Renewable energy (RE) technologies such as hydro, wind, biomass, geothermal, and solar power offer the potential of increased energy security, limited local and global environmental impact, and reduced exposure to fuel price volatility. Many of them are also experiencing rapid cost reductions as the technologies improve and the industries grow to scale. However, except in areas of particularly good natural resources, or in countries that are otherwise dependent on expensive imported diesel, renewable energy is yet to be cost competitive with traditional sources of power such as coal and gas. Increasing the contribution of renewable energy within a county’s energy mix often faces other challenge—such as perceived higher risk by investors, unsuitable contractual or regulatory frameworks, and existing infrastructure and subsidies that weight decisions in favor of traditional thermal power.

In response, many countries have and are implementing specific regulatory support systems to encourage renewable energies. Multiple different approaches exist, including fixed long-term elevated “feed-in” tariffs, auctions for specific amounts of new renewable energy capacity, and requirements for utilities to source specific percentages (or “portfolio standards”) from renewable sources.

Each approach has its supporters but none has proven a panacea: all have their strengths and weaknesses and often their success comes down to the details of implementation. Feed-in tariffs were once the darling of many as Europe’s schemes encouraged rapid scaling of wind and solar power. But the shine has come off these solutions with painful retroactive reductions of tariffs in Bulgaria, Spain, and the Czech Republic. Auctions have more recently been very effective in Brazil, South Africa, and elsewhere in creating competition and driving down tariffs, though such approaches might be less successful in periods of inflating prices and interest rates.

As regulators and markets learn from past mistakes, many hybrid approaches are being designed that optimize the benefits of several different approaches.

TAX INCENTIVES

Accelerated tax depreciation, transferable tax credits (which can be used to raise capital), and other tax-based investment incentives.

STRENGTH:

  • Can accelerate pay down of capital cost.
  • Can drive competition among RE technologies,
    delivering similar incentives to all.
  • Public “subsidy” is delivered upfront so regulatory
    reliance and public liability are not long-term.

WEAKNESS:

  • Burden is directly on government finances with reduced tax income.
  • Can lead to stop/start markets if support is only approved on an annual basis (such as in the U.S.) or with economic cycles affecting the availability of profits to shelter from taxes.
  • Reduced operating incentives can lead to less well-run generation assets.
  • May disadvantage some RE technologies.

PORTFOLIO STANDARDS

A government-required percent of all power generated to be sourced from RE, often twinned with a credit or tradable certificate system by which suppliers demonstrate compliance.

STRENGTH:

  • Can drive competition among RE technologies, delivering the governmenttarget at the lowest cost.
  • Can achieve an exact volume target if measured against metered output.
  • Cost efficient (depends on floor price of certificate).

WEAKNESS:

  • Low Transparency, Longevity, Certainty.
  • Price volatility.
  • Disadvantages some RE techs so likely to only support the single lowest cost technology for that country.
  • Complexity.
  • Bureaucracy in administering and managing the RE credit scheme.
  • Setting right percent can be a challenge in understanding the cost implications on the sector (this can be mitigated by setting a suitable safety valve or penalty price above which the credits cannot go).

FEED-IN TARIFF (“FiT”)

A FiT gives a guaranteed fixed price or premium per kilowatt hour (set by a regulator) to the generator for all projects of a technology (renewable energy) type for a fixed period of time.

STRENGTH:

  • Transparency, Longevity, Certainty.
  • “Pull” incentive on the market.
  • Separate FiTs can allow multiple technologies to be supported and deliver diversification.

WEAKNESS:

  • Getting the price right is hard, as equipment and financing prices are dynamic. A FiT that is too low will result in no investment and a FiT that is too high will give away excess returns and add to public costs.
  • A FiT alone is not enough to spur the market—also need access to grid, bankable PPAs, etc.
  • FiTs create long-term liability—suitable caps on the amounts of RE supported are needed, so sustainability depends on who is paying—are the tariffs passed through to consumers or subsidized by government funds—and how much is supported?

AUCTIONS

Government or utility-run competitive tendering of fixed amounts of capacity for specified RE technologies.

STRENGTH:

  • Combination of market efficiency with the auction and the transparency, longevity, certainty of a guaranteed price once set.
  • Greatest regulatory control on expansion of RE in the system.
  • Separate auctions can allow multiple technologies to be supported and deliver diversification.

WEAKNESS:

  • High transaction costs and long lead times associated with running the auctions.
  • Risk of non-delivery if auction entry requirements and bid scrutiny are inadequate.
  • Setting suitable bid deposit/guarantees is essential to successful outcomes.
  • Harder to achieve success in context of volatility in capital costs and/or costs of capital, particularly related to currency markets (bids may become quickly unviable).