National Energy Regulatory Commission (NERC) RES Support Schemes (priority access to the network, financial support schemes, trading in green certificates) Alexey Orzhel Kiev April 3, 2012
Priority Access to the Network Distributed regulatory support means ensuring priority access to the network for RES-E producers. It could be done through the following: - support of connection to network; - priority dispatch; - both, the first and the second. Priority dispatch (sometimes referred to as mandatory takeover) of RES-E generation makes the network operator accept energy generated from renewable energy sources irrespective of the cost of production. In the liberalized electricity market a zero bid for sale from a RES-E producer usually guarantees that its product is purchased by other market participants. 2
Priority Access to the Network Possible restrictions with respect to mandatory purchase by the network operator: - Regulation of RES-E can set maximal production quotas for certain types of RES-E. In such cases, the producer has a right for priority purchase (and also, possible, for other support) only within the size of the quota; - The network operator could be allowed to have authorities to decline acceptance of RES-E, when such acceptance represents a serious risk for system safety (technical limitations). Such rules have to be determined in advance and have to be transparent. The network operator have to be financially liable for their actions and have to provide explanations in connection with reductions to the regulatory body to the affected parties. The rules have to clarify, whether the network operator have to pay even when a RES-E producer is reduced. Priority dispatch for a RES-E generator is not equivalent to payment of subsidies for its electricity. RES-E producer often can conclude bilateral contracts (including export contracts) or to sell its electricity in the organized market, if there is any. In this case, the generator is paid the market price for electricity. 3
Priority Access to the Network Sometimes priority dispatch is accompanied by additional regulatory support by means of appointing a buyer for a RES-E producer. Such organization is often referred to as a RES balancing entity (RBE). Often RES-E producers have to sell their electricity to such organizations as RBE. The RBE can be the network operator, or a separate organization, which is a RES-E aggregate buyer. The RBE can provide at least two important services for RES-E producers: cheap balancing and settlements on balancing costs and production subsidies (if there are any). The cost of purchasing balancing energy for aggregate RES-E production would be cheaper than for individual units, especially for renewable energy producers that are weather dependant. 4
Financial RES Support Schemes Financial support schemes for RES-E could be aimed at investments or production. Investment support schemes could take the following forms: - investment grants (refunded or non-refunded); - supported investment credits (credit support or credit guarantees); - tax credits. The source of financing for such support is mostly the state budget, and sometimes, funds that are provided by international financial organizations and/or development banks. Production support schemes can take the form of the following: - support of a certain volume of production of electricity from RES; - support at the expense of the price (feed-in, higher) for electricity generated from RES. The source of financing a production support scheme (both quantity, and price) is usually a mark-up for the payment included in the final consumer tariff. 5
Financial RES Support Schemes If the main political goal is to achieve - but not to exceed certain quantitative tasks related to RES-E production, the main choice should be made in favor of mandatory quantity schemes. If the main political goal is to exercise control over prices for RES-E to ensure financial viability of certain types of RES-E projects, price support schemes could be a proper choice. Combination of price and quantity regulation could be useful when exercising control over the common budget for support of RES-E at the expense of economic efficiency. Most EU countries apply direct support schemes in the form of regulated feed-in tariffs (FIT). A so-called green certificate trading system, which is a support scheme based on the volume of production also become more common. In the EU, trading in green certificates is done in Romania, Poland, UK, Sweden, Belgium and partially in Italy. Other countries apply other types of feed-in schemes. 6
Trading in Green Certificates When the objective of the policy is to generate a certain amount (or share) of RES-E in some future time period, regulatory bodies could make suppliers of electricity to acquire certain amount of renewable energy, for example, pro rata to sales to final consumers. Suppliers can prove that they fulfilled obligations on purchase of green certificates from corresponding RES-E producers. RES-E producers have in this system at least two products: electricity and a green certificate (GC) for each kwh of their generation, and the latter is confirmed or is under the supervision of the regulatory body. The price for green certificates would continue being formed, since so far the demand is higher than demand. This price would ensure revenue for RES-E producers in addition to revenues from sale of electricity. At the same time, end consumers would pay additional costs of suppliers related to purchase of green certificates. Organized trading in green certificates could lead to a transparent and unified price for them. For example, power exchanges could easily introduce green certificates as one of their products. Price transparency improves conditions for investments in RES-E. 7
Trading in Green Certificates Advantages of the green certificate trading scheme: - ensures targeted volumes of RES-E production at least costs for consumers (since unified pricing contributes to payment for generation of electricity irrespective of production costs, therefore, it ensures higher profits for the cheapest technology and its broader development until the end of the economic optimum ; then more expensive technologies are developed, or less favorable sites are developed for cheaper technologies); - technological development (all other things being equal) increases supply of RES-E and reduces the price for green certificates (therefore, benefits from technological development and reduction of costs for corresponding technologies are transferred to consumers). Deficiencies of the green certificate trading scheme: - they work efficiently only when there is a large number of RES-E producers (there is no abuse of market power); - instability of prices for green certificates could reduce attractiveness of the scheme for investors. 8
Trading in Green Certificates In some cases regulatory bodies would want to combine efficiency of the green certificate trading scheme with support to an expensive technology. For example, it could be done by providing to a unit of production (MWh) of these technologies several green certificates. Such differentiation would to a certain extent distort economic efficiency of the scheme. The mandatory quota scheme has to have legal effect and there have to be sanctions in cases of non-execution (suppliers bound by the obligation who do not buy sufficient number of green certificates). Non-execution should be penalized by levying a fee which is referred to as special price or a non-execution fee, for each not purchased green certificate. A fee for non-execution would be an upper cap of the actual price of a green certificate. Setting a fee for non-execution serves not only the purpose of imposing a fine for non-execution, but also the purpose of ensuring safety from the cost perspective for consumers of renewable energy. If there is a green certificate trading scheme, the regulatory body is responsible for certification and tracing of RES-E (see Section 8), monitoring of the settlement mode and introduction of the green certificate market. 9
Thank you for attention! 10