lecture 5 policies to support renewable energy sources · need for support for renewable energy...
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Lecture 5Policies to support renewable energy sources
Environmental Economics, Politecnico di Milano, Academic Year2015-2016
Giovanni Marin
IRCrES-CNR, Milanoe-mail: giovanni.marin@ircres.cnr.it
Giovanni Marin Environmental Economics - Lecture 5 1 / 19
Outline of the lecture
� Need for support of renewable energy?
� Comparison of the different support mechanisms for renewable energy� Price-based� Quantity-based
� Data on European and Italian markets
Giovanni Marin Environmental Economics - Lecture 5 2 / 19
Need for support for renewable energy
� Electricity production based on fossil fuels generates environmentaldamages ⇒ external costs
� Renewable energy technologies are still not mature
� Reliability issues of renewable energy sources
� Job creation at the local level
� Renewable energy sources (e.g. wind, solar) require initial supportmechanisms to compete with large hydro and thermal plants
� They also require policy support to reduce investors’ uncertainty
Giovanni Marin Environmental Economics - Lecture 5 3 / 19
Types of support schemes for renewable energy
� Price based approaches� Obligation of electric utilities to purchase electricity generated by
renewable energy sources at a predetermined price ⇒ feed-in tariff� Premium on spot market electricity price for electricity generated by
renewable energy sources ⇒ feed-in premium
� Tradable green certificates (quantity-based approach):� Electric utilities are required to generate a certain quota of electricity
with renewable energy sources� If they do not produce enough electricity with renewable energy sources
they can buy it from other companies that produced in surplus
� Many countries also complement these instruments with other fiscalmeasures (grants, tax credit, etc)
Giovanni Marin Environmental Economics - Lecture 5 4 / 19
Feed-in tariff
� Renewable energy producers are paid a set rate for their electricityover a long term period
� The tariff is usually differentiated by technology and size of theinstallation
� Given the tariff, markets determine the total installed capacity andthe total generation
� Feed-in tariff schemes were very effective in most countries in boostingthe diffusion of renewable energy sources (e.g. Germany, Italy, Spain)
� Fixed prices provide stable investment climate
� Long term stability leads to innovation
Giovanni Marin Environmental Economics - Lecture 5 5 / 19
Feed-in tariff
� The subsidy generated windfall profits for producers of renewableenergy
� They were not probably cost efficient (public funds used for thesubsidy are collected with distortionary taxation)
� Generate rent-seeking behaviours
� May induce technological lock-in
� Interaction with other policy instruments ⇒ ETS� Generation of electricity with renewable energy ‘releases’ permits within
the ETS for other generators of CO2 emissions� If the feed-in tariff is unilaterally set by one single country (e.g.
Germany) that would reduce the price of CO2 allowances also in othercountries ⇒ lower compliance costs in other countries subsidized byGerman taxpayers...
Giovanni Marin Environmental Economics - Lecture 5 6 / 19
Renewable energy quota obligations
� The government mandates a minimum share of capacity or generationto be based on renewable energy sources
� This obligation is usually combined with tradable green certificates� The market decides the price of green certificates� These schemes are very useful to support low-cost (i.e. mature)
technologies
� With tradable certificates cost efficiency is attained
� Volatility and uncertainty about the value/price of certificates have anegative impact on investments
� Large windfall profits for incumbent utilities with a big installedcapacity in renewable energy sources
Giovanni Marin Environmental Economics - Lecture 5 7 / 19
Support schemes and innovation
� Feed-in tariffs are particularly effective for the diffusion oftechnologies that are not mature
� Policy-induced acceleration in the diffusion facilitate the movementalong the learning curve
� Extensive evidence in the economic literature about the strong andpositive impact of feed-in tariffs on innovation in renewable energytechnologies (patents)
� Even more powerful if coupled with liberalization of the electricitymarket
� Incumbent firms have little incentive to innovate in these technologiesas that would erode their profits arising from traditional technologies
� Easing entry of new players may help boosting innovation (by entrant)
Giovanni Marin Environmental Economics - Lecture 5 8 / 19
Figure: Total primary production for EU28 (TJ, Eurostat)
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Hydro power Wind power Solar thermal
Solar photovoltaic Tide, Wave and Ocean Geothermal Energy
Giovanni Marin Environmental Economics - Lecture 5 9 / 19
Figure: Total primary production of renewables excluding hydro (TJ, Eurostat)
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Germany Spain France Italy United Kingdom
Giovanni Marin Environmental Economics - Lecture 5 10 / 19
Figure: Total primary production of hydro (TJ, Eurostat)
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Germany Spain France Italy United Kingdom
Giovanni Marin Environmental Economics - Lecture 5 11 / 19
Figure: Total primary production of wind (TJ, Eurostat)
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Giovanni Marin Environmental Economics - Lecture 5 12 / 19
Figure: Total primary production of solar thermal (TJ, Eurostat)
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Giovanni Marin Environmental Economics - Lecture 5 13 / 19
Figure: Total primary production of solar photovoltaic (TJ, Eurostat)
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Giovanni Marin Environmental Economics - Lecture 5 14 / 19
Figure: Italy - Installed capacity for electricity generation (MW, Eurostat)
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Combustible fuels Hydro Mixed plants Pure pumped hydro
Geothermal Wind Photovoltaic
Giovanni Marin Environmental Economics - Lecture 5 15 / 19
Italian ‘Conto Energia’
� Introduced in 2005 following the EU Directive on renewable energy(2001/77/CE)
� Feed-in tariff for solar photovoltaic� Primo Conto Energia (July 2005)
� Up to 85MWp of new installed capacity per year� Feed-in tariff of about 0.5 euro per kWh for 20 years� 5% reduction in the feed-in tariff for each year
� Secondo Conto Energia (February 2007) ⇒ mostly changes in thebureaucratic procedures
� Terzo Conto Energia (August 2010) ⇒ differentiation of tariff fordifferent installations (and reduction of the tariff)
� Quarto Conto Energia (May 2011) ⇒ further reduction in tariffs� Quinto Conto Energia (July 2012) ⇒ ceiling set to 6.7 billion euro/year
� In July 2013 the ‘Quinto Conto Energia’ was ended and substitutedwith a 50% tax credit for the installation of solar photovoltaic
Giovanni Marin Environmental Economics - Lecture 5 16 / 19
Installed capacity under ‘Conto energia’
Giovanni Marin Environmental Economics - Lecture 5 17 / 19
Green certificates (Certificati verdi)
� Introduced in 1999 (Decreto Bersani), kick-off in 2004
� Electric utilities have to produce at least 2% (in 2004, +0.35% everyyear) of their electricity with renewable sources
� If an utility cannot attain that target, it has to purchase ‘certificates’from other producers to reach the target (certificati verdi)
� There is a market for these certificates
� Differently from the feed-in tariff, there exists uncertainty about theprice of certificates
� Useful for more mature technologies (e.g. wind)
Giovanni Marin Environmental Economics - Lecture 5 18 / 19
Green certificates
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Giovanni Marin Environmental Economics - Lecture 5 19 / 19
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