Moving away from the present fuel mix:

regulatory tasks and dilemmas in supporting renewable electricity

penetration

Péter KaderjákDirector, REKK

Alternate member of the Board of Appeal, ACER

World Forum on Energy Regulation VQuébec, May 15, 2012

Coal is still here

Global primary energy demand growth between 2000 and 2010

Major role played by power generation in non-OECD countries

Source: IEA WEO 2011

Where do we go with the present fuel mix?

3Source: Varró L., IEA, 2012

Is CCS deployment on track?

Source: Varró L., IEA, 2012

To reach its projected contribution to the 450 ppm policy, 100 projects would need to be under construction at any time until 2035And one year project time overrun wipes out 30% of NPV

Nuclear: the dream that failed? (The Economist, March 2012)

Source: Varró L., IEA, 2012

The rest of presentation

• Major RES-E regulatory principles and tasks

• Five RES-E related regulatory dilemmas

• Transparency and support level: which is the more important promoter of RES-E?

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Questions

• The regulatory environment is decisive for RES-E investments and growth

• 3 recent studies by REKK‣ ‚Principles of Regulation to promote the development of

Renewable Energy Sources (RES)’, the Black Sea Regional Regulatory Initiative, with NARUC

‣ ‚Support Schemes for Electricity Produced from Renewable Energy Sources’ with ERRA

‣ ‚Clean Energy Finance Solutions: Central & Eastern Europe’, with Cambridge Programme for Sustainability Leadership

• What are the main regulatory principles, tasks and dilemmas with regard to RES-E regulation?

• What do we know about the impact of regulatory characteristics on RES-E penetration?

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There are just a few general regulatory principles to follow

• Effectiveness – to meet policy objectives• Cost efficiency – to provide least cost

solutions for end customers• Transparency, consistency, credibility - to

promote a proper RES-E investment climate and prevent corruption

• A certain level of flexibility – to reserve regulatory ability to adjust support levels to changing technology costs

• Easy and inexpensive authorisation – to promote easy entry

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Prominent RES-E related regulatory tasks

• Contributing to the design of RES-E support schemes (production price support or quota obligation schemes)

• Regulating grid access and integration for RES-E (balancing and settlement regime, grid connection rules, cost allocation rules for grid upgrade, remuneration for additional reserve needs, etc)

• Licensing and monitoring of the RES-E market• RES-E certification • Promoting cross-border cooperation in RES-E

utilization

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1. Poor RES-E support design might create undesirable investment cycles

• Stress on support budget

• Excess demand for grid connection licenses

• Might prompt an unplanned change of regulation that undermines credibility

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Capacity over 0,5 MW Capacity under 0,5 MW Generation (GWh)

„Gold rush”: effectiveness without cost-efficiency

Growth of installed PV capacities in the Czech Republic

Source: REKK analysis

Smart design is needed: e.g. learning curves and adjustment of feed-in tariffs

Total installed geo, MW

Market price of electricity

FIT2

MC geothermal

Q3

FIT in period 1

FIT1

Cost, prices

t1

FIT3

Q1

FIT in period 3

t2

t3

Total installed wind MW

MC wind

Q3

t1

Q1

t2t3

Total installed solar, MW

MC solar

Q3

t1

Q1

t2

t3 FIT in period 3

FIT in period 3

FIT in period 1

FIT in period 1

Transparency and flexibility: rate adjustmentonly for new projects

2. Asymmetric incentives for RES-E generation versus network to be balanced

• RES-E generation: fast; sexy; simple incentives

• Network upgrade: slow; complicated; counter-incentives

• Queue management• Integrated resource and

network planning• Sufficient incentives for

transmission and distribution upgrade is key

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3. Licensing: how to make it simple and cheap?

• Limit on the time and cost of administrative procedures (e.g. Moldova)

• One-stop-shop licensing (e.g. Germany, Denmark)

• Reduced number of authorities involved in RES-E licensing (e.g. Georgia)

‣ Reduction of corruption opportunities

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4. Electricity market integration process can boost RES-E

• Electricity market integration promotes RES-E growth‣ Better spatial distribution of weather-dependent

RES-E production

‣ Common pool of reserves and storage capacities

• RES-E should get a role when electricity market coupling rules are created

• Harmonized green certification regimes might promote cross border trade in RES-E and thus promote investment

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5. Regulatory governance, capacity building and policy feedback is needed

• The promotion of RES-E is a relatively new competence for energy regulators

• Considerable regulatory knowledge and human resources are still to be developed

• A requisite organizational solution can also help the Regulator meet the new expectations in this regard‣ RES certification, licensing and market monitoring

• Fast feedback of market information into the rulemaking process‣ Regular consultations with ministry and stakeholders

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6. Is transparency or support level the more important promoter of RES-E?

16Survey results from ERRA

Hypotheses

• Hypothesis 1: Higher RES-E production support levels lead to higher RES-E penetration

• Hypothesis 2: Good regulatory practices, including transparent, consistent and flexible regulation are preconditions for a faster RES-E penetration

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Production support levels, 2011

- German PV FIT level 2012

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Typical pattern: RES-E capacity shares versus support level - wind

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RES-E capacity shares versus support level – solar PV

Indicators involved in regulatory characteristics analysis

Licensing/target setting Grid Tariff and GC

Transparency

Consistency /credibility/ stability

Easy entry and flexibility

capacity threshold for RES-E licensing

connection rules

allocation of connection capacities

technical standards

balancing responsibility

capacity allocation

FIT/premium/GC setting mandate

eligibility period

non-planned revisions

regular tariff review

priority network access

RES-E target

legal remedy

GO certification

lead time

technical standards

tariff level

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Transparency

-0,02

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-1 -0,8 -0,6 -0,4 -0,2 0 0,2 0,4 0,6 0,8

TR

BG EE

BiH

AL

HU PL

SK UA

LT LV AM RO

RS AE MK

CR

Transparency Index

RES-E Capacity growth 2007 - 2010

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Integrated effects – Regression analysis

Dependent Variable: LOG(CAP_GR) Method: Least Squares Sample (adjusted): 1 16 Included observations: 14 after adjustments1 Variable Coefficient Std. Error t-Statistic Prob. C -7.333706 3.377328 -2.171452 0.0550 TRANS 1.097044 0.513469 2.136536 0.0584 LOG(PRODPR) 1.405245 0.296314 4.742422 0.0008 LOG(FIT_WEIGHT) -0.286652 0.585180 -0.489853 0.6348 R-squared 0.800302 Mean dependent var -3.991196 Adjusted R-squared 0.740393 S.D. dependent var 1.279444 S.E. of regression 0.651898 Akaike info criterion 2.217100 Sum squared resid 4.249713 Schwarz criterion 2.399688 Log likelihood -11.51970 F-statistic 13.35854 Durbin-Watson stat 1.947352 Prob(F-statistic) 0.000785

1 Bosnia (Federation BiH), Macedonia and United Arab Emirates were left out by the program due to missing data.

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Lessons

• ‚Good regulation’ (transparency, consistency and easy entry) and healthy general investment environment are important pre-conditions to RES-E capacity growth

• No such a relationship can be detected between RES-E growth rate and the nominal level of support (FIT)

• The main regulatory message here is that countries aiming to increase their RES-E shares should as first step design their regulatory environment carefully, while the level of Feed-in tariff or premium is less determining in achieving higher RES-E penetration levels

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THANK YOU FOR YOUR ATTENTION!

pkaderjak@uni-corvinus.huwww.rekk.eu

+36 1 482 7071

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