Learning from Feed-in Tariffs Dr. Axel Bree

Roadmap of Presentation Introducing WFC The Problem Policy Solutions Design of Feed-in Tariffs Tariff Period Burden Sharing Purchase Obligation

28th June 2008 Alexandra Wandel | Development Director| Who we are 3 The World Future Council consists of fifty highly respected figures represented in governments, civil society, business, science, education and the arts from all five continents is an integrated global forum based on mutual ethical values, highlighting our responsibilities as citizens of the earth strives to mobilise moral energy and political will to protect the rights of future generations

Breakthrough for Renewable Energy: South Australia, UK, USA 4 South Australia has implemented a law to promote renewable energy. South Australian Premier Minister Mike Rann highlighted explicitly the role of the WFC with regard to the implementation and realization of the law. The renewable energy law has a good chance to be passed in UK. WFC has advised the leading decision makers on legislative procedure. By now a large coalition (led by FoE and REA) pushes for the adoption of a FIT amendment. On the basis of WFC activities there are further parliamentary legislative initiatives in California, Michigan, Minnesota, Hawaii and Washington DC.

What is the problem? Increasing CO2 and temperature levels Increasing energy consumption Increasing fossil fuel prices Increasing volatility of energy prices

Barriers to Market Entry for RES Costs and pricing: distortion from subsidies for competing fuels; fluctuation of oil and gas prices; high initial capital costs; environmental externalities Legal and regulatory: Lack of legal framework for independent power producers; planning restrictions; grid access; liability insurance requirements (net metering) Market performance: lack of access to credit; Perceived technology performance uncertainty and risk; Lack of technical or commercial skills and information

7 Distorted market conditions Source: BEE, Lackmann, 2005

Performance and Targets of Eastern European Countries

Renewable Energy Payments (Feed-in systems) in Europe Source: Klein et al. 2006: Evaluation of different feed-in tariff design options – Best practice paper for the International Feed-in Cooperation.

Quota vs. FIT System Quota Closer to market approach Promote least cost technologies and large scale projects Provide certainty of future market share Higher risk -> risk premium Administrative burden FIT Long-term investment security Equal chances for all technologies Lower costs No upper limits Incentives can be set via tariff

Installed RE capacity in Germany and the UK ( ) Germany – Feed-In system UK – Quota-System- and Auction-based system Source: Butler/Neuhoff 2004, Cambridge Working Papers in Economics

28th June 2008 Alexandra Wandel | Development Director| Source: Haas et al 2006 Tradable certificates vs FITs Comparison of Quota TGC and Feed-in Tariffs

Pieces of the FIT Puzzle Tariff period Purchase obligation Burden sharing Tariff level

Tariff Level Generation costs / avoided external costs Fixed tariff / premium tariff Stepped up tariff (wind yield, plant size, fuel type) / flat tariff

Premium Tariff Premium is paid on top of electricity market price (ESP, CZ, SI, NL, DK) Advantage for producer when energy prices are high Higher oil prices lead to higher cost per kWh RES-E + higher comparability with liberalised energy markets -Higher risk for producer (no purchase obligation) -Solution could be a top or bottom limit (as in DK)

Costs Connection to the grid: paid by the plant operator Essential grid upgrades: paid by the grid system operator Metering devices: paid by the plant operator RE contribution: paid by consumer (only 3,5% of bill) EEG added 2.94 to the monthly electricity bill per household in 2007 (equivalent to a pint of beer or a Starbucks latte!)

Advantages of Renewable Enery Payments at a glance Overcomes barriers: guarantees grid access; premium price guarantees support for the technology; 20-year tariff periods allow full investor confidence. Supports installations of different sizes and technologies: In addition to large RE projects for wind, solar etc, householders can now get a guaranteed payback on a solar roof in just a few years, rather than years. The 100,000 solar roof programme helped meet costs with subsidies. Promotes innovation: Annual reduction of tariffs for new installations drives technological efficiency. Drives economies of scale: investment and demand are rising, and manufacturing expansion is taking place globally in response, lowering costs further. Promotes stability: Change of government does not affect system, as it does not cost taxpayers anything through taxes, and so cannot be cut from national budget. Promotes public support: Through public participation in the scheme, no direct taxpayer costs, support for the nuclear phase-out, and awareness levels being very high in general. All possible when implemented properly!

Renewable Energy Payments under the EEG for Cent/kWh Degression Hydropower % Biomass (<20 MW) % Geothermal Energy (<20MW) % Wind energy (onshore) % Wind energy (offshore) % Solar energy35.49 – % - 6.5%

Why have Renewable Energy Payments been so successful? year contracts create long term planning security Crucial to investors Gives technology-specific incentives Crucial for driving new technologies into the market Adapts to technological development Fosters innovation

Impact of the EEG – Economic benefits Approx jobs in the field of renewable energy technologies created by the EEG RE overall jobs in 2007 Approx billion turnover through the EEG RE overall 25 billion turnover in 2007 Avoided external costs approx. 3,4 billion (in 2006) Avoided energy imports approx. 1,0 billion (in 2006)

How would you best replicate the German system of feed-in tariffs/subsidies? Apply the following formula to pricing: (investment cost + operating cost) / expected production over service life = compensation per kilowatt hour. Add on a reasonable profit margin, and voilà -- you have your rate per system type (size / source, etc.). Now estimate cost decreases due to expanding market and reduce your rates accordingly. Revisit every few years to tweak the figures.

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Thank you for your attention.

Economic Impact: Development of New Industry Source BMU 2008

Renewable Energy Payments have made Germany the world leader in solar power 54% of all solar power capacity worldwide is located in Germany

Renewable Energy Incentive Policies Feed-in tariffs Quota obligation system Tender Tax incentives, grants

Solar is a growing market

Jobs in the renewable energy sector in Germany in 2007 Source: BMU March 2008

Climate Impact: Reducing CO2 Emissions Source: BMU March 2008

Quota Obligation/Tradable Green Certificate System (Example Poland) Companies selling electricity to final consumer must satisfy quota obligation (2008: 7.0%) TCGs guarantee compliance with quota obligation TCGs are granted to RE producers per MWh RE producer sells TCGs separatly Price is determined by market and technology neutral Substitution fee, penalty Additional obligation to buy all RES at average market price

Sir Nicholas Stern (former Chief Economist and Senior Vice-President of the World Bank): Comparisons … suggest that [pricing] mechanisms achieve larger deployment at lower costs. Central to this is the assurance of long-term price guarantees…. Uncertainty discourages investment and increases the cost of capital as the risks associated with the uncertain rewards require greater rewards. – Stern Review: The Economics of Climate Change p. 366

Reduced risk: Renewable Energy Payments (in Europe known as Feed-in Tariffs) deliver lower prices compared with renewable energy certificates

Solar Resource and Market U.S.: ~150 MW PV in % capacity factor Germany: ~1000 MW PV in % capacity factor Solar Resource Availability: NREL, PV Capacity Additions: SEPA

Déjà Vu We have always used natures energy for our needs

Development of electricity generation from RE in Germany, Source: BMU March 2008

How the EEG Works

Criteria for effectiveness of Incentive Instruments Long term planning security Differentiated assistance for different types of technology and scale of plants Political feasibility and administrative applicability