1.01 Renewable Energy Policy and Incentives D Porter, Association of Electricity Producers, London, UK

© 2012 Elsevier Ltd. All rights reserved.

1.01.1 Types of Mechanism and Their Use 1 1.01.2 Impact on Deployment 3 1.01.3 Ensuring Investor Certainty 3 1.01.4 Potential for Harmonizing Support Schemes 4 1.01.5 Conclusion 4

The world’s scarce resources are allocated mostly according to supply and demand and priced accordingly. We tend to use the cheapest first and economists approve of this because of the efficiency that it delivers. But in many different electricity supply industries, there are examples where particular technologies enjoy the protection of subsidy for an energy source. There can be different reasons for this – more rapid development of technologies that are not yet competitive, but are expected to become so in the future, or the protection of indigenous fuels, for example, through support for a coal mining industry. In the United Kingdom, before the liberalization of the economy in the 1980s, a state-controlled electricity industry was heavily dependent on a state-controlled coal industry and even the development and operation of the state-owned railway network, which transported most of the fuel, was influenced by this. Privatization of the electricity industry in 1990–91 and the liberalization of the electricity market led to the development of gas-fired power stations, which began, eventually, to undermine coal-fired electricity production.

But, the world’s fossil fuels are finite and on the timescales that historians use, their deployment is no more than temporary – a passing phase. Dependence on them, however, is huge and the transition to alternatives could become urgent, so interest in support schemes for renewable energy has never been greater.

While schemes for supporting the use of renewable energy in heating and transport are developing, mechanisms to support the generation of renewable electricity are commonplace. This chapter reviews a range of such support schemes.

1.01.1 Types of Mechanism and Their Use

Renewable energy brings many benefits, and governments and society therefore wish to see it being widely used. However, renewable energy-generating technologies have high upfront costs compared with some conventional forms of electricity genera­tion. Although schemes imposing emission limits (and trading) and fossil fuel taxes should make renewables more attractive investments, these are usually insufficient to make renewable technologies commercially viable. To ensure that renewables are produced in the quantities desired, governments therefore put in place support mechanisms that transfer some of the additional costs of renewable energy schemes to society at large or, at least, to those who buy electricity.

A common form of support mechanism is the production incentive, which rewards electricity producers using renewables with a payment for each unit of electricity they produce, thus encouraging the most efficient operation of the plant on an ongoing basis. These incentives take two forms: quantity- and price-based instruments.

For price-based instruments, the government specifies the price to be paid for output from renewable technologies, which is higher than the electricity price. This system of ‘feed-in tariffs’ can specify either a fixed price or a premium to be paid on top of the market price for electricity. Feed-in tariffs are used extensively around the world, including Germany, Spain, China, India, and several states in the United States.

For quantity-based instruments, the government sets the amount of renewable electricity that it would like to see provided and the market determines the price at which it will be delivered. This often takes the form of an obligation on a certain market participant (especially suppliers or ‘retailers’) to source a certain amount of renewable electricity, coupled with a system of tradable green certificates to demonstrate compliance. Certificate schemes are used in the United Kingdom, Australia, and states in the United States, which have a renewable portfolio standard.

Tender systems are also used, although such schemes have been abandoned in several countries (e.g., the United Kingdom and Ireland) and now seem to be used mainly for large-scale renewable projects, such as offshore wind in China.

Various forms of tax incentives and grant supports are widely used, often in conjunction with other methods of support. Tax incentives take the form of exemptions or credits for the investment made or electricity produced or accelerated depreciation of assets. In the United States, these have proven to be very effective, with the production tax credit helping to drive a significant uptake of wind generation over much of the past decade. In India, accelerated depreciation has been a key tool for encouraging investment in wind generation and will remain an option for wind projects alongside the new generation-based incentive.

A review of support schemes internationally reveals that it is not unusual for countries to use a mixture of different mechanisms targeted at particular investors and intended to achieve particular policy outcomes, with different schemes applying in different regions and for different technologies. In particular, separate mechanisms are often used to encourage investment in small-scale renewables, such as photovoltaics (PVs), by nonenergy professionals. For example, both the United Kingdom and Italy maintain

Comprehensive Renewable Energy, Volume 1 doi:10.1016/B978-0-08-087872-0.00901-X 1

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certificate schemes as their primary support mechanism, but have feed-in tariffs to encourage the deployment of small-scale solar power (Table 1).

Governments are, of course, keen to ensure that public money is being used most efficiently and that it maximizes the deployment of renewables. Various methods are employed to keep costs down, including limiting eligibility to particular technologies that best exploit the available resource in that country or meet policy aims, reducing feed-in tariffs paid to new projects year on year (known as ‘degression’), or differentiation of support by technology, resource, or location. Differentiation by technology is common across support schemes, including some certificate schemes, which award different multiples of certificates to particular technologies, such as in the United Kingdom. Differentiation by location or resource has been introduced in China, which provides different levels of support to wind projects across four resource areas.

Table 1 Financial incentives for renewables: four international case studies in summary

Country Current financial assistance Support scheme specifics

Australia Financial support for renewables is primarily The renewable energy target recently underwent an ambitious ‘upgrade’, channeled through a quantity-based instrument – increasing its target to 45 000 GWh (20%) from 9500 GWh, share for the renewable energy target. renewable electricity supply, by 2020.

Australian states also provide state-level support From 2011, small-scale renewables will be supported and subsidized separately through price-based instruments, grants, and tax (from large-scale renewables), using the same instrument albeit with different incentives. rules. Small generators will receive a fixed rate for certificates submitted and

therefore (1) mitigate the price fluctuations small generators make on the renewable energy certificate (REC) market, and (2) will be protected from the market in general.

There is no carbon emissions trading scheme or State support mostly arrives in the form of localized grants and ‘feed-in tariff’ carbon tax. production incentives. For example, generators in New South Wales receive

AUS$0.60 per kWh for all the electricity that their eligible solar photovoltaic (PV) system or wind turbine generates. In Queensland, the Solar Homes and Communities Plan provides cash rebates for the installation of solar PV systems on homes and community use buildings.

China China outlines its ambitions in five-year plans – the China’s Renewable Energy Law 2009 stipulates that grid companies are obliged next being the 12th plan covering the period to purchase the full amount of the electricity produced from renewable 2011–15. sources.

Current Chinese policy targets state renewable energy Amendments to the Renewable Energy Law in 2009 require grid operators to to account for up to 10% of the total energy supply purchase a certain fixed amount of renewable energy, and penalties for in 2010 and 16% in 2020. noncompliance are foreseen. There is a subsidy available to grid companies,

the newly established ‘Renewable Energy Fund’, to cover the extra cost for integrating renewables if necessary.

The Renewable Energy Premium formed part of the instruments laid out in the Renewable Energy Law and stipulates that the price difference between the electricity from renewable energy and that from coal-fired power plants should be shared across the whole electricity system. The current rate is set at 0.004 RMB kWh−1 (€0.000 4).

The Chinese government introduced a feed-in tariff in 2009 for wind power, which applies for the entire operational period of a wind farm (20 years). There are four categories of tariff depending on a region’s wind resources, ranging from 0.51 RMB kWh−1 (€0.054) to 0.61 RMB kWh−1 (€0.065)

India India maintains several financial incentive schemes Wind expansion is supported by a ‘generation-based incentive’ – essentially a for development of a renewable electricity feed-in tariff – for what the Government terms ‘Grid Interactive Wind Power generation sector. Wind power, hydropower, and Projects’, based on the following: solar power remain India’s key priorities. 0.50 per unit of electricity fed into the grid for a period of no less than 4 years

and no more than 10 years, with a cap of 62 lakhsa per MW. A maximum installed capacity limit is applied (4000 MW). Small hydro (>25 MW) is supported by financial contributions toward construction of the project. The Indian government usually awards 50% of the grant to help finance payments toward electromechanical equipment with a further 50% awarded on successful commissioning of the plant.

The Solar Mission is an important policy in India, aimed at increasing India’s security of supply. The government wish to have 20 000 MW of installed solar electricity equipment by 2022.

One aim of the ‘Mission’ will be introducing a mandate on the state electricity regulators to fix a percentage for a purchase obligation on suppliers, to purchase solar electricity. The solar power purchase obligation will start at a low level and increase up to 3% by 2022. A power purchase obligation aims to achieve a ‘Mission’ target of grid cost parity (solar electricity vs. grid average) by 2022, and parity with coal-based thermal power generation by 2030.

(Continued )

3 Renewable Energy Policy and Incentives

Table 1 (Continued )

Country Current financial assistance Support scheme specifics

USA Federal financial assistance is managed and distributed by the US Department of Energy’s Office of Energy Efficiency and Renewable Energy (EERE). Last year, EERE awarded $2.2 billion in financial assistance. Federal tax breaks are also employed.

There are also state and local support schemes. Financial support is channeled through a variety of methods. The most frequently used methods are rebates, preferential loans, production incentives, and grants.

The federal department administers ‘production incentive’ funds for renewable power generators. Qualifying facilities are eligible for annual incentive payments of $0.015 per KWh (in 1993 dollars, and indexed for inflation) for the first 10-year period of their operation, subject to the availability of annual appropriations in each Federal fiscal year of operation.

There are literally hundreds of support schemes across all of the US states. As an example, in California, there are 58 types of financial support (although many are very small or meant for niche markets), e.g., there are 48 types of rebate available.

The California feed-in tariff allows eligible customer-generators to enter into 10-, 15-, or 20-year standard contracts with their utilities to sell the electricity produced by small renewable energy systems – up to 3MW – at time-differentiated market-based prices.

In Florida, a corporate tax break means renewable electricity generators receive the equivalent of $0.01 per kWh for electricity produced from 1 January 2007 to 30 June 2010. Qualifying renewable electricity is defined as “electrical, mechanical, or thermal energy produced from a method that uses one or more of the following fuels or energy sources: hydrogen, biomass, solar energy, geothermal energy, wind energy, ocean energy, waste heat, or hydroelectric power.”

a1 lakh = 100 000.

1.01.2 Impact on Deployment

Various claims are made about the impact of different support mechanisms on levels of deployment. In the European Union, commentators often point to the German feed-in tariff as being a highly successful model, encouraging a massive expansion in wind (from 48 MW in 1990 to 6 GW in 2000 and more than 25 GW by 2010) and PV capacity (from 62 MW in 2000 to approximately 6 GW by 2010).

However, in reality, it is difficult to draw any clear correlation between the type of support scheme offered in a particular country and levels of deployment. Factors such as the availability of natural resources, public and political attitudes to and ambitions for renewables, long-term stability of support schemes, planning and network connection barriers, and the actual level of support offered will all affect how many projects get built. The massive expansion of PVs in Germany, for example, may have been built on an unsustainably high level of public support.

1.01.3 Ensuring Investor Certainty

Energy companies need a stable policy and regulatory framework to make the long-term, capital-intensive investments that electricity generation projects entail. They therefore place significant value on stability in renewable energy support schemes. However, governments’ priorities and ambitions with respect to renewable energy are constantly evolving. This appears to have led to a lack of stability in support schemes globally, with changes being regularly implemented to encourage particular outcomes or reduce costs. A review of the evolution of support mechanisms across the European Union shows that of the 16 Member States that had a support mechanism in place in the year 2000, only a quarter did not change or significantly adapt their support schemes in the following 7 years.

The United Kingdom is a case in point, where the Non-Fossil Fuel Obligation (NFFO), a tender system that had only limited impact, gave way to the Renewables Obligation (RO), a certificate scheme, in 2002. Following criticism that the RO, which rewarded all technologies equally, was encouraging only a handful of cheaper technologies, differentiation of support was introduced to the mechanism by awarding different multiples of certificates to different technologies from 2009. In 2010, the system for small-scale renewables was changed again as a feed-in tariff was introduced for projects up to 5 MW in the light of concerns that a certificate scheme was too complicated and inaccessible for small-scale generators. The recent change of government in the United Kingdom has led to further uncertainty with an as yet undefined commitment to introduce a full system of feed-in tariffs while retaining the RO.

Without a long-term commitment to providing support for renewable energy, a ‘start–stop’ environment can develop for renewable energy. In the United States, a clear correlation can be seen between the occasions earlier in the decade when the production tax credit was allowed to expire and a dramatic reduction in levels of wind deployment. This sort of approach to support can discourage the development of supply chains and create a negative impression of the overall investment environment in a

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country. In the United Kingdom, the NFFO has put some developers’ businesses under great strain, by inviting tenders at unpredictable intervals – staff had to be retained for an unknown period, with the developer having neither a contract nor, necessarily, the prospect of one, until the next call for tenders.

A serious concern for investors must be that governments will weaken their financial commitment to renewables in response to the current economic situation. Germany and Spain, for example, have both recently decided to cut the levels of support offered to PV dramatically as they are no longer considered affordable. Germany has agreed to cut its feed-in tariff by approximately 15%, while Spain is considering cuts even for existing installations.

1.01.4 Potential for Harmonizing Support Schemes

Support schemes tend to operate on a national or subnational basis. While many of the benefits of renewables may also be national – security of supply, economic development – some, such as reductions in carbon emissions, are supranational. Furthermore, natural resources, renewable energy targets, and even energy markets do not necessarily correspond with national boundaries. For example, Ireland now has a single electricity market, but separate support schemes operate in the Republic of Ireland (a feed-in tariff) and Northern Ireland (certificate scheme), with fears that this may be causing market distortions.

The European Union has a target for 20% of its energy to come from renewable sources by 2020, which is subdivided into 27 national targets. Although the majority of Member States seem confident that they will be able to meet their targets domestically, it would clearly be more cost-effective to exploit the lowest-cost potential across the European Union. Analysis carried out for the European electricity trade association, EURELECTRIC, suggests that implementing a full system of renewable Guarantee of Origin trading across the European Union could lead to a saving of €17 billion in the year 2020 compared with meeting the targets domestically. Even allowing only 20% of the target to be traded could lead to savings of €14 billion in the year 2020.

Theoretically, it would therefore seem desirable to harmonize or integrate support schemes across the European Union to allow for the most cost-effective deployment of renewables. Similar considerations about harmonization of state support schemes occur when considering the possible implementation of a federal Renewable Energy Standard in the United States. However, in practice, the multitude of different support schemes that have been implemented, each with their own features, and political sensitivities make such harmonization or integration challenging. Norway and Sweden have been discussing the possible implementation of a joint support scheme for several years without result. Furthermore, proposals to integrate support schemes or, as is being considered in the United Kingdom, to open them up to overseas projects face the underlying political question of whether citizens of one country are willing to pay for a project in another without seeing many of the direct benefits (e.g., job creation) that they bring.

1.01.5 Conclusion

Across the globe, financial support mechanisms are clearly seen as a key tool for encouraging the deployment of renewable energy. However, the cost of such schemes must ultimately be borne by society at large and there will be tensions, especially in economically straitened times, over how much we are willing to pay to achieve our renewable energy ambitions. Maximizing efficiency in support schemes will therefore be a priority for politicians, but this will need to be balanced against the needs of investors in terms of certainty and level of reward as, ultimately, a support scheme that does not work for them will be ineffective.

Renewable energy will play a central role in the world’s decarbonized energy future – a study by EURELECTRIC suggests that 38% of the European Union’s electricity (and approximately 50% of its generating capacity) will be renewable by 2050. It is highly unlikely that public subsidies for renewable energy will be sustainable in the long term, given the large volumes that would need to be supported. The renewable energy industry will therefore need to prepare for a transition to a world without subsidy, in which renewable energy projects are able to stand on their merits alone. In December 2010, the UK government proposed changes to its renewable energy support regime, to favor low-carbon technologies generally, via either a feed-in tariff with a contract for differences, or a premium feed-in tariff. Draft legislation is expected in 2011.