Solar Energy Perspectives - IEA

Chapter 10: Policies
and can hardly be adapted to small-scale projects unless project aggregators step in. Apart
from the risks of bribery or nepotism where the rule of law is weak, tenders run the risk that
very aggressive bidding by inexperienced – or gaming – developers might fail to deliver the
capacity, precisely because contracted prices end up lower than actual costs. (This is called
the winner’s curse dilemma in auction theory.) The deployment of wind in Brazil, which
moved from a FIT to tender, offers a case in point. The average tariffs under the tender
concluded in 2010 were only half the tariffs of the earlier FIT, but at least a quarter of the 3.1
GW wind capacity tendered is considered at risk by Bloomberg New Energy Finance’s
analysts for providing too low return on equity. Only a fifth had already reached financial
closure in the first half of 2011.
Another risk relative to not-yet mature technologies is that competitive pressures lead
developers to use lower cost, lower quality assets, which may then underperform and be
unable to cover their debt. Immature technologies may also witness the opposite risk, i.e.
lack of competition if too few experienced actors can take part. These risks can be
alleviated by specific measures but suggest that requests for tenders should be used with
care, and are more easily designed for mature markets and technologies than for emerging
ones.
Tax credits
A wide variety of tax credits are or have been used in many countries to support the
deployment of solar energy. While production tax credits (PTC) are, like other support
schemes, linked to the actual production of renewable energy, investment tax credits (ITC)
directly support investments. ITCs run the risk of supporting low-productivity investments, as
has been seen in the past with wind power in some countries. This risk, however, is minimal
if ITC level is adjusted so that the actual energy output is necessary to make these investments
profitable, whether through another support mechanism or through its market value. ITCs are
more effective in directly addressing the high up-front costs and technology risks associated
with the early deployment of expensive nascent technologies.
ITC can support a broad set of technologies with relatively low transaction costs, as no
measure of the actual output is required. In the United States the federal business energy ITC
supports solar water heat, solar space heat, solar thermal electric, solar thermal process heat,
photovoltaics, and even solar hybrid lighting. The credit is equal to 30% of expenditures for
solar energy equipment, and is in place up to 2016. The American Recovery and Reinvestment
Act of 2009 further allows eligible taxpayers to receive a grant from the US Treasury
Department instead of taking the ITC (or the renewable energy PTC) for systems for which
construction begins before the end of 2011.
Market design
The greatest uncertainty affecting the emergence of profitable solar electricity rests with
fluctuating fossil fuel prices. In fact, fossil fuel price volatility is a bigger problem for
renewable energy project developers than for fossil fuels. This results from the design of
standard wholesale electricity markets, in which marginal pricing determines the spot-market
price of electricity. Generators offer capacity into the market at a price sufficient to recover
their short-term running costs (including fuel and carbon costs). Capacity is dispatched
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© OECD/IEA, 2011