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Incentive Schemes for Renewable EnergyThe success of renewable energy in the electricity sector in individual states differs greatly. This is more a result of policy context than natural potential.This raises a few questions. 1. What instruments do governments use? 2. What has proved to be the most efficient and effective way of support? And finally, we look at what governments really do and what that could mean for investors.
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Production-based IncentivesProduction-based incentives provide an award that is proporitonal to the actual energy generated. There are 3 main systems:
All of those systems come with a number of parameters, such as
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Investment-based IncentivesInvestment-based incentives provide awards for the initial investment, regardless of how much electrcity is generated.
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Robust Legal FrameworkAlthough not a direct monetary incentive, a robust legal framework has to be in place to attract investors. This includes
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The Art of Setting IncentivesWhat is the most effective and efficient way for the market introduction of renewables? A stable, feed in tariff regime that is sustained over many years. Beyond market introduction, competitive procurement has yielded the lowest tariffs but not all of the lowest bidders are able to implement their projects. One of the challenges with setting the feed-in tariff at the right level is finding the right moment of reducing the tariff at the right time. Ideally, a feed-in tariff tracks the costs, which have come down dramatically over the past decade. They are however very much a political instrument and do therefore not necessarily follow rational logic. For instance, feed-in tariffs in 2008 in sunny Spain and not-so-sunny Germany were nearly the same, while Greece paid almost 20 cents more per kWh. Tax creditsProduction tax credits in the U.S. are only beneficial to profitable companies, only available for 10 years, and only issued in chunks, i.e. not always available. |
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Investment IncentivesAs with production tax credits, most investment incentives are either tax credits (only available to some) or they do not significantly lower the high capital costs. More importantly, unlike feed-in tariffs, they do not address the uncertainties of the revenue streams. Legal FrameworkEven with the best feed-in tariff on the planet, the introduction of renewables won't be a success without a robust legal framework. The approval and planning processes must be transparent and streamlined. The responsibilities of grid or utility companies must be clearly defined. Despite favourable feed-in tariffs in Greece, there is no significant installed PV capacity - mainly because of bureacracy. |
Eco- Taxes & ExemptionsRather than incentivising investors, governments can (and do) also use the instrument of taxation. There are many examples such as the Eco-Tax or the Climate Change Levy in the UK where the consumption of fuels or electricity is taxed, some of which is promised to be channelled into renewable energy projects, although most of the income is consumed in other departments of the administration. While such taxes may discourage the use of energy, they do not alter the economics of renewable energy plants, and therefore will have only a very narrow effect on investment decisions regarding renewable energy. However, where levy exemptions for use of renewables are granted (in the UK), the exemption works like a certificate that can be traded for money. See above for effectiveness. Seems bureaucratic and not available to all. |