Effective and efficient long-term oriented RE support policies

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1 Effective and efficient long-term oriented RE support policies Dr. Mario Ragwitz Fraunhofer Institute Systems and Innovation Research Saudi Solar Energy Forum Workshop on Renewable Energy Financing Mechanisms 4 th April

2 RES policy: a main driver for technology innovation We need to recognize that we are in the midst of the 6th industrial revolution and that the pioneers will be the winners. -Nicholas Stern, 2010 World Climate Summit The transition to a low carbon economy will be driven by energy and climate policy "Carbon pricing alone will not be sufficient to reduce emissions on the scale and pace required deployment incentives for low emission technologies should increase two to five times public energy R&D funding should double" Stern Review An active innovation policy in the energy sector can become one of the most important pillars for increasing the economic competitiveness of countries 2

3 What is the objective for policy for renewable energy? 1. RES deployment leading to: Environmental protection Security of supply Economic / rural development / jobs in energy sector 2. Build up of RES industries leading to: Industrial production capacities / jobs in industry Technological and institutional innovation

4 Challenges and expected effect of RES policies: Renewable energies typically show higher generation costs (presently) and higher learning rates compared to conventional alternatives Renewable energies are capital intensive. Future reference final energy prices are subject to substantial uncertainty. Policy needs to compensate additional generation costs, provide low risk financing, accelerate technological and institutional learning and reduce non-economic barriers. Costs of the policy should be minimised. effective and efficient (static & dynamic) policies

5 Costs and benefits of RES policies should be continuously monitored

6 category impacts study scope Main elements of costs and benefits System analytical impacts Price and allocation impacts Macro economical impacts Benefit Cost Discharging Charging Employment GDP, sales + Avoided externalities Avoided energy imports Employment and sales Additional generation cost Merit-order effect Impacts on GDP Transaction costs Taxation of power Energy portfolio effect Additional cost of control and balancing power Public and private funding, e.g. R&D Impact on innovation Cost of grid expansion Special equalisation scheme for electricity-intensive enterprises

7 Summary of system analytical impacts in Germany in 2009 Additional generation costs, electricity (incl. costs of CO 2 certificates) Costs (Mio. ) Benefit (Mio. ) 5590 System services and balancing costs ~ 360 Grid expansion costs Transaction costs 30 Additional generation costs, heat (total) 1470 Additional generation costs, heat (supported) Avoided external costs electricity 5900 Avoided external costs heat

8 Summary of allocation and price impacts in Germany in 2009 Merit-Order effect (reduction of electricity price at the spot market) Benefit (Mio. ) Avoided fossil fuel imports 7200 Special equalisation scheme for energy intensive industry 660 Taxation of renewable electricity Public funding of renewables 790 Based on all relevant system analytic impacts and the main allocation and price impacts positive overall impacts of RES policy on GDP and employment have been found for the EU (+0.25% GDP by 2020 by reaching 20% RES target)

9 Examples of policy driven development of RES technologies

10 Global development of wind power until 2009 In all top-5 countries the main support policy consists of generation-based long term guaranteed price based instruments. Source: GWEC

11 Global development of wind power until 2009 The European and the North American market showed a similar volume in recent years but large differences in industry development Europe North America Asia Latin America Africa & Middle East Pacific Source: GWEC

12 US imports of wind technology Missing long term certainty of the support framework (PTC) made the build up of a domestic industry more difficult. Imports in 2008 from: Denmark (28%), Spain (27%), Japan (15%), Germany (12%), and India (7%). Source: USITC

13 Examples of rising RE industries in emerging countries Establishment of stable framework conditions for new energy technologies allows for creation of globally competitive industries: India created, in parallel to promoting wind energy generation, a competitive wind turbine manufacturing industry. Today, Indias Suzlon is one of the largest wind turbine manufacturers worldwide. China belongs to the leading countries in terms of production of photovoltaic and solar thermal collectors as well as wind turbines and benefits from large export revenues. The MENA region might become home to a promising CSP industry and take advantage of a multitude of related benefits explained in more detail in the following.

14 Effectiveness and efficiency of currently implemented policies in the EU

15 Electricity generation [TWh/a] Historical development of new RES-E in the EU-27 New Renewables in the EU-27 Dominating: Wind energy (in the EU-15) & Biomass (in the new member states) Wind off-shore Geothermal electricity Photovoltaics Biowaste Biogas Solid biomass Wind on-shore

16 Policy background Support schemes for RES-E 1. Feed-in tariffs (FIT) Renewable electricity can be fed into the grid at a guaranteed tariff for a determined period of time The electricity output depends on the support level price-based FITs may also consist of premium tariffs paid in addition to the market price (e.g. in Spain) stronger market orientation 2. Quota obligation with tradable green certificates (TGC) Determination of quota target Renewable electricity is sold at the market electricity price Additional revenue from selling TGCs Certificate price depends on predefined quota target and is determined on the market quantity-based

17 Policy background Support schemes for RES-E 3. Tender procedures A predefined target of additional capacity or generation is set In a bidding round projects with the lowest generation costs can obtain financial support i.e. in form of long-term feed-in tariffs quantity-based 4. Fiscal incentives/investment grants Tax incentive: Reduction or exemption of tax payment pricebased Investment grants: Reduction of capital costs price-based Classification of policy measures Price-based mechanisms Feed-in tariff Fiscal incentives Investment grants Quantity-based mechanisms Quota/TGC Tender schemes

18 Dominating support schemes for RES-E in the EU Main RES-E support instruments in the EU-27 Quota obligation Feed-in tariff Feed-in premium Other instruments than the above Notes: 1) The patterned colours represent a combination of instruments 2) Investments grants, tax exemptions and fiscal incentives are not included in this picture. Ireland United Kingdom Netherlands France Belgium Denmark Germany Luxembourg Sweden Czech Republic Austria Slovenia Poland Finland Slovakia Hungary Estonia Latvia Lithuania Romania 20 EU countries use feed-in tariffs as main instrument 6 countries have implemented a quota obligation with TGCs with 3 of them partially using feed-in tariffs Portugal Italy Bulgaria Spain Greece Cyprus Malta

19 Measuring the effectiveness of RES-E support 1. Relative or absolute growth rates are typically used to demonstrate the achievements of countries, however both measures are biased 2. Better measure to judge the performance is the absolute growth as ratio of the additional potential E i n G i n G i n 1 ADD POT i n i E n i G n Effectiveness indicator for RES technology i for the year n Existing electricity generation potential by RES technology i in year n i ADD POT n Additional generation potential of RES technology i in year n until

20 Effectiveness for wind on-shore in the period in EU-27 21

21 Effectiveness in the sector biogas in the period in EU-27 22

22 Current level of support and costs per Member State Example of wind onshore - Sept. 2009

23 Current level of support and costs per Member State Example of biogas electricity - Sept. 2009

24 Performance of Feed-in Systems in the EU

25 Share of feed-in systems in EU RES capacity until 2009 Installed Capacity of RES Technologies [GW] Comparison of capacity in feed-in countries and EU EU - 27 Biomass Capacity EU - 27 Feed-In Biomass Capacity EU - 27 Wind Onshore Capacity EU - 27 Feed-In Wind Onshore Capacity EU - 27 PV Capacity EU - 27 Feed-In PV Capacity

26 Some feed-in tariff success stories By % of all new RES-E generation installed after 1997 in the EU was achieved by countries using feed-in tariffs, which are responsible for 61% of the EU electricity consumption 85% of all new wind capacity (after 1997) was installed in countries using feed-in tariffs By the end of 2009, wind energy accounted for 6.7% of German electricity production; in Spain 12.7%, in Denmark even 19.5% 100% of the new PV capacity was installed in countries using feed-in tariffs 68% of all new biomass capacity (after 1997) was installed in countries using feed-in tariffs

27 Risk & return: a key success factor of FITs Banks & investors assess Risk/cost for project versus Return for project Construction, technology, operation risk General country risk Cost & revenues influenced by RE (support) policy features Higher risk Revenue risks RE (support) policy risk Investors require higher return Banks offer worse loan conditions (leverage, DSCR, term) Banks only lend if overall risk not too high less RE realisable Source: Rathmann

28 Support levels for new plants should be continuously decreasing

29 Turbine price per electricity yield [ Cents/(kWh/a)] Remuneration [ Cents/kWh] Tariff degression Case study Germany Experience curve for onshore wind energy Support for onshore wind energy StrEG EEG 8.00 EEG ,000 10, ,000 Cumulative installed capacity [MW] Reduction of 53% from High decrease in costs between 1991 and 1996, lower decrease since Year Reduction of 36% from Tariff degression of 1-2% per year Technology learning overestimated due to decreasing raw material prices

30 Tariff degression in feed-in countries (1) Germany Annual tariff reduction Technology-specific (1% for wind power plants and, once in July 2010 up to 13% and in October 2010 another 3% for PV Consideration of cost reductions induced by learning curve effects Continous incentive for efficiency and cost improvements Greece Tariff degression for small photovoltaic systems (<10 kwp) 5% is foreseen for new entrants between 2012 and 2019 France Tariff degression of 2% annually is for wind since 2008 Italy Tariff degression for Solar PV FIT since % annually Plants commissioned in 2010 receive a premium reduced by another 2%

31 Tariff degression in feed-in countries (2) Czech Republic Annual adjustment of 2-4 % depending on inflation. Exception: Biogas and biomass plants Reduction in the following year limited to 5% of the tariff in force at the time of the calculation of the new tariff Slovenia Recent adjustment of support scheme: RES-E plants <= 5MW supported through a feed-in tariff Larger plants (> 5MW) support from a feed-in premium No degression for fixed feed-in tariff (except PV: 7%) Adjustment of FIT-premium based on energy market prices

32 Average certificate prices [ /MWh] Development of green certificate prices in the EU Italy UK Flanders Wallonia Sweden Poland Romania Remuneration in (2005)

33 For achieving an ambitious target a portfolio of RES technologies being in a different stage of development (cost) - is required. Therefore technology specific support is preferable to reduce policy costs and to incentivise deployment of less advanced technologies.

34 Generation Cost [ /MWh ele ] Technology neutrality leads to high producer surplus Marginal cost for RES-E Producer Surplus Cost-resource curve (RES-E in the EU27) Power price Required RES-E deployment >> Source: Green-X database << Additional (up to 2020) realisable potential for RES-E [TWh] A technology-neutral support leads to high policy costs technology banding has been introduced in UK, Italy and Romania Source: schematic depiction of aggregated cost curve for 35 RES-E technologies at EU level

35 Non-economic barriers are relevant and can hamper the success of otherwise well designed policies

36 Non-economic barriers show large variety Source: Wind-Barriers project // shown is the total (administrative and grid related) lead time for wind projects

37 When renewable energy technologies become mainstream the compatibility with electricity markets becomes crucial

38 Share of electricity sold within the premium option Premium tariff design Case study Spain Share of RES-E sold with the premium option 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% RD 436 Jan 04 Apr 04 Jul 04 Okt 04 Jan 05 Apr 05 Jul 05 Okt 05 Jan 06 Apr 06 Jul 06 Okt 06 Jan 07 Apr 07 Jul 07 Okt 07 Jan 08 Apr 08 PV Wind Small Hydro Biomass Residues In March 2004 a new premium option was introduced by the RD 436

39 Continuous transition between different support schemes Fixed feed-in Feed-in premium with electricity price index premiums Banded quota models Fixed Feed-in traiffs Technology neutral quota models (RPS) + low investment risk + high technology diversity + low windfall profits for mature technologies + broad spectrum of investors - low compatibility with electricity markets + high compatibility with electricity markets + competition between generators - high risks and uncertainties (prices and market growth) - low incentives for less mature technologies - windfall profits

40 Conclusions on RES policy design Renewable energy technologies need a long term oriented and risk mitigating deployment policy. Instruments should be technology specific to reduce policy costs and to promote less mature technologies. Compatibility with general energy markets should be ensured, when higher market shares of RES are reached. Non-economic barriers can have a significant impact on the effectiveness of an instrument and hamper the effectiveness of generally very powerful policy schemes. Innovations need long term, stable and degressive support Effective instruments for RES-E support are frequently economically efficient as well!

41 Thank you very much Kontakt: Mario Ragwitz