Regulatory and policy options to encourage development of ...

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SUSTAINABLE ENERGY REGULATION AND POLICYMAKING TRAINING MANUALpage 9.14The level of deployment of technologies is not set in advance, but instead isdriven by the level of the premium in the tariff price. In other words, the governmentsets the price for the output from renewable energy generators, but lets themarket determine the level of output. This in turn means that the total costs ofthe scheme are not known in advance because the costs will depend on the successof the mechanism in driving new capacity. Having said that, it would be possibleto make sensible predictions about the amount of new capacity likely to bestimulated and hence the costs, based on the prices set in the tariffs.Similarly, the length of a scheme can mean that technological developments overthe course of a few years allow participants to make windfall profits in the lastfew years. A degree of flexibility should therefore be designed in to any schemeto ensure that the tariffs are not set unreasonably high, especially in the lateryears of a scheme.The design of a tariff scheme may have to take into account the availability ofrenewable resources. For example, areas of high wind will obviously prove moreattractive to developers seeking to maximize their returns. This can mean thatnetworks in areas with high wind resources are targeted by developers, whichin turn means that the customers of the network in that area are potentiallysubject to higher prices than network customers in areas with less wind. Thetariff scheme can be designed to minimize this by offering higher prices forwind output in areas with less wind resources, so encouraging developers tosite projects there. Alternatively, in order to distribute the financial impactequally over consumers and to avoid significant differences in price, the levyto finance the feed-in scheme can be equally covered by all the existing networks(cf. Germany).As well as the level to which the tariff is set, the success of such schemes candepend on: Access charges to the grid—transmission or distribution. Any limits set on capacity. The ease of siting projects—i.e. getting approvals through planning systems.Quota mechanismsQuota mechanisms, also known as renewable portfolio standards (RPS), are anobligation for electricity suppliers to take a certain amount of sustainable power,or for customers to source a proportion of their power from renewable energysources.
MODULE 9: RENEWABLE ENERGY: REGULATORY AND POLICY OPTIONSpage 9.15Key features: The percentage can increase over time, driving increased deployment. Utilities can also choose to pay a penalty rather than buy their allocation ofthe obligation. No requirement for utilities to allow priority access to networks. The operation of the system is supported by tradable green certificates for theoutput, which certify that the supplier has actually bought renewables-basedpower. These certificates can be sold with the power, or traded separately. Ineither case, the value of the certificate adds value to the actual generation.Green certificate markets are discussed in more detail below. Certificates could be banked for use in future compliance periods. This bankingperiod is usually limited (generally five years).In contrast to tariff systems, the government sets the desired level of output, andallows the market to decide the price that will be paid for it. A quota systemavoids the government selecting which technologies will receive the benefits,instead leaving the technical choices to the market.The level of incentive for the utilities to comply with the obligation depends onthe level of the penalty payment set—the higher the cost for non-compliance, themore incentive to buy renewables-based power.The value of renewables-based power can be further enhanced by redistributingany of the money paid as penalties to companies who have met their obligation.Utilities decide how best to meet this obligation, and what projects they will contractwith if they chose to buy renewables-based power. Not surprisingly, utilitieswill chose to contract with the cheapest forms of generation, so meeting theirobligation in the most cost effective way. This will keep the cost to companiesand consumers down. In addition, there is no requirement for utilities to signlong-term contracts with generators for their output. The short-term nature of themarket can act as a disincentive to investment across the board.The need to negotiate deals with utilities for their output implies a degree ofexpertise and resources for developers. This may limit new entry into the system,or at least limit entry to relatively large, well-resourced entities. In addition,new entry by smaller companies may be limited by the investment risks inherentin the mechanism, effectively meaning that only large companies with diverseportfolios are able to participate. Both of these problems can be addressed byensuring the availability of consolidation services to allow smaller developers topool their output, reducing individual participation costs and risks.If certificates can be banked from one compliance period to the next, careful monitoringwill be needed to ensure that no gaming takes place, and that there is
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