A Comparison of Feed-in Laws, RPS, & Tendering Policies

Jan Hamrin, PhDPresident

Center for Resource Solutions

Bangkok, Thailand

August 28, 2006

www.resource-solutions.org

Outline of Presentation

•Key RE Policy Types:• Feed-in Tariff • Renewable Portfolio Standard (RPS)•Tendering Approach

•Comparison of Results•Criteria for Decision Makers•Conclusions

Key National Renewable Energy Policies

Feed-in Laws

Government Mandated Price• Utility must take power from eligible facilities• Focused on new and emerging technologies• Four methods of setting price

– Estimated long term cost plus reasonable profit – Wholesale avoided cost of power (Calif. 1980s)– Wholesale avoided cost of power + incentive (China)– Percent of retail electricity rate (Europe)

Feed-in Law Success Factors

• Long-term Contracts – 15-20 years

• Guaranteed buyer under standard contract

• Tariff that gives reasonable rate of return

• Flexibility to capture cost efficiencies

Renewable Portfolio Standards (RPS)

• Quantity-based Government Mandate

• Focused on Emerging and New RE Technologies

• Requirement on Wholesale or Retail Market Participants (Utility or Grid Company)

RPS Success Factors

• Policy design is critical to success!

• Energy/Output-based target levels– Target increasing over time– Only new and emerging RE are eligible

• Strong & Effective Enforcement

• Creation of Certificate Trading Platform based on compliance tracking

Tendering Policies

• Government sponsored competitive bidding process for RE

• Lowest priced projects awarded contracts– Contract guarantees to take all power generated at

specified price over fixed time period

• Govt. pays incremental cost of RE• Usually combined with other policies, e.g.

Public Benefit Funds (NFFO - UK) or Resource Concessions (Wind - China)

• Long term standard contract reduces risk for investors

• Contracts/Tenders awarded must be large enough to achieve economies of scale

• Contracts/Tenders should be awarded every year to create stability

• Appropriate Penalties for Not Meeting Milestones

• Need stable source of funding

Tendering Success Factors

Criteria for Comparison of Policies

Primary Criteria

• Quantity of RE for Specified Time

• Causes both Cost & Price Reductions

• Results in Resource Diversity

• Sustainability of Market for RE

Primary Criteria (cont.)

• Local Industry Development

• Certainty for Investors

• Simplicity of Implementation

Comparisons

Quantity of RE Development

• Feed-in Laws: Can produce large amounts of RE in short time period

• RPS: If strongly enforced can meet realistic RE targets

• Tendering: Related only to quantity of RE established by process

Cost & Price Reductions

• RPS and Tendering: Best at reducing both cost & price using competitive bidding– Need long term PPAs– Enforcement/penalties critical esp. for RPS– Must have competition- multiple bidders– Volume- large projects, many projects

• Tendering : Good at reducing cost. Need to also have a mechanism to reduce price over time

Resource Diversity

• Feed-in Laws: Excellent at bringing in wide diversity of technologies

• RPS & Tendering: Favors least-cost technologies – Diversity possible with separate technology targets or

tenders– Administratively complex– Adds costs

Sustainability of Market

• Feed-in Laws & RPS: Have been the most technically & economically sustainable in intl. experience

• Tendering : Tied to resource planning process – sustainable if planning supported, stable source of funding

• Political sustainability needs to be considered (Feed-in more vulnerable)

Local Industry Development

• Feed-in Laws: Excellent for creating local manufacturing and infrastructure

• RPS & Tendering: Favors least cost technologies and established industry player– Needs companion policies

Certainty for Investors

• All 3 policies can be designed to reduce investor risk

• Feed-in Laws: Price guarantee & PPA give great certainty to investors

• Tendering: Can provide certainty if well designed– Somewhat more risk than Feed-in Law

• RPS: Lack of price certainty difficult for investors – PPA recommended to reduce investor risk

Simplicity

• Feed-in Laws: Most simple design, administration, enforcement, contractual

• Tendering: More complex than Feed-in laws, simpler than RPS

• RPS: More complex to design & administer & complex for generators

Conclusions

Conclusions

• Feed-in Law:– Simplest to administer & enforce– Greatest resource diversity– Greatest local industry development– May be more expensive in short-run

• Can be mitigated by adjusting price over time

– Works best in regulated markets

Conclusions (cont.)• RPS:

– Good cost & price minimization if accompanied by long term PPA & well-designed

– Good resource development, use certificates for development in less-populated regions

– More compatible with reformed electricity markets

– May take longer to build local industry & meet resource targets

– More complex to administer

Conclusions (cont.)

• Tendering:– Best at price minimization if industry established– Can be combined with RPS, Resource Concessions

and Public Benefit Funds– Will not build a market by itself- need companion

policies– Can discourage local industry formation if not

carefully used– Can be politically challenging to find stable source

of funding

Conclusions (cont.)

• Each of 3 policies have pros and cons• Different policies are better matched to different

goals– Important to articulate & prioritize goals

• No perfect policy – Benefit from integrated policy framework may change over time

• Timing important relevant to infrastructure development

• Ability to enforce mandates critical• Policy design is critical to success!

Contact information

Dr. Jan Hamrin, President

Center for Resource Solutions

San Francisco, CA

415/561-2100

Email: jhamrin@resource-solutions.org

www.resource-solutions.org

Extra Slides

U.S. Renewable Portfolio StandardsNevada: 20% by 2015, solar 5% of annual

Hawaii: 20% by 2020

Texas: 5,880 MW (~4.2%) by 2015

California: 20% by 2010

Colorado: 10% by 2015

New Mexico: 10% by 2011

Arizona: 1.1% by 2007, 60% solar

Iowa: 2% by 1999

Minnesota: 19% by 2015*Wisconsin:2.2% by 2011

New York:24% by 2013

Maine: 30%by 2000

MA: 4%by 2009

CT: 10% by 2010

RI: 16%by 2019

Pennsylvania:8% by 2020

NJ: 6.5% by 2008

Maryland:7.5% by 2019

22 States + D.C.

*Includes requirements adopted in 1994 and 2003 for one utility, Xcel Energy.

**No specific enforcement measures, but utility regulatory intent and authority appears sufficient.

Washington D.C:11% by 2022

Montana:15% by 2015

DE: 10% by 2019

Illinois: 8%by 2013**

Idaho

25% by 2025

RE Certificates as a ToolUses of RECs:• Substantiating

compliance with mandatory programs

• Supply for utility green pricing programs

• Choice for customers with no green power options

• Meeting emissions reduction goals

• Greening of events

• RECs were first sold commercially in the US in 2000

• They are also used in Europe, Australia & Japan

• Commercially: RECs are universally used– >7.5 Million MWh RECs

contracted in 2004• Retail REC sales: >120

% increase each year for last three years

RECs a Renewable Energy Tool

Production of Renewable Energy

Environmental & Other Benefits(from displacement)

Commodity Electricity

•Certificates represent the contractual right to claim the environmental and other attributes associated with electricity generated from a renewable energy facility

•May be traded independently of energy markets

Benefits of RECs

• Facilitates renewable energy markets• Breaks down geographic boundaries• Creates fluidity in markets• Can be used as a financing

mechanism for new renewable energy facilities

• Could be used for solar aggregation• Monetizes the value of attributes

REC Tracking

• Each unit of generation is assigned a unique ID that includes its attributes:

• Date generated• Facility location• Date facility went online• Type of renewable• Emissions profile• Eligibility for programs such as RPS, Green-e

• In the US electronic systems track each unit from “birth” to retirement

PROPERTY RIGHTS TO RECs

• Standard Practice– Certificates are issued to the generator and

are transferred through contract

– Once a claim is made, the certificate is considered ‘used’ and is retired

RECs & Carbon Credits

• RECs are measurable and verifiable

• They can be translated into pounds of GHG avoided using approved international methodologies

• When a REC is converted to a carbon offset, the REC is retired