Choosing Appropriate Incentives to Deploy Renewable Energy

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1 Choosing Appropriate Incentives to Deploy Renewable Energy Workshop, World Bank Headquarters Global Head of Climate Change Investment Research Climate Change Advisors January 30 th, 2012

2 TLC: What Investors Want From Policy Investors essentially look for 3 key drivers in policy: In assessing the potential success of policies, these factors should be taken into account 2

3 Best-in Class Policy: Driving Transparency, Longevity and Certainty (TLC) Emissions Control Financial Support Country Binding Emissions Target Renewable Electricity Standard (RES) Long-term Energy Efficiency Plan Feed-in Tariff (FiT) Long-term Govt-based Green Bank Tax Benefit Long-term Funding Program Grid Improvement Plan Budget Strength (% of 2010 GDP) Capital Investment (USD Bn) China -1.6% Germany -3.6% United Kingdom -11.5% United States 6 COP Acc State-level State-level State-level 6 State-level State-level -10.0% California X -1.0% - Texas X X X -2.2% - Brazil X -2.2% 42.3 South Korea India 6 COP Acc 6 COP Acc X -1.1% 31.2 State-level X -5.5% 27.1 Australia State-level X State-level -4.2% 9.8 South Africa 6 COP Acc X X 6-5.3% 0.4 Notes: 6COP Acc = policy is a submission to the Copenhagen Accord and is not legally binding ; 6 = tentative / unconfirmed policy dependent on certain provisions (e.g. funding) Source: DBCCA Analysis

4 Major Policy Mechanisms for Promoting Renewables Policy Mechanism Feed-in Tariff (FiT) Renewable Energy Standard (RES) with capacity auctions or tradable certificates Description Guarantees generator a fixed price per kwh, usually over a long period of time (~20 years) Mandates that utilities procure a certain % of electricity from renewable sources; utilities can fulfill this quota by (1) seeking bids from renewable generators via capacity auctions; or (2) buying RES certificates on the spot market (each certificate represents a certain amount of renewable electricity that has been generated) Tax Incentives or Credits Direct Cash Grants/Rebates Investment in RE technologies or production of RE yields tax credits (which often can be traded) Grants/rebates from government budgets offset a portion of RE investment costs Source: Deploying Renewables 2011, International Energy Agency (IEA),

5 Viewing Renewable Energy Policy Through a Lens of Impact and Cost-Effectiveness The IEA evaluates RE policy in terms of impact (deployment to meet GHG-reduction targets) and cost-effectiveness using 3 key measures: Policy Impact Indicator (PII) Assesses countries progress in stimulating RE deployment toward the levels that IEA envisions in its 450 ppm scenario Remuneration Adequacy Indicator (RAI) Compares remuneration levels across countries, taking into account: (i) payment schedule of incentives; (ii) influence of resource endowment; and (iii) interaction between incentives and system prices (cost-effectiveness) Total Cost Indicator (TCI) To quantify the total cost of policy support in various countries, calculates the amount of additional annual premiums that are paid for additional renewable generation produced in a given year (cost-effectiveness) Sources: Deploying Renewables 2011, International Energy Agency (IEA),

6 IEA: Assessing FiTs and RES capacity auctions FiTs High level of investor security ideally suited to earlier-stage technologies: in nearly every solar PV success story, FiTs have been the policy driver Simplified procedures/contractual arrangements establish low-risk environment that encourages entry of smaller players valuable for distributed technologies As system costs evolve with deployment, frequent tariff reviews necessary to keep investor premiums in-check and manage deployment volumes Aggressive degression schedule useful to encourage cost-reducing innovations RES capacity auctions Controls deployment volumes while encouraging price discovery Subjects investors to high initial risks and significant transaction costs Best for larger-scale and mature technologies closer to cost-competitiveness May be useful to structure with public agency as buyer for small projects Sources: Deploying Renewables 2011, International Energy Agency (IEA), 2011; DBCCA analysis,

7 IEA: Comparing FiTs and RES capacity auctions A FiT optimizes the trade-off between impact and total premium costs better than does an RES capacity auction If receiving support via an RES capacity auction as opposed to a FiT, wind energy investors will require 50% higher risk premia 1 For onshore wind, average total remuneration in auction countries is 20% higher than in FiT countries ($213K/MWyr vs. $176K/MWyr) FiTs and auctions represent ends of a spectrum; hybrid systems possible Difference between systems tends to be smaller than differences among countries with the same system Focus on details and non-economic barriers enables high impact at low cost Cost-effectively scaling RE requires policy engagement above and beyond the choice between FITs and RES capacity auctions 1 Risk premia estimates from survey results presented in Deploying Renewables 2011, Figure 3.8 International Energy Agency (IEA), 2011; IEA estimates adapted from The Price of Renewable Energy Policy Risk: An Empirical Analysis Based on Choice Experiments with International Wind and Solar Energy Investors, Institute for Economy and the Environment (IEE),

8 Investor Perspective on Key FiT Design Elements TLC (1 of 2) FiT markets have deployed 59% of global wind capacity and 87% of global solar PV capacity FIT DESIGN FEATURES OPTIONS TLC AT THE RIGHT PRICE Explicit objectives - Policy explicitly linked with qualitative objectives - Objectives are not linked to the policy Integration with national - FITs are not directly linked to national targets / no policy goals national target exists Sources: DBCCA analysis 2012; Meister Consultants Group FITs are directly linked to national targets Technology eligibility - Technology - Owner - Size - Location - Off-grid vs. on-grid Payment differentiation - Differentiated - Non-differentiated Rate setting method - Generation cost - Value Payment structure - Fixed floor - Fixed ceiling - Premium - Spot market gap Inflation - Rate adjusted for inflation - Rate not adjusted for inflation Interconnection guarantee - Guaranteed interconnection - Evaluated on a case-by-case basis Interconnection costs - Costs borne by generator - Costs borne by ratepayer Items in red are essential to investors FIT policy includes specific policy objectives FITs are directly linked to national targets Broad eligibility with links to climate goals Differentiation for energy portfolio goals Reflects generation cost Fixed floor Varies by technology due to O&M content, country Inflation hedge attractive to investors Guaranteed interconnection Costs borne by ratepayer 8

9 Investor Perspective on Key FiT Design Elements TLC (2 of 2) Items in red are essential to investors FIT DESIGN FEATURES OPTIONS TLC AT THE RIGHT PRICE Purchasing requirements - 100% purchase / must take or pay - Utility does not have purchase obligation Purchasing entity - Utility - Third party - Government Policy cost recovery - Ratepayer pays - Taxpayer pays Adjusting the purchase - Triggers requirement (Digression) - Adjustment Processes Program caps - Capacity caps - Generation caps - Cost caps Dispatch - Priority dispatch - Economic curtailment possible Contract Length - Long-term - Medium-term - Short-term Contract in place? - Contract used - No contract Standard contract - Standard contract - Negotiated on a case-by-case basis Contract currency - Domestic currency - Hard currency Queuing - Queuing rules in place - No queuing rules in place Sources: DBCCA analysis 2012; Meister Consultants Group % purchase / must take or pay Creditworthy counterparty (or counterparty with guarantees) Ratepayers (in most cases) Time-based trigger with a published and automatic adjustment schedule (can be volume sensitive?). Grid parity is best practice. Capacity caps Priority dispatch Long-term (in most cases) - from years (for wind, solar PV) to 5-10 years (for biomass) Contract Standard Hard currency If the policy is capped, queuing rules should be transparent and enforced 9

RE Generation (% of Total Consumption) 03-Feb-12 Cumulative Installations (GW) Case Study: Germany Has Led the Way in RE Deployment Through Feed-in Tariffs Germany currently accounts for 43% of total

10 RE Generation (% of Total Consumption) 03-Feb-12 Cumulative Installations (GW) Case Study: Germany Has Led the Way in RE Deployment Through Feed-in Tariffs Germany currently accounts for 43% of total installed solar PV globally Germany's total renewable power output in 2011 (20%) was larger than the contribution from nuclear and hard coal Renewable Energy Sources Act (EEG) FiTs emphasized EU ETS Participation in first trading period ( ) Renewable Energies Heat Act EEG Amendment National Renewable Energy Action Plan EEG Amendment 25% Energy Saving Ordinance EEG Amendment FiTs uncapped 60 20% 15% 10% 5% 0% Combined Heat and Power Act Wind Solar PV RE Generation (in relation to total gross electricity consumption) Notes: Investment data converted from Euros to USD according to average of monthly USD-EUR foreign exchange rate; RE generation includes hydro Sources: TechI; Business Week; Global Wind Energy Council; German Federal Ministry for the Environment; DEWI; DBCCA Analysis

11 Annual Installed Solar Capacity (MW) 03-Feb-12 Solar FiT (EUR/kWh) German FiT Degressions have Exerted Consistent Downward Pressure on PV Prices 8,000 Germany s Solar PV FiT Rates and Capacity Additions ( ) 7,400 7, ,000 6,000 5,000 4,000 3,000 2, Added MW Upper Bound Lower Bound , , , , Sources: DBCCA analysis 2012; Meister Consultants Group

12 German FiTs for Solar PV Tracking Solar System Costs Germany s PV FiT rates have tracked solar system costs more closely than FiTs in NPV other OF markets EUROPEAN FEED-IN TARIFFS AND SYSTEM COST ($/W) 8 NPV of European Feed-in Tariffs and System Cost ($ / Watt) System Cost ($/W) Germany Spain Italy 1 Czech Republic 0 Q2 06 Q4 06 Q2 07 Q4 07 Q2 08 Q4 08 Q2 09 Q4 09 Q2 10 Q4 10 Q2 11 Q4 11 Notes: NPV calculated at 5% discount rate. System cost represent s German Notes: NPV calculated at 4% discount rate; system cost represents German average and excludes impacts of value-based pricing in high FiT markets average and excludes impacts of value-based pricing in high FiT markets. Source: Bloomberg New Energy Finance Source: Bloomberg New Energy Finance 12

13 Germany s Volume-Sensitive Degression Schedule for Solar FiTs Scenario MW installed Degression (2010) Degression (2011) < -2 GW < % 1.5% -2 GW % 4% -1 GW % 6.5% Base case % 9% +1 GW % 12% +2 GW % 15% +3 GW % 18% > +3 GW > % 21% > +4 GW > 7500 NA 24% Note: the latest EEG amendment in 2011 increased the maximum degression to 24%, if installed capacity exceeds 7500 MW as indicated in bottom row of above table Sources: DBCCA analysis 2012; Meister Consultants Group

14 Euro / kwh Euro / kwh A Policy That Works: Solar PV Already Below or Nearing Retail Electricity Rates in Germany MW Corridor (<30 kw) > 7500 MW Corridor (<30 kw) 3500 MW Corridor (Freestanding) > 7500 MW Corridor (Freestanding) Average Elec. Price Euro / kwh Year Sources: DBCCA analysis 2012; Meister Consultants Group

15 Germany a Global Leader in Renewables Share of power from renewables is expected to more than double by 2020 Also expect 11.4% reduction in power production by 2020 due to efficiency gains Germany s Electricity Supply Mix 2010A Germany s Electricity Supply Mix 2020E Nuclear 21% Biomass 6% Wind Hydro 6% Solar 2% Oil 1% Natural Gas 9% Other 2.1% Biomass Hydro 7.5% 5% 3% Coal Solar Geothermal 37% 6.5% 0.3% Coal 52% Nuclear 5.5% Natural Gas 17% 17% RE 38% RE Note: Totals may not add due to rounding; Germany s National Renewable Energy Action Plan (NREAP) targeted 38.6% RE by 2020; Other includes waste-to-energy, biogas and landfill gas Sources: EWI; GWS; Prognos; DB Research Wind 23% Oil 0.1% 15

16 Generation (TWh) Generation (TWh) Retail Cost ($/kwh) Retail Cost $/ kwh Renewables are trending toward grid parity Conventional technologies have started out at very high cost and have only achieved cost reduction with economies of scale Solar and Wind are still more expensive than fossil generation and require interim support until adequate scale is reached 2, , , , , , , U.S. Electricity Generation and Retail Cost by Energy Source Coal, Natural Gas, and Nuclear required massive achievements in improving scale to achieve current favorable cost structures Solar and Wind are experiencing significant improvements in their cost structure with small increases in scale Coal Generation Gas Gas Generation Generation Nuclear Generation Generation Solar Solar Generation Generation Wind Generation Coal Cost Trend Coal Cost-trend Gas Cost Trend Gas Cost-trend Nuclear Cost Trend Nuclear Cost-trend Solar Cost Trend Solar Cost-trend Cost Trend Wind Cost-trend Source: Hudson Clean Energy Partners Analysis, 2011

17 GET FiT Program: Public-Private Parntership to Create Markets for RE in Developing Countries 17

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