Solar Energy Perspectives - IEA

Solar Energy Perspectives: Policies
considered to be excessive (IEA, 2008d; IEA, 2011h ). It shows no general superiority of one
system over others. This underlines the importance of the non-market barriers that may stand
in the way of effective deployment, and the need to design specific policy measures to
overcome them.
RECs markets are usually considered better suited to more mature technologies than to
emerging ones. Even for a mature technology like wind, however, several countries with
RECs systems reportedly intend to move in the next few years towards FITs (UK) or tenders
(Italy), to reduce system costs (but the Netherlands may go the other way, moving from FITs
to RPS).
While FITs have been criticised as providing investors with weak stimulus to reduce costs due
to very stable cash-flow perspectives, this may have finally turned into an advantage as
reducing investors’ risks allowed reducing the costs of capital. As up-front investments
represent the bulk of the cost of renewables, the cost of capital to utilities or developers has
a direct and important bearing on the levelised cost of electricity. Emerging technologies
usually bear some technology risks; they can hardly bear large market risks at the same time,
which in the case of solar electricity arise from the volatility of fossil fuel prices, as shown
below. A secure framework reduces the costs of capital, and thus the cost of solar energy. For
this reason, RPS work more effectively if they drive utilities to offer long-term, stable PPAs to
solar project developers.
However, FITs do not by themselves offer policy makers easy control over the policy costs,
a legitimate preoccupation. FITs or FIPs control the level of incentives but not the amount of
investments made – as the regulator does not accurately know the rapidly changing
technology costs. RPS control the investment, but not the incentive level, for the same reason.
Tenders could in theory provide a solution to the dilemma but are less suitable for small-scale
projects and do not necessarily deliver large projects when aggressive bidding drives
remuneration levels too low.
Most systems in practice mix elements of price control and quantity control. For example,
most RPS with solar set-asides also have solar-specific alternative compliance payments
(SACP), setting an upper limit for the cost of RPS solar compliance. This also serves to cap
prices for all RECs in the entire RPS. Another approach is the Spanish FIP for STE/CSP
plants, which is only valid for a yearly total aggregate capacity (500 MW) of newly-built
plants.
Feed-in tariffs and feed-in premiums
FITs or FIPs have demonstrated efficacy in the absence of strong non-economic barriers, but
are not necessarily cost-effective. Further, even if cost-effective, they do not offer policy
makers an easy control over total costs, i.e. they can prove “too effective” in driving
investments beyond or faster than expectations.
Generous incentives, inconsistent with declining PV costs, have been and still are available
in several countries. This might be necessary to jumpstart a new activity by providing
potential investors with attractive returns. However, sustained high-level support is
inconsistent with declining PV cost and encourages intermediaries to appear in the PV
development business. FITs and FIPs are usually paid by electricity customers (ratepayers)
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