Renewable Energy Policy Overview


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A short paper on renewable energy policy in the US and abroad.

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Renewable Energy Policy Overview

  1. 1. 2010 Presidio Graduate School SUS6015 S1-2 SP10 Justin Bean [RENEWABLE ENERGY POLICY] Final Paper
  2. 2. Renewable Energy Policies for a Better World Introduction Renewable energy is defined by the EU (Directive 2001/77/EC) as: • Wind power (onshore and offshore) • Solar power (photovoltaics and solar thermal electricity) • Geothermal power • Hydro power (small scale and large scale) • Wave power • Tidal power • Biomass • Biogas (including landfill and sewage gas). These forms of electrical power generation comprised just 7% of the US energy consumption mix in 2008 (DOE 2009). As shown in figure 1, this primarily consists of biomass and hydroelectric, which represent 53% and 34%, respectively. Wind, solar, and geothermal together accounted for just 13% of the renewable energy mix. However, the US Department of Energy expects the portion of energy consumption supplied by renewables to double over the next 20 years (Quad = quadrillion BTUs, roughly the energy consumption of 10 million US households annually). Figure 1 Source: DOE 2009 Despite these optimistic estimates, the probability of increasing our utilization of renewables will be affected significantly by the policies we chose to put in place. The market can be a powerful driver of new technologies and their implementation. However, current production prices for renewables can be cost-prohibitive. Reaching grid parity (the point at which the price of Justin Bean SUS6015 S1-2 SP10 Page 2
  3. 3. generating renewable energy equals the price of power generated from the grid) will be a major breakthrough for any particular renewable energy industry, but is not a reality currently because of large subsidies for oil and other traditional sources of electrical generation which amount to an average of nearly $10.3 billion per year (ELI 2009), cost of research and development of renewable technologies, and economies of scale enjoyed by more established energy industries. McKinsey & Company (2008) report that this grid parity for photovoltaics (PV) is within reach, however, at current rates of technological advancement and fossil fuel price levels, this won’t be achieved for many states or countries until 2020 (see figure 2). The top right, dark grey area represents the cost region where grid parity exists today because of power costs, solar yields, and peak price. The lighter-shaded area represents the cost region where PV grid parity is expected to be reached by 2020. Renewables in general will become economically competitive in an open market when they reach grid parity, usually because of improved technology, unless fossil fuel subsidies are dropped or an unforeseen breakthrough in renewable energy technology brings down the price by a substantial margin. Figure 2 Source: McKinsey & Company (2008) It becomes clear, then, that at our current levels of technological capability and cost of renewable energy production, strong policies are needed to advance cleaner, renewable energy in the United States. Justin Bean SUS6015 S1-2 SP10 Page 3
  4. 4. Policy Types Several key policies have been implemented in the US and abroad, from market-based incentives to mandated energy mix ratios, to net metering, which requires utility companies to purchase unused energy from customers with their own power generation capabilities. These policies have been undertaken with varying degrees of success but what is clear is that they are more effective in a more supportive political and customer environment and especially in combination with each other (Runci 2005). Financial Incentives Incentives are most commonly paid to customers of PV or solar water heating (SWH) modules to offset the discouraging up-front costs of capital and installation, in order to encourage installation of renewable energy generators. These can come in the form of grants, tax credits, or rebates, or performance-based incentives and expected performance-based rebates. The latter two funds can be paid in one lump sum based on the tilt, direction, location, etc. of the installation, or in a series of payments that reflects the actual energy production of the module in an effort to encourage efficient design and installation. Although these policies are primarily designed to reimburse customers of solar installations, these incentives could be adopted for other renewable energy installations with the cooperation of policy makers. As of 2009, 20 US states and around 100 utility companies offered some kind of direct incentives for purchasing and/or installing renewable energy (NREL 2009). The Center for Resource Solutions, in their report on international tax incentive policies for renewable energy (2005), found that incentives “are powerful policy tools that can help to drive the market for renewable energy, when combined with other policies.” Grid Integration Connecting residential or commercial renewable power generators to the area’s electrical grid, and crediting or paying the owner of the generator for what they produce is another option. This usually takes the form of net metering or feed-in tariffs (FiTs). The motivations for using these systems vary from economic opportunity to self-sufficiency and a desire for alternative energy sources during grid instability and brownouts/blackouts. Justin Bean SUS6015 S1-2 SP10 Page 4
  5. 5. Net Metering Net metering is a policy which requires utilities to credit a customer who produces energy and sells it back to the grid, receiving credit on their monthly bill. This is a relatively simple accounting option that requires no installation of a second meter (unlike FiTs) because standard meters are already capable of measuring inflows and outflows, as they simply rotate backward if net outflow exceeds net inflow. Prices of electricity are usually set at the wholesale or market (retail) rate, but sometimes based on the type of generator used for generation (although this requires a second meter). The US Energy Policy Act of 2005, specifically section 1251 required State Commissions and non-regulated utilities to “consider adoption” of net metering as well as plans to diversify energy sources. This has led to the adoption of net metering policies in more than 40 US states, although they vary widely in approach, rules, and limitations (NREL 2009). This can be an effective means of encouraging consumers to purchase and install renewable generators, as it eliminates the need for costly energy storage systems and rewards the producer for energy produced, making it a more attractive long-term investment. Although because a customer’s electric bill can only reach zero, they are unable to make money on energy produced over their amount of consumption. This can discourage energy efficiency or the implementation of large installations when small ones are sufficient to credit an entire bill. Feed-in Tariffs Feed-in tariffs differ from net metering schemes in that they require a utility to pay a customer for electricity produced in excess of consumption. They require the installation of a second meter and a more complicated policy structure that often requires payments to be made at differing rates depending on the source of the electricity being produced. Often the price of producing renewable energy is above the price of retail energy from the utility, and rates generally reflect this, making it a desirable option for the consumer (LABC 2009). FiTs have been at the heart of many successful attempts to stimulate renewable energy industry growth, assure investors of future revenue, and push more capital into the market. By helping renewable industries to reach or even exceed grid parity, they provide powerful incentives for investors to support both large and small-scale projects (LABC 2009). Studies of FiT policies abroad and in the US done by the US Department of Energy (2009) and the Los Angeles Business Council (2009) found characteristics of successful FiT policies to be:  Tailored to fit the needs and composition of their jurisdiction’s policy goals. Justin Bean SUS6015 S1-2 SP10 Page 5
  6. 6.  Designed to target a specific market, scale, or project type (e.g. small residential, medium commercial, or large utility)  Adaptable in order to adjust to market conditions and stakeholder needs/desires.  Operating within a supportive policy and cultural structure that has a long-term interest in renewables (such as renewable portfolio standards).  Implemented in combination with other renewable-friendly policies (such as incentives to cover up-front costs, technology-specific pricing, renewable energy credits (RECs), etc.)  Effective reevaluation and management of trade-offs for stakeholders and local economies. Renewable Energy Certificates Renewable Energy Certificates (RECs) are awarded to a producer of renewable energy and can be traded for a profit, much like carbon credits, to other parties who would like to make an environmental claim. Certificates are measured in increments of one Megawatt of renewable electricity produced, and can only be traded once to avoid double-counting. Non-renewable generators can purchase RECs to meet portfolio standard requirements, creating a new cost (arguably to account for externalities), disincentivizing them from choosing polluting sources for energy generation (EPA 2008). Especially in states or regions with renewable portfolio standards, RECs can be an effective policy approach to stimulating new renewable energy projects and generation, and getting utilities on board with legislation, as they benefit from the ability to purchase RECs to meet emissions or renewable mix standards (NREL 2009). Examples and Lessons Learned In formulating policy recommendations for the US it can be helpful to learn from examples from abroad and within the US that have been successful or unsuccessful alike. In 2001, the EU passed Directive 2001/77/EC, creating renewable mix targets of 21% and enabling a feed-in tariff system that laid the groundwork for member countries to increase the size and participation of their renewable industries (EEG 2008). Soon after in 2004, Germany and Spain formed the International Feed-In Cooperation, in order to exchange design ideas and experiences. Germany also incorporated lessons learned from 14 years of a FiT policy that saw little growth in solar or widespread renewable utilization. According to The Federal Ministry for the Environment (2009), by amending the price structures in 2004 to reflect technology-specific energy production costs (between $.37 and $.64) which decline at an annual rate of 8-10%, and setting an ambitious target of 30% of energy consumption from renewables by 2020, it saw an Justin Bean SUS6015 S1-2 SP10 Page 6
  7. 7. explosion of solar and renewable power growth, surging over 105% in 2008 and 2009 to 7.8 gigawatts, and creating approximately 140,000 new jobs in 5 years, despite the recession (FMftE, 2009). Spain’s Royal Decree 661/2007 in 2007 created a FiT system with similar payouts as Germany (from $.35 to $.68), but with nearly double the sun exposure as Germany, investors were receiving windfall profits and a runaway industry bubble began. 2,661 megawatts of renewable energy (mostly solar) was installed in 2008, a 400% increase over the year before. To tackle fears of boom-and-bust cycles and a looming recession, Spain decided to cut tariffs by 25%, introduce a 500MW annual cap on its renewable program, and introduce a complicated permitting and application process to discourage inexperienced project managers. This resulted in the addition of only 5 megawatts of new renewable generation capacity in the first 8 months of 2009 (LABC 2009). Closer to home Gainesville, Florida implemented a FiT policy that paid out $.26 or $.32 per kWh, depending on the installation type. Its 4 megawatt annual cap was reached in a week, and within 5 months had enough applications to fill its cap until 2016. Vermont also introduced a program in 2009 that paid a $.30 tariff and intended to offer a 12.13% rate of return to investors. The program fully subscribed its 50 megawatt cap on the first day. It is apparent from these examples that there is a heavy demand for renewables in the US, when the proper policies are in place (LABC 2009). Conclusion and Implications for US Policy US policy has made attempts to encourage renewable energy in the past, but often critics assert that regulations (such as the US Energy Policy Act of 2005, US Energy Independence and Security Act of 2007, and American Recovery and Reinvestment Act of 2009) have diverted relatively small amounts of resources and policy assistance towards renewables while offering large subsidies to fossil fuel industries (Revkin 2010). Based on the lessons learned from our previous analysis and examples, we can make recommendations to the various actors in the US policy community to make informed decisions about how to implement effective policies, as well as assess the appropriacy of responsibilities of each policy actor (DOE 2009). These recommendations are summarized in the following policy community map (figure 3). However, as can be seen from examples of citizen blockage of projects (Drash 2010) or non-participation, economic considerations and engaging stakeholders and civil society in general is absolutely essential for the successful implementation of any policy. Justin Bean SUS6015 S1-2 SP10 Page 7
  8. 8. Figure 3 Source: Author et al. (2010) Justin Bean SUS6015 S1-2 SP10 Page 8
  9. 9. Works Cited American Council on Renewable Energy. (2009). An Overview of the U.S. Renewable Energy Field in 2009. Retrieved May 10, 2010 from: Center for Sustainable Systems, University of Michigan. 2009. “U.S. Renewable Energy Factsheet.” Pub No. CSS03-12. Retrieved on May 9, 2010 from: Clement, David . Lehman, Matthew. Hamrin, Jan. Wiser,Ryan. (2005) Center for Resource Solutions. International Tax Incentives for Renewable Energy: Lessons for Public Policy Retrieved May 10, 2010 from: Renewable_Tax_Incentives.pdf Drash, Wayne. (2010). Nation’s First Offshore Windfarm Approved for Nantucket Sound. CNN April 28, 2010 8:13 p.m. EDT. Retrieved on May 10, 2010 from: Environmental Protection Agency. (2008). Renewable Energy Certificates. Retrieved May 9, 2010 from: Environmental Law Institute. (2009). U.S. Tax Breaks Subsidize Foreign Oil Production. Washington, DC. Retrieved May 10, 2010 from: Federal Ministry for the Environment, Nature Conservation and Nuclear Safety. Retrieved on May 10, 2010 from: Klein, Arne Pfluger, Benjamin Held, Anne Ragwitz, Mario Resch, Gustav Faber, Thomas. (2008). Evaluation of different feed-in tariff design options – Best practice paper for the International Feed-In Cooperation. Energy Economics Group. Retrieved May 9, 2010 from: Lorenz, Peter. Pinner, Dickon. Seitz, Thomas. (2008). The Economics of Solar Power. McKinsey & Company. Retrieved May 9, 2010 from: Los Angeles Business Council. (2009). Designing an Effective Feed-In Tariff for Greater Los Angeles. UCLA Luskin Center, School of Public Affairs. Retrieved May 9, 2010 from: Greater-Los-Angeles-040110.pdf National Renewable Energy Laboratory. (2002). The Effects of Net Metering on the Use of Small-Scale Wind Systems in the United States. Retrieved May 10, 2010 from: Justin Bean SUS6015 S1-2 SP10 Page 9
  10. 10. Revkin, Andrew C. (2010). America’s Energy Crossroads. New York Times, May 5, 2010, Retrieved May 10, 2010 from: crossroads/?hp Runci, Paul. (2005). Renewable Energy Policy in Germany: An Overview and Assessment. Pacific Northwest National Laboratory Technical Lab Report PNWD-3526. Retrieved May 10, 2010 from: The Solar Foundation. (2010). US Dept. of Energy. Retrieved May 10, 2010 from: 10_Solar%20Foundation%20webinar.pdf US Dept. of Energy (2009) Solar Powering Your Community, A Guide For Local Governments. Retrieved May 10, 2010 from: Justin Bean SUS6015 S1-2 SP10 Page 10