Overview of government and market drivenprograms for the promotion of renewable

power generation

Thomas Ackermann*, GoÈ ran Andersson, Lennart SoÈ der

Royal Institute of Technology, Department of Electric Power Engineering, Electric Power Systems,

Teknikringen 33, 10044, Stockholm, Sweden

Abstract

This paper presents and brie¯y evaluates some existing government instruments andmarket schemes which support the development of renewable energy generation. The briefevaluation focuses on the incentives provided by the various instruments to reduce

production costs. The instruments and schemes are: feed-in tari�s, net metering, biddingprocess, ®xed quotas, green certi®cate trading, green power exchange, green pricing. 7 2000Elsevier Science Ltd. All rights reserved.

1. Introduction

The paper is part of a project that compares the market regulations of

deregulated electricity markets in di�erent countries. Special emphasis is given to

distributed renewable power generation. The aim of the project is to analyse those

aspects of the market regulations which a�ect the installation of distributed

renewable power systems.

This paper presents and brie¯y evaluates certain existing government

instruments and market schemes which support the development of renewable

0960-1481/01/$ - see front matter 7 2000 Elsevier Science Ltd. All rights reserved.

PII: S0960 -1481 (00)00015 -X

Renewable Energy 22 (2001) 197±204

www.elsevier.com/locate/renene

* Corresponding author. Tel.: +46-8-790-6639; fax: +46-8-790-6510.

E-mail address: thomas.ackermann@ieee.org (T. Ackermann).

energy generation. The brief evaluation focuses on the incentives provided by thevarious instruments to reduce production costs, as cost competitiveness isconsidered the major driving force for the utilisation of renewable energy within aderegulated, competitive market. Fixed feed-in tari�s, tax reduction, used forexample in India and the US, and investment subsidies are traditional economicinstruments to support renewable power generation.

Sweden, for example, uses a combination of investment subsidies, taxreductions, ®xed feed-in tari�s and reimbursement of avoided distribution losses,which add up to approximately 0.05 ECU/kWh (0.0575 US$, 0.035 £) for windenergy production. The approach is very complex and the di�erent sources ofsubsidies lead to high transaction costs. For more details, also regarding the totalsubsidies for other renewable energy sources in Sweden, see [1].

As an example for these traditional instruments, feed-in tari�s are presented inmore detail. This paper, however, focuses on economic instruments and marketschemes that have emerged with the introduction of competitive electricitymarkets.

2. Feed-in tari�s

In Europe, feed-in tari�s are currently the main instrument to promote thedevelopment of grid connected renewable energy technology. Such feed-in tari�sare de®ned by the governments as the price per kWh that the local distributioncompany has to pay for local renewable power generation fed into the localdistribution grid. In many European countries utilities have the obligation toconnect local renewable power generation and to pay the corresponding feed-intari�s. The tari�s, as can be seen in Table 1, vary widely between the countriesand even within a country. This is due to di�erent tari�s for di�erenttechnologies, e.g. wind, photovoltaic (PV), biomass. Some countries also have timevariations, e.g. peak or base load tari�s, and seasonal, e.g. winter or summer

Table 1

Feed-in tari�s in Europe in ECU/kWh 1.99: 1 ECU=1 Euro=1.15 US$=0.7 £ (source: [1])

Minimum Average Maximum

Austria 0.028 0.045 0.065

Belgium 0.025 ± 0.073

Denmark 0.022 0.036 0.057

France 0.046 ± 0.060

Germany 0.063 ± 0.088

Italy 0.025 ± 0.197

Luxembourg 0.025 ± 0.058

Spain ± 0.065 ±

Switzerland ± 0.098 ±

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204198

tari�s. Furthermore, tari�s can depend on the capacity of the renewable energysystem. A detailed overview of the feed-in tari�s in Europe can be found in [1].

The political instrument `feed-in tari�s' is very useful to get a technology o� theground, as the income is secured and, thereby, the risk for the developer isreduced. In Germany, which has relatively high feed-in tari�s, the world-widelargest market for wind turbine generators (WTG) has emerged, and the fast up-scaling of wind turbine size is mainly driven by the German market needs.However, this instrument provides limited incentives to reduce costs below acertain break even level. In Germany for example, WTGs cost seems to bebetween 15 and 30% higher than in countries where no feed-in tari�s exist (see[13]).

3. Net metering

Net metering is established by law and regulations in 23 US States. Netmetering means that utilities bill only the net consumption or generation ofcustomers with small generating facilities, such as PV or small wind powersystems. This system allows the small generator to use the grid as a `storage', asthey can consume part of the electricity they generate at another time within theirbilling cycles (usually monthly). Production and consumption has to be at thesame location. In the US the following di�erences in the regulations regarding netmetering can be found.

. Technology: In some States, e.g. Idaho and Wisconsin, all technologies areallowed, in others, e.g. Iowa, only renewable energy can be used for localgeneration. Some States restrict even the use of renewable energy, e.g. Nevadaonly allows wind and solar, and Maryland only solar.

. Capacity: Most States have limited the capacity that is eligible for net metering.The allowed capacity varies between 10 kW, e.g. in California, and 100 kW, e.g.in Arizona, per customer. Only two states, Pennsylvania and Iowa have no limitper customer. Iowa, however, has a State-wide limit of 105 MW. Other Stateshave introduced a State-wide limit in relation to the maximum State-wide load,e.g. 0.1% in California or 0.2% in Maryland. Nevada has limited the numberof customers per utility to 100.

. Customers: About 80% of the 23 US States have open net metering to allcustomers classes, hence also industry customers. The other States have limitednet metering to residential customers only.

. Net excess generation: Surplus of local generation during a billing period has tobe purchased in most States by the utilities at avoided costs. In some States,e.g. New Hampshire, excess energy is granted to the utilities, as they have noobligation to purchase excess power generation.

Net metering particularly encourages the investment into very small systems forself generating. As Wan et al. [2] points out, distributed power generation leadsalso to bene®ts for the utilities, as net metering leads to a reduction in distribution

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204 199

losses and an improvement of the voltage pro®le. Details of net metering in theUS can be found in [2].

4. Bidding processes

Potential project developers for renewable energy projects are invited to submito�ers for building new projects. The developers bid under di�erent technologybrands, e.g. wind, solar, for a feed-in tari� or for the amount of ®nancialincentives to be paid for each kWh fed into the grid by renewable energy systems.The best bidder(s) will be awarded their bid feed-in tari� for a prede®ned timeperiod.

Bidding processes for feed-in tari�s regarding renewable energy projects exist inEngland & Wales (The Non-Fossil Fuel Obligation Ð NFFO), in North Ireland(NI±NFFO), in the Republic of Ireland (The Alternative Energy Requirement ÐAER) and in Scotland (The Scottish Renewable Order Ð SRO). A similarapproach is the bidding for the California Energy Commission (New TechnologiesAccount Auction) as well as the windpower bidding process in France (ECOLE2005) and Austria.

The longest experience exists for the NFFO process in England and Wales. In1990, the ®rst bidding round was announced (NFFO1). However, each projectwas assessed separately and no direct competition between the projects emerged.This was changed with NFFO2 (in 1991), when competitive bidding in technologybrands was introduced, e.g. wind project competed with wind, solar with solar.The successful bidders were awarded with the strike price of the bidding process.The strike price was paid for a period of 8 years. The framework for NFFO3(1994) was changed again, however, NFFO4 (1997) and NFFO5 (1998) followedmainly the NFFO3 regulations. The new regulations awarded the successfulbidders their bid price instead of the strike price, but for a period of 15 yearsrather than 8 years.

Due to the changes in regulations, only the price development between the lastthree bidding processes can be compared, which are summarised in Table 2. Itshows that NFFO has led to signi®cant cost reductions. A comparison between

Table 2

Successful bidding prices in British pence/kWh 1.99: 1 ECU=1 Euro=1.15 US$=0.7 £ (source [3])

NFFO3 NFFO4 NFFO5

Large wind 3.98±5.99 3.11±4.95 2.43±3.1

Small wind ± ± 3.40±4.6

Hydro 4.25±4.85 3.80±4.40 3.85±4.3

Land®ll gas 3.29±4.00 2.80±3.20 2.59±2.8

Waste system 3.48±4.00 2.66±2.80 2.34±2.4

Biomass 4.90±5.62 5.49±5.79 ±

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204200

the 1997 (NFFO4) and 1998 (NFFO5) average successful bid prices shows a 22%price reduction (calculated in 1998 prices, see [3], p. 2). Surprisingly, the averageprice of all renewables for NFF05 is 2.71 British pence (p)/ kWh (or 0.038 ECU/kWh or 0.44 US$/ kWh) while the average price at the England and Wales spotmarket is expected to be between 3 and 3.5 p/kWh (0.042±0.049 ECU/ KWh,0.048±0.056 US$/ kWh) in 1998. So, why would a project developer accept alower priced contract from NFFO, if he could also sell its energy for a higherprice via the spot market?

The reason probably is that NFFO is o�ering a 15 years ®xed contract, hencethe ®nancial risk is easier to calculate. Also additional costs for trading via thespot market make the trade of a small amount of energy not feasible.Furthermore, as project developers have a period of 5 years to commission theirplants, some developers have used cost prediction for their future projects basedon large cost reductions during the following 5 years.

NFFO5 has introduced two bands for wind energy, as the high costs forparticipation in the bidding process was often seen as a discouragement for thedevelopment of small projects. The small wind schemes included projects of up to0.995 MW declared net capacity (2.3 MW installed capacity). Based on an averageprice of 2.88 p/kWh (0.04 ECU/kWh, 0.046 US$/kWh) for large wind energyprojects, small projects (average 4.18 p/kWh or 0.059 ECU/kWh or 0.068 US$/kWh) are 45% more expensive. Hence, such a distinction is important to developsmall scale projects. Further information regarding NFFO can be found inMitchell [4] and in O�ce of Electricity Regulation [3].

In June 1998, the California Energy Commission (CEC) invited projectdevelopers to submit bids for the amount of incentive to be paid by CEC perkWh of renewable energy fed into the public grid system. Successful biddersbecome eligible to receive incentives for generation produced during the ®rst 5years of operation after the project is developed. 55 projects with a total capacityof 552.5 MW were accepted. The average bids were 1.2 US cents/kWh (0.01 ECU/kWh or 0.007 £/kWh), however, almost 55% of the total successful capacitycomes from wind generation. Further information regarding the CEC `NewTechnologies Account Auction' can be found on the California EnergyCommission web-page [5] and the American Wind Energy Association (AWEA)web-page [6].

The price development within NFFO as well as the low average bidding price inCalifornia indicates that renewable energy projects become increasinglycompetitive. However, large variations exist between the di�erent technologybrands and di�erent project sizes. Hence, a careful design of the bidding process isnecessary to achieve the desired e�ect.

5. Fixed quotas combined with green certi®cate trading

The Government will introduce ®xed quotas for utilities regarding the amountof renewable energy per year they have to sell via their network. On the other

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204 201

side, producers of renewable energy receive a certi®cate for a certain amount ofenergy fed into the grid. The utilities have to buy these certi®cates to show thatthey have ful®lled their obligation.

It is expected that a competitive market for these certi®cates will emerge. If theprice for the certi®cates is high, new project developers will be attracted and willinstall new renewable generation capacity. It is also planned to trade thecerti®cates via a certi®cate exchange, which operates like a stock exchange. Suchan exchange could also o�er future contracts for certi®cates, hence long-term riskmanagement for renewable energy projects will be possible. Such a system will inparticular lead to the development of the most economic renewable energy source,e.g. wind energy in most parts of Europe.

The ®rst such system was o�cially started in the Netherlands in February 1998.A `voluntary' quota was found between the Dutch Government and all utilitieswhich are represented by the Dutch EnergieNed Association. The quota forrenewable energy production was set at 3% of the total electricity consumption.The producer will get one `Groen Label' for every 10,000 kWh they feed into thegrid. However, as the evaluation will not begin before 2001 little information onthe current status of the system is available. According to the Dutch `Groen Label'web-page [7], 92% of all `Groen Labels' issued have gone directly to the utilities,because the renewable energy producers have old ®xed contracts with the utilities,which will continue for up to 10 years. New projects also prefer ®xed contracts,which include the `Groen Lables'. Such contracts are preferred as they provide asecure long-term income, which is often essential for the ®nancing of the project.Hence, `Groen Labels' are seldom traded in an open market yet. In Australia andthe US, e.g. Connecticut, Massachusetts, Maine, Nevada, Arizona, similar systemsare under development. The US approach is called Renewable Portfolio Standard(RPS) and the labels are known as Renewable Energy Credits (RECs). TheConnecticut RPS will begin on 1 July 2000. The quota is set at that 0.5% of thestate's electricity must come from solar, wind, sustainable biomass, land®ll gas, orfuel cells. The level will increase to 1% by July 2002, then to 3% by July 2006,and to 6% by July 2009 (see [8]). To avoid the Dutch problems regarding thetrade of the labels in an open market, the AWEA has suggested that theGovernment should de®ne the value of the RECs for a certain starting period,until an independent market has emerged (see also [9]).

6. Green Power Exchange

A Green Power Exchange organises the trade between renewable energygenerators and service providers who want to sell `Green Power' or largecustomers who want to buy `Green Power'. Such an exchange can also be used fortrading green certi®cates. Its most important task is to provide a reliable marketindicator regarding the price for renewable energy. Thereby, it will reducetransaction costs and will enhance the market development. The ®rst green powerexchange, The APX Green Power Market, opened in California in April 1998.

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204202

Only energy generated from wind, solar, geothermal, biomass, land®ll gas andsmall (less than 30 MW) hydro power plants can be traded via the powerexchange, but one single price covers all renewable resources. The exchangeoperates up to 168 h ahead of delivery. This forward price can be used by greenpower producers with the ¯exibility to do so, to schedule production when it isvaluable. Similarly, green power buyers can schedule purchases when prices aremost attractive. Table 3 gives an overview of the green market prices during July,August and September 1998 (more information see [10]).

7. Green Pricing

Green Pricing is a marketing program developed by utilities world-wide (e.g.Sweden, USA, UK) to provide choices for electricity customers to purchase powerfrom environmental preferred sources. Customers thereby agree to pay highertari�s for `Green Electricity' and the utilities guarantee to produce thecorresponding amount of electricity by using `Green Energy Sources'. Thefollowing three program types can be distinguished:

. Contribution program Ð customers contribute to a utility-management fundfor renewable projects;

. Capacity programs Ð customers purchase a ®xed block of their electriccapacity requirements;

. Energy programs Ð customers purchase a ®xed block of their electric energyrequirements.

Green Pricing is a market-based tool to develop renewable energy projects.However, its results predominantly depend on the design of the program, and anindependent control of the program seems important as a high degree of freedomexists to develop and interpret such programs. In the UK for example, a marketindependent organisation, The Friends of the Earth, frequently analyses andevaluates the existing utilities' green pricing programs, due to large di�erences inprogram layout. More information regarding the US Green Pricing programs canbe found in [11] and on the Green Power Network [12].

Table 3

APX Green Power Market prices in US$/MWh for July±September 1998. 1.99: 1 ECU=1.15 US$=0.7

£ (source [10])

July August September

Daily average peak 3.02 3.60 7.11

Daily average o�-peak 3.88 5.24 6.16

Hourly peak: high 85.00 111.00 145.00

Hourly peak: low 15.01 25.01 28.50

Hourly o�-peak: high 61.96 55.00 66.00

Hourly o�-peak: low 14.65 21.66 26.87

T. Ackermann et al. / Renewable Energy 22 (2001) 197±204 203

8. Conclusion

Di�erent instruments exist to stimulate the growth of renewable powergeneration. Tax reduction, investment subsidies, feed-in tari�s and net meteringare important instruments to get the di�erent technologies `o� the ground',however, they can only be considered an interim solution as they do notnecessarily lead to cost reduction. A bidding process is one way to achieve thesecosts reductions, but high transaction costs will favour the development of largerenewable energy projects, which is not always desired. Other instruments, such as®xed quotas combined with green certi®cate trading or a power exchange incombination with Green Pricing seem to lead to similar costs reduction, however,so far there exists only limited experience with such instruments.

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T. Ackermann et al. / Renewable Energy 22 (2001) 197±204204