Webinar - Incentives to attract clean energy investments


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This webinar will review various incentives globally that have been adopted to attract clean and renewable energy projects and make them financially viable and attractive to private sector investors. The program will include a review of different mechanisms, such as feed-in tariffs, RFP and procurement strategies, investment tax credits, priority dispatch, and other strategies adopted in various countries, including the United States, the United Kingdom, Turkey and Morocco to induce desired and target levels of renewable energy resources.

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Webinar - Incentives to attract clean energy investments

  1. 1. John W. Gulliver Pierce Atwood LLP CLEAN ENERGY REGULATOR INITIATIVE 25 March 2014
  2. 2. “Incentives to Attract Clean Energy Projects”
  3. 3. Incentives for Renewable Energy (RE) Growth • Why is this important? • European Commission: The RES Directive is based on the rationale that a positive framework for renewable energy development is necessary due to a number of market and regulatory failures or imperfections. These include non-internalisation of negative externalities of conventional energy forms, the presence of subsidies for other energy forms, imperfect market structures, regulatory barriers, the status of many renewable technologies as “infant industries” together with significant inertia of the system, and barriers related to information and public perception.* * Commission Staff Working Paper SWD (2012) 149 Final; Impact Assessment accompanying the document Renewable energy: a major player in the European energy market; p. 12. 3
  4. 4. New Investment in RE by Region, 2004-2012 4 (Source: REN21, 2013 Renewables Global Status Report, 58-59)
  5. 5. Key Topics for Discussion • Review of incentives utilized to encourage RE development in various countries • Discussion of which have worked best to achieve policymakers’ desired results • Type • Amount • Location • Timing • What has worked? What hasn’t? What can we learn? 5
  6. 6. Principal Incentive Mechanisms • Feed-In Tariffs (FITs) • Renewable Portfolio Standards (RPS)/ Tradable Certificates • Tax Credits • Loan Guarantees • Priority Dispatch, Priority Grid Access • Net Metering • Competitive Tender • Contracts for Differences • All of the above! 6
  7. 7. FITs • Establishes fixed price for all electricity generated by eligible RE facility and provided to grid • Typically based on assumed cost of RE generation • Most widely used tool – simple to administer • Sometimes differentiated by RE type, size; sometimes single rate for all • Mixed results 7
  8. 8. The U.K. Experience • FIT: • Commenced April 2010 • Applicable only to small-scale RE • FIT-CfD Structure: • FIT insufficient, need to supplement to achieve targets • Creation of long-term “Contract for Differences” (CfD) to encourage investment in RE • Generators receive “top-up” payment when agreed contract strike price exceeds electricity market price • Long term revenue stability 8
  9. 9. The German Experience • Global leader in renewable energy support and development • FITs key to success with 20-year term, differentiated by project size and technology • Grid operators required to purchase RE output at FIT • FIT reset over time • Key role of public financing • Critical role played by Kreditanstalt fur Wiederaufbau (kfW) • Provides additional support, analogous to U.S. investment tax credits • Low-interest loans, up to 100% of project costs, to residential households for PV installations, support for offshore wind projects, etc. 9
  10. 10. The Turkish Experience • Increased FITs included as part of 2010 law to provide more comprehensive RE support mechanism • Prior FIT levels insufficient to achieve targets • Differentiated by type • Wind and hydro: USD Cent 7.3/kWh • Solar and biomass: USD Cent 13.3/kWh • Geothermal: USD Cent 10.5/kWh • Incentive tariffs apply for first ten years of commercial operation of plants commissioned by December 2015 • Subsequent FIT levels will be established by Cabinet of Ministers 10
  11. 11. The California Experience • FIT levels initially based on assumed cost of generation from a new fossil plant, not the cost of production for the renewable resource • Insufficient to meet initial target of 20% • Reset targets and mechanisms • Tied FIT to other incentives, including Renewable Auction Mechanism, creation of traded Renewable Energy Credits (RECs), and long term contracts • New target of 33% by 2020 likely to be exceeded 11
  12. 12. The Spanish Experience • RE projects up to 100 MW chose either FIT with purchase obligation or market premium incentive without purchase obligation • Massive over subscriptions, large “tariff deficit” • Incentive mechanisms for new projects suspended January 2012 • Retroactive cuts to FITs and market premiums • FIT set too high, produced too much RE, too expensive, too quickly • Drag on overall economy 12
  13. 13. Spain: Annual Electricity Tariff Deficit, 2000-2012 13 (Source: Comicion Nacional de Energia (CNE), “Nota Resumen Del Saldo De La Deuda Del Sistemas Electrico” 10/5/2013)
  14. 14. Successes, Setbacks and Lessons: Learned FIT Regimes United Kingdom • Significance of RE CfD approach: • Aggressive RE development not achievable without financial stability through long-term agreements with creditworthy counterparty • FITs alone insufficient to procedure desired levels of generation • Better coordination and clarity of regulatory roles critical California • Due to misalignment between original FIT and cost of production from RE, FIT program failed to attract desired investment levels • California adopted supplemental incentives, with greater revenue certainty, longer term contracts 14
  15. 15. Successes, Setbacks and Lessons: Learned FIT Regimes Germany • Combine FIT with other financial support • FIT differentiated by RE type • Reset rates periodically • Overall German power rates declining – due to coal Spain • FIT set too high • Achieved much more capacity than expected, and faster: 3000 MW vs. 400 MW • Contributed to substantial tariff deficits 15
  16. 16. Renewable Portfolio Standards (RPS) • Incentive mechanism that mandates percentage of energy portfolio to come from RE • How basic RPS works: • RECs (Green Certificates) issued to certified RE generators for every unit of electricity produced • Both kWh and RES sold • Purchasers of RECs use them as evidence of regulatory compliance • Creates two income streams: • kWh sales • REC sales 16
  17. 17. The U.K. Experience • RPS equivalent (Renewable Obligation, RO) instituted in 2002 • Suppliers required to source increasing proportion of electricity from RE sources • Operators of receive Renewable Obligation Certificates (ROCs) – Tradable with other parties – Used by suppliers to demonstrate they have met their obligations • If suppliers lack sufficient ROCs, must pay financial penalty • Program administered by Office of Gas and Electricity Markets – regulator 17
  18. 18. The ROC Certificate Cycle 18
  19. 19. The U.K. Experience • Impending transition from ROCs to CfD as primary incentive mechanism to develop low- carbon electricity generation • CfDs will be offered as parallel option alongside ROCs beginning in 2014 • Possible that CfDs will be only choice available by 2017, RO program closed to new entrants • CfDs perceived to be more flexible, easier to administer than ROC system 19
  20. 20. The U.S. Experience • California • Most aggressive RPS program in U.S. • Requires utilities to obtain 33% of total electricity supply from RE by 2020 • Target likely to be exceeded • Massachusetts • Instituted in 1997; target 15% by 2020 • Statutory obligation imposed on both regulated utilities and competitive suppliers • RPS in 29 states 20
  21. 21. Renewable Portfolio Standard Policies 21
  22. 22. Successes, Setbacks and Lessons: RPS/Certificate Regimes California • Failure to achieve initial goals • Lack of clear responsibilities between state agencies • Weak enforcement mechanisms for utilities’ failure to reach goals • Fixed shortcomings, expanded RPS • Stronger enforcement mechanisms, clearer agency responsibilities 22
  23. 23. Successes, Setbacks and Lessons: RPS/Certificate Regimes Massachusetts • Desired targets under RPS initially unmet; • Uncertain revenues from sale of RECs limited ability to finance • Regulatory risk – perception that legislature or government could repeal program at anytime • Solutions: • Massachusetts offered to purchase RECs under ten-year contracts • Green Communities Act: formal requirement that regulated utilities purchase RE under long-term contract to meet RPS Lessons: • Enforceable procurement requirements, regulatory certainty and long term contracts essential 23
  24. 24. What is Priority Dispatch, Priority Grid Access • Incentive mechanism whereby electricity from RE sources is given priority dispatch, priority access to grid, despite higher costs • Frequently combined with other mechanisms, such as FIT 24
  25. 25. Priority Dispatch: Selected Experiences • Priority dispatch and access must be coupled with other mechanisms to assure financial stability (FIT, long term contract) • Numerous countries and regulatory regimes allow priority dispatch/access, e.g., Germany, Spain, Greece, U.S., Albania • System operator must assure safe, adequate, reliable and uninterrupted supply • RE can be intermittent and variable • Priority dispatch of intermittent and variable resources can upset system stability • Balancing policy goals of RE vs. legitimate system stability concerns 25
  26. 26. Tax Credits • National policymakers in U.S. prefer federal tax credits over FITS to encourage RE development • Investment Tax Credits (ITC): Tax credit for qualified RE projects based on capital investment, up to 30% of investment • Production Tax Credits (PTC): Per kWh tax credit for ten-year period for kWh generated and sold by qualified RE • Additional Tax Mechanisms: Accelerated depreciation available under federal tax code, tax exempt bonds 26
  27. 27. Tax Credits • Proponents believe • Up front tax benefits facilitate RE finance • Subsidy up front places less risk on future contract performance, since contracts based on market rates, not FITs • Proponents of FITs respond • Incentives up front place risks on ratepayers/taxpayers if plant fails or shuts down prior to contract termination • FIT, “pay as you go”, reduces these risks • NB – so does PTC • But, PTC may not provide sufficient revenue, since underlying tariff is usually market-based 27
  28. 28. Successes, Setbacks and Lessons: Tax Incentives • Tax mechanism typically do not require compulsory prices paid to RE generators • To establish price certainty for investors and generators, further incentives required • PTC, ITC, and related programs typically adopted for limited number of years • RE projects in U.S. follow distinctive pattern • Closer to end of tax credits, fewer projects started • “See-saw” or “yo­yo” effect 28
  29. 29. Competitive Tenders • Process that awards long term PPAs to qualified RE projects in competitive tender • Different than FIT – instead of trying to “guesstimate” target price to incentivize development, tender “tests the market” • Tenders can be restricted by technology (e.g., only solar, only wind) • Tenders can be allocated by geographic region or location, so as to reduce system costs, improve reliability • Tenders have risks, too – despite financial stability, if bid price is too low, project won’t be built; if too high, stranded costs 29
  30. 30. The Moroccan Experience • Primarily single buyer system: government agency responsible for buying all RE from privately-owned distribution and selling to end-users • Seeks development of RE sources, particularly solar energy • Competitive Tender Procedure • Moroccan Agency for Solar Energy (MASEN) off-taker • Until RE prices fall, full purchase price in first phase of bidding will not be passed through directly to consumers • Government absorbs difference • Morocco evolving sophisticated tender process as key part of its effort to diversify from oil-fired generation 30
  31. 31. MASEN-Identified Solar Power Sites in Morocco 31
  32. 32. The Moroccan Experience • Benefits of Government off-taker • Protects end users from higher cost of generated renewable energy • Provides creditworthy counterparty for contract • Increases revenue stability, project financeability • But, can lead to sovereign debt problems 32
  33. 33. Competitive Tenders for PPAs: An Assessment • Create revenue stability, but • Experience shows that fixed price, long-term power contracts persistently above market face enormous political pressure for rescission, revocation or renegotiation • USA • EU • Tenders need to be conducted on periodic basis to reflect price changes 33
  34. 34. Net Metering • Incentive mechanism that allows customers to sell electricity to utilities generated by customer-owned distributed generation, such as PV • kWh sold netted against kWh consumed • Typically for smaller systems • Payment (credit) at retail price per kWh • Price (credit) thus includes T&D 34
  35. 35. The U.S. Experience • California • Approximately 120,000 customer accounts registered for net metering; • Program limited to customers who install solar, wind, other RE < 1 MW • Massachusetts • Mandatory for investor-owned utilities to offer net metering (voluntarily for municipal utilities) • Individual customers, community groups (10+ residential customers), and governmental entities • Widespread deployment • 43 U.S. states have adopted net metering 35
  36. 36. 36
  37. 37. Net Metering: Lessons Learned • Provides simple and certain method by which customers paid for RE generation • May cause cost shift from customers who own distributed RE generation to those who do not • Retail price may be too high – includes T&D that customer is not necessarily displacing • Night and seasonal production variations • Standby demand costs 37
  38. 38. Discussion • Is one RE incentive system superior to others? • Probably not • No “one size fits all” approach to encouraging RE development • Underperformance (or over performance) can occur under any system • Important that policy makers and regulators: • Carefully analyze markets and desired targets • Be flexible in responding to cost and price changes and investment climate 38
  39. 39. Discussion • Recalibrate incentives periodically, but prospectively • Retrospective change in rates very challenging to market development • Benchmark and change programs as needed, but not too frequently • “Goldilocks” • Policymakers can construct multiple kinds of incentives (FIT, tax credit, carbon trade) that can be used simultaneously 39
  40. 40. Parting Thoughts • Stable, predictable legal and regulatory environment fundamental • Well-defined roles for regulators and enforcement mechanisms for renewable energy are important • Different technologies require different mechanisms • Setting and subsequent evaluation of policy targets crucial to long-term success • Incentive mechanisms that provide investors with long term revenue stability critical 40
  41. 41. First Principles “The Overriding Criterion: A legal and regulatory framework that is far, consistent, predictable where contracts and agreements are reasonably enforceable.” World Bank Energy and Mining Sector Board Discussion Paper 6, May 2003 41
  42. 42. Many thanks to Leonardo ENERGY for sponsoring this webinar
  43. 43. Merrill’s Wharf 254 Commercial Street Portland, ME 04101 USA John W. Gulliver jgulliver@pierceatwood.com PH / +1.207.791.1296 CELL / +1.207.415.3400 /Preparers Merrill’s Wharf 254 Commercial Street Portland, ME 04101 USA Liam J. Paskvan lpaskvan@pierceatwood.com PH / +1.207.791.1306