Posted by: joachim in Policy on February 18th, 2013

While it was easy for the German government to abandon nuclear power in 2011, it proves much more difficult to replace the old energy mix with a new strategy. That’s because energy policy is never limited to the one resort of the energy minister. In fact, energy policy touches so many sectors. That’s not surprising, since the provision of energy is intrinsically linked with economic wealth of nations..

Here is why it’s so difficult.

Objectives

There are quite a few objectives for energy policy, which differ from country to country, as do the constraints. The support of renewable energy is only an indirect objective. However, as some governments have set themselves renewable energy targets, it becomes a quasi-objective all of its own.

Objective Context Policies Side Effects
Mitigate Climate Change Many governments or states are committed to combatting climate change. In a first instance, they have set themselves carbon emission reduction targets. Over the years, more and more countries have declared targets, some more ambitious than others. The crux of the matter is how to reach those targets.

The instrument of choice is a carbon emission reduction certificate trading scheme like the EUETS. This has the effect that more cost effective schemes would get done first. More expensive solutions ranging from renewable energy generation to carbon storage would have to wait.

It is believed, however, that all solutions will be required to combat climate change, and, hence, policy makers have introduced further policies such as airport taxes, incentives for renewable energy, or other tax incentives.

In addition, in order to stay competitive, countries are worried that too much of this would be detrimental. Hence, the polilcy comes with exceptions and high allocations.

 

The various policies are competing with each other rather than complementing.

For instance, setting targets for renewable energy undermines the technology-neutral carbon trading scheme in favour of more expensive technologies.

Airport taxes on the other hand do not discriminate against inefficeint airplanes, and therefore will only divert traffic to low tax countries but not help higher fuel efficiency.

In the end, all of those competing policies render the carbon price too low to be an efficient instrument.

Supply Stability

One of the objectives of utilities is to supply households and industry with electricity at all times without power cuts. To achieve that, the overall generating capacity has to be sufficient, and the mix of technologies involved has to be right so that capacity can be switched on and off at short notice.

Where overall capacity is not sufficient, "load shedding" will occur either according to a schedule or unscheduled ("power cuts").

In most instances, there is no policy to start with, as it is the responsibility of utilities to provide uninterrupted supply of electricity.

Few governments finance the capital to build capacity themselves. China is probably one of the few exceptions. Mostly, governments set targets for certain technologies. For instance: We want 4GW of solar by X.

Subsidizing specific technologies in order to hit technology-specific capacity targets may have a negative impact on the overall energy mix for power generation. Too much solar may mean no investment in pump storage stations, which are needed for storage (and can be switched on and off when necessary).
Energy Security Energy security is about a country’s ability to access the fuels it needs for its energy mix. How much do we want to depend on other countries on our energy? This is neither a mere philosophical nor a purely economic question. Many wars have been fought over access to energy, since energy powers economies. Policy in this area comes in the form of state-sponsored or state-sanctioned projects such as the gaspipeline from Russia to Europe. Subsidies given to nuclear power station operators may fall into this category too.

Politically motivated projects (such as the gas pipeline from Russia to Europe) may cause new dependencies that are assessed in a very different light a few years later.

State sponsorhip of particular technologes bears the risk of high costs.

Access to Energy In countries with low rates of electrification, getting households to access electricity is vital for economic growth and wealth. The policy of choice is to make investments in infrastructure attractive to foreign investors. For instance, by allowing re-patriation of foreign currency and waiving of import duties on equipment. This may cause a substantial outflow in currency. Import of foreign goods and foreign ownership mean that there is less economic participation by locals than hoped. This can be countered by insisting on "local content" of project. However, those local content policies may make projects more expensive or delay them.
Industry Competitiveness If a country’s industry heavily relies on energy and that energy is too high in comparison to other countries, it will lose its competitive edge. To maintain competitiveness whilst increasing the share of renewable energy, feed-in tariff laws needs to betweaked to the extent that certain industries are exempt. Consumers will have to pay a higher share of the renewable energy policy. See Consumer Protection.
Consumer Protection Governments don’t want electricity to become unaffordable for consumers.

This is a difficult one, because politicians can not fight global trends that easily. Measures include

  • Order an investigation into high oil prices
  • Get wind fall taxes from energy companies
  • Subsidise consumer energy prices
  • Regulate pricing or market

Most measures have very little effect. Side effects from wind fall tax could be lower investment levels.

Subsidies tend to fizzle out after some time, because states just can’t afford them long-term.

Jobs and economic growth

Without access to energy, economic growth is severely hindered. A recent study by the government of South Africa has quoted the cost of unserved energy to be 5-10 times the cost of generating that electricity. Hence, building more capacity enables economic growth, and therefore jobs.

Even in developed countries, the energy sector including manufacturing of equipment for power plants provides jobs for many.

Policies that target jobs and growth tend to combine incentives for investing in power plants (through tariffs) with so-called "local content" requirements. Those local content requirements come in the guise of incentive bonuses for use of locally produced equipment / local workforce, simple minimum local content ratios or selective import duties (e.g. Chinese manufactured modules in the USA).

A side effect of local content is higher cost of power in those countries with local content requirements.

However, there is an argument that fledgling industries may need temporary protection.

Support for Renewable Energy

Many solutions to above objectives seem to point to increased use of renewable energy sources, accelerating climate change mitigation, improving energy security, providing access to energy (especially in remote areas).

Where renewable energy technologies are competitive on cost, there is no need for any policy. Hydro is already the technology of choice in many countries, on-shore wind can compete with gas, and solar pv does not depend on any subsidies in Chile.

Having identified renewable energy technologies as a good option, policy needs to be clear as to what it wants to achieve:

Where policies have predominantly supported renewable energies such as wind and solar (e.g. Germany) without making changes to the grid structure or capacity storage, the grid can become instable.

Constraints

Constraint Context
Macroeconomic Trends Energy policy is a long-term game. Investment decisions taken today will affect the energy landscape for decades. Therefore, taking macroeconomic trends into account is pivotal: Deomgraphics, economic growth, competition for resources, commodity price trends, CO2 emission forecasts.
Budget Constraints When energy policy is driven by the treasury, long term view is out of the window, but governments have to work with a budget.
Public Opinion

Public opinion can have a massive impact on energy policy. In Germany, the phasing out of nuclear power was decreed by parliament in a head-over-hells action after the nuclear accident in Fukushima, mostly because the government feared electoral defeat. However, public opinion can be fickle and will also depend on the questions asked. It can be particularly strong on very narrow topics, such as "Do you wnat nuclear energy?", "Do you think electricity is too expensive?" or "Do you want a high-voltage transmission line nearby?"

Public Behaviour Public behaviour can differ from public opinion. In a nut shell: People generally like to be "green", but their personal investment decisions or behaviour does not necessarily follow that.
Climate change trends or events Some trends in natural resources as well as natural disasters can trigger a re-think of policy, or even force one. In Sri Lanka, for instance, a long-term trend of hydro power resources drying up slowly has prompted the government into re-focusing energy policy on solar power.
Posted by: joachim in Policy,Renewable Energy,Solar on January 18th, 2012

End of October 2011, the UK announced an unexpected and severe cut of its feed-in tarff for small solar installations. The department of energy and climate change (DECC) called it a consultation. However, since the date the new tariffs were valid from (12/12/11) preceded the date of the end of the consultation, it can hardly be called such thing. In fact, there has been a court challenge regarding the legality of the process. While the outcome of this ongoing legal battle may change things slightly, it will most likely not change the conclusion of this article.

The new proposals

The proposal (Comprehensive review of feed-in tariffs for solar pv) slashed feed-in tariffs for solar for under 4kW from 43p/kWh to 21p/kWh, for 4-10kW to 16.8p/kWh and for under 250kW to 12.9p/kWh. As before, anything below 5MW (and free-standing) get 8.5p/kWh. Above the 5MW threshold for microgeneration, photovoltaic installations continue to generate 2 ROCs (renewable obligation certificates) per MWh. The department also proposes "prioritising energy efficiency by linking PV tariffs to specified minimum energy efficiency requirements from 1 April 2012". We are also proposing new multi-installation tariff rates for aggregated solar PV schemes, applying to new installations with an eligibility date after 1 April 2012.

Why is the government doing this?

Plain and simple, it boils down to money. The UK treasury has set a limit for the overall feed-in tariff program. Thanks to the combination of high tariff and decreasing panel prices, the up-take of solar has been phenomenal and much higher than the government expected. And hence, the FiT for solar had to be cut in order to have some money left for other technologies. The rationale for making solar tariffs subject to energy efficiency measures (e.g. wall insulation, double glazed windows) being in place is logical too: Energy efficiency measures are more cost effective measures to reduce carbon emissions.

What’s the issue?

A cut in the feed-in tariff is not contentious. We have long argued that the tariffs in the UK were too high and therefore vulnerable to sudden and harsh cuts due to political pressure (see article). However, there are three issues:

  • Exposing political risk: The way in they were cut exposes a high political risk in the UK for renewables.
  • Breaking promises: In June 2011, the government published their "Action Plan for Microgeneration", claiming "we want to help people who are enthusiastic to generate their own energy matched by an industry with the desire, creativity and tenacity to grow in a sustainable and responsible way". A roof-top solar system is exactly that microgeneration technology they were talking about.
  • Misjudging consumer behaviour: We doubt very much that the link to energy efficiency measures will trigger investment in energy efficiency. We believe people have a deep-seated psychological preference for revenues (as generated by solar panels) over savings (as in energy efficiency measures). For that reason, as an entry-level investment in home energy, a solar system looks more attractive. Once established, the second investment may well be in a new boiler or a wall insulation, but less likely the other way round. Plus, many people can not afford both investments in energy efficiency and solar.

What’s the effect on the UK solar industry?

Some of the feed-in tariff cuts will have to be borne by module manufacturers. This is already evident in lower prices for systems. Solar will remain viable for the most sunny parts of the country if wholly financed by the homeowner. The many "free solar" offers where a third party finances the purchase will most likely disappear, because there isn’t enough tariff to pay for the financing. However, most damaging will probably be the linking to energy efficiency measures.

In the end, the fledgling UK solar industry will be smaller – there are 30,000 jobs at stake, and it will favour big players that can offer both solar and energy efficiency. Independent installers will find it very tough.

Does it matter to the wider UK renewables market?

The political risk in the UK that has been exposed by this action may well deter investors from putting money into other renewables. It will therefore no doubt increase the cost of capital for all renewable projects in the UK, ultimately making it more expensive for the UK to achieve its climate change or renewables targets.

The UK government will have to work hard to prove that it is serious about being the "greenest government ever".

Posted by: joachim in Policy,Renewable Energy,Solar on August 8th, 2011

Rising cost of capital for solar pv projects in some euro-zone countries, caused by the EU debt crisis, will mean that many projects will no longer be financially viable. Instead, investors in solar may switch to African or South American countries that have more sunshine to compensate for higher cost of capital.

Even in countries with fixed feed-in tariffs, solar pv projects are not immune to the sovereign debt crisis. Whether a solar pv project is viable not only depends on the prevailing tariff, annual irradiation and cost to build the plant, but also the cost of capital. Reflecting the risk of a project, the cost of capital comprises a basic risk component and a risk premium. For solar pv that basic risk is about 6% taking into account the low technology risk and the stable traffic from the sun. Unsustainably high sovereign debt and subsequent downgrade in credt rating causes higher cost of borrowing, increased risk of cuts in feed-in tariffs and generally dampens investor confidence. All of this leads to an increased risk premium (i.e. the required internal rate of return over and above the basic risk of 6%) of solar projects in those countries.

For a numerical analysis we use a simple formula for the net present value of the project:

Net present value of a solar park

with capital expenditure of 2,600 €/kW, operational expenditure of 0.5% of capex and a system performance ratio of 80%. No degradation is taken into account. The internal rate of return of a project is the cost of capital that makes the net present value zero. For the purpose of this illustration, we assume a basic business risk of 6%. The risk premium is the difference between the basic risk of 6% and the actual internal rate of return.

Irradiation, tariff and risk premium on solar pv generators

Current state

The diagram shows the tariff dependant on annual irradiation (x-axis) and risk premium (y-axis). If we assume 2011 feed-in tariffs for mid-sized systems, the implied risk premium in Germany is 1%, in Italy 4% and Ecuador 10%. In other words: With the high risk premium, it is no wonder that the feed-in tariff in Ecuador is as high as in Italy despite higher irradiation.

Impact of increase in risk premiums due to debt crisis

For projects still to be built in a country that faces a higher risk premium, the increased cost of capital would have to be compensated for by lower expenditure, higher irradiation or higher tariffs. With prices for systems already under pressure and tariffs only going down, the increase in the cost of capital may cause a rush for the sunniest spots in the country. However, there is a physical limit. In Germany, the maxium is around 1,000kWh/m2, whereas in Italy, the limit is reached in Siciliy with 1,700kWh/m2.

Will investors in solar move away from Europe?

However, this has another effect: Countries in Africa or South America with high irradiation, but traditionally higher risk premiums, all of a sudden become more attractive, as European countries may not have sufficient irradiation to compensate for higher cost of capital. Livingstone, Zambia, enjoys more than 2,300kWh/m2 while Riobamba in Ecuador gets 2,100kWh/m2.

 

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