmit of ROI = 7.5% (Case C2)
10
Upper Limmit of ROI = 8.0% (Case C3)
NTD/kgCO2

0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Year

Fig. 11. Average costs of CO2 emission reduction under different upper limits of ROI.

Table 4
Comparison of the simulation results for different cases in 2030.

Case no. Accumulation of Accumulation of CO2 Total cost of policy Average cost of CO2 emission
PV system (MW) emission reduction (Mt) (million NTD) reduction (NTD/kgCO2)
A1 1924 30.96 77,826 2.51
A2 3165 51.14 87,162 1.70
A3 3687 59.63 144,789 2.43
B1 3161 51.07 72,590 1.42
B2 3623 58.59 102,338 1.75
B3 3977 64.34 110,479 1.72
C1 1598 25.65 34,441 1.34
C2 3165 51.14 87,162 1.70
C3 6387 103.53 214,958 2.08
D1 3687 59.63 144,789 2.43
D2 3687 59.63 126,588 2.12
D3 3687 59.63 108,387 1.82

Table 5 cost of CO2 emission reduction. This means that, from the perspec-
Initial FIT price and subsidy for Cases D1–D3. tive of reducing government spending and decreasing the average
Case no. Proportion of subsidy (%) FIT price (NTD/KWh) cost of CO2 emission reduction, a high subsidy with a low initial FIT
D1 0 10.32
price is the best combination.
D2 10 9.37
D3 20 8.42 4.6. Cost/benefit analyses

The simulation results show a very clear consistency for the
effects of these three policy combinations on the promotion of
solar PV systems (Fig. 12). For these three scenarios, the number
of solar PV systems in 2030 are same and the value is 3687 MW
(see Table 4). In 2030, the average cost of CO2 emission reduction
for Case D1 is 2.43 NTD/kgCO2, while that for Case D3 is only
1.82 NTD/kgCO2 (see Table 4 and Fig. 13).
Therefore, even though the number of solar PV systems for the
five scenarios is close, the higher the subsidy, the lower the average
The simulation results show that the effects of initial FIT price,
subsidy, upper limit of ROI, and combinations of FIT price and sub-
sidy on the promotion of solar PV systems are different. Such
effects can serve as useful information for policymakers to choose
an appropriate promotion policy for solar PV systems.
(1) When the upper limit of ROI is constant, higher initial FIT
prices or subsidies mean more solar PV systems. The reason
for this trend is that increasing the FIT price or subsidy will
improve the ROI for solar PV users, leading to an increase in
216
4,000
Case D1
3,500
3,000
2,500
MW
2,000
1,500
1,000
500
-
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Fig. 12. Accumulation of PV system under different policy combinations.
14
12
10
NTD/kg CO2
0
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030
Fig. 13. Average costs of CO2 emission reduction under different policy combinations.
public willingness to use the system. However, increasing
the initial FIT price or subsidy also increases government
spending and increases the average cost of CO2 emission
reduction, although the solar PV installations and CO2 emis-
sion reduction will significantly improve at the same time.
Therefore, careful analysis is required to find an optimum
value for the initial FIT price or proportion of subsidy so as
to reach the accumulation target of solar PV and reduce
the average cost of CO2 emission reduction.
(2) When all conditions are fixed, increasing the upper limit of
ROI increases the accumulation of solar PV systems. Similar
to the FIT price or subsidy, increasing the upper limit of ROI
improves annual ROI for solar PV users and increases the
average cost of CO2 emission reduction.
(3) When the upper limit of ROI is fixed, the effects of different
policy combinations of FIT price and subsidy on the number
of solar PV systems are consistent. Nevertheless, the policy
combination with a higher subsidy results in a lower average
cost of CO2 emission reduction. Thus, in order to achieve a
specific goal for the number of solar PV systems, combining
a high subsidy with a low FIT price can reduce government
spending. However, the government subsidy is often paid
upon installing the solar PV system. In contrast, if an FIT
mechanism is adopted, government spending lasts for
20 years. Therefore, policymakers must think carefully when
selecting policy combinations.
5. Conclusion
Although Taiwan is a major manufacturer of solar cells, the
number of solar PV installations at the end of 2010 was only
20.8 MW. To achieve the CO2 emission reduction goal set for the
nation, the government of Taiwan is planning to adopt policies
C.W. Hsu / Applied Energy 100 (2012) 205–217
Case D2 Case D3 (The three lines are almost overlapping)
Year
Case D1 Case D2 Case D3
Year
such as FITs and capital subsidies to encourage the public and com-
panies to invest in and use solar PV systems. The goal set for the
number of solar PV installations in 2030 is 2500 MW.
This study used system dynamics to develop a simulation for
assessing policies promoting solar PV applications, such as FITs
and capital subsidies, in order to achieve solar PV installations
and CO2 emission reduction goals under different conditions. Using
this simulation system, policymakers can carry out cost/benefit
analyses for CO2 emission reduction under different policy combi-
nations, CO2 emission reduction goals, and budget limitations.
The results showed that the solar PV installation goal can be
reached by adopting proper policy measures such as reasonable
FIT prices or subsidies. Other than positive policy measures, com-
pulsory regulations and punitive measures could also be useful.
For example, based on energy consumption, the government could
require that large enterprises install suitable numbers of solar PV
systems.
To reduce the difficulty in carrying out the simulation, the sys-
tem dynamics model developed in this study uses less complex
and more straightforward approaches to describe the correlations
between certain parameters. Further studies should be more com-
prehensive and should incorporate the experiences of other coun-
tries in promoting solar PV. In addition, land cost was excluded
from the present model, which would influence the predicted val-
ues of ROI and installations for large-scale solar PV systems. Future
research should address this problem.
Acknowledgment
The author appreciates the financial support from the National
Science Council of Taiwan (NSC 100-3113-P-035-003; NSC 100-
3011-P-007-001-MY2).
 C.W. Hsu / Applied Energy 100 (2012) 205–217 217

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