mechanism. This paper considers the renewable energy development strategies of three countries (the UK, Australia, and New Zealand)all using a variant of the quota/certiWcate approach as the central instrument in their programs. The regulatory frameworks deWning theapplication of the certiWcate systems diVer notably, and the likely diVering outcomes suggest that these regulatory settings may be at leastas important as the selection of the basic policy instrument, in determining the overall success of programs of this nature. 2006 Elsevier Ltd. All rights reserved.

Keywords: Cross-national comparisons; Climate policy; Renewable energy; Tradable certiWcates; Quota systems

1. Introduction

The pursuit of renewable energy (RE) development hasemerged as a common and signiWcant component ofnational greenhouse gas (GHG) reduction eVorts. Whilecommonly targeted at electricity generation because of thescale of its contribution to emissions, RE adoption haswider economic implications, through the conservation ofexisting premium hydrocarbon resources such as oil andgas (Meyer, 2003), the creation of employment, and supplyindustry development. RE programs are commonly associ-ated with multiple energy policy objectives environmentalsustainability (including greenhouse gas emission reduc-tion), containment of energy cost, enhancement of supplysecurity and broader issues of industry development. Theinitiatives undertaken by diVerent countries are reXective of

The development of RE has been pursued through abroad range of policy instruments in diVerent countries.This paper compares the RE development programs ofthree countries the UK, Australia and New Zealand andseeks to identify the main factors inXuencing their level ofachievement. The three countries are all upper-incomeOECD members with political and legal systems sharingmuch common background. In each country RE-basedelectricity (REE) generation has been the principal target oftheir initiatives, and in each a form of tradable certiWcatesystem has been a central feature of programs. The UK hasover time used two markedly diVering approaches to REEmarkets, and employs a broad range of supporting mea-sures; Australia introduced the Wrst truly mandatorynational REE consumption quota system; and NZ hasundertaken its certiWcate system based not on nationallyGeoforum 38 (2007

Renewable energy strategies in Eng

GeoV

Graduate School of Business, University of Wo

Received 2 August 2005; received

Abstract

The development of renewable energy sources is of prime interest tion obligations. The increased use of renewables oVers the possibilityimproving energy supply diversity and security, and developing empnisms are in common use, one a quota (quantity) instrument often as0016-7185/$ - see front matter 2006 Elsevier Ltd. All rights reserved.doi:10.1016/j.geoforum.2006.08.002

their relative weighting of these sometimes competingobjectives.

E-mail address: gkelly@uow.edu.au) 326338www.elsevier.com/locate/geoforum

land, Australia and New Zealand

Kelly

llongong, Wollongong, NSW 2522, Australia

in revised form 22 February 2006

to many countries seeking to pursue greenhouse gas emission reduc- of not only contributing to emission reduction, but at the same time

loyment and business in related supply industries. Two main mecha-sociated with tradable certiWcates, and the other a prescribed pricingmandated consumption quotas, but on the internationalbasis provided by Kyoto Protocol allowances. The UK hasthe longest history of structured programs, and hence theapproach here will be to Wrst examine the UK approach,and then compare the two smaller economies with thatmodel of development.

G. Kelly / Geoforum

The discussion Wrst considers the instruments in com-mon use before moving to a depiction of the strategiesadopted by the three countries, their approaches to over-coming barriers to RE deployment, and a brief assessmentof the factors inXuencing the success achieved.

2. Instruments for RE development

Development of renewable energy in recent years hasbeen largely driven by the need to reduce greenhouse emis-sions. While the allied beneWts of energy supply securityand potential employment have not of themselves been themajor drivers, most operational programs have beenshaped within the context of those other objectives and aconstraint of minimum cost. As an adjunct of direct emis-sion reduction programs, RE programs employ a similarrange of instruments, though with two approaches (trad-able certiWcate systems, and pricing systems) tending toprevail.

The International Energy Agency (IEA, 2004) provides abroad survey of RE promotion instruments in use in IEAcountries which illustrates well how RE programs mustaddress two dimensions simultaneously, in promoting boththe supply and demand for REE. On each side of the mar-ket, both the cost of physical (capital) capacity and theoperating cost of that capacity must be addressed. Combi-nations of instruments are therefore common includingincentives such as tax exemptions and direct subsidies, gov-ernment demonstration by REE purchase, voluntary (sua-sion) programs and, overarching all others, regulation bygovernment where required to compel a speciWed consump-tion of renewable energy. The use of regulation to facilitateREE deployment is illustrated by the two schemes whichhave emerged as the principal instruments in this Weld.

In the Wrst, demand is created by government mandatinga certain minimum level of REE purchase, provision ofsuch REE being undertaken by suppliers whose processesare accredited, and whose generation of REE is certiWed, bygovernment. The certiWcates so created (attesting to a quan-tity of REE, and hence to a reduction in GHG emissions)are able to be traded separately to the electricity proper, forpurchase by parties liable for the minimum REE purchaserequirement. In such a system, the price of certiWcates isdetermined by bargaining between certiWcate suppliers andpurchasers, and there is commonly little if any diVerentia-tion between alternative forms of REE. Such systems areessentially quota (quantity-based) systems, with certiWcateprices being market determined.

The second system regulates not quantity but price, andleaves determination of total REE purchase to the interac-tion of suppliers and purchasers. Such systems may haveseparately speciWed prices for diVerent technologies, obviat-ing competition between diVerent REE forms and promot-ing the development of alternative technologies. Thepricing system is decidedly more interventionist in nature

than the quota system, and has been responsible for thegreater part of REE growth in recent years. By end 2001 for 38 (2007) 326338 327

example, three countries alone (Denmark, Germany andSpain) were responsible for 84% of installed REE capacityin the EU, all using variants of the pricing system (Meyer,2003).

Individual national schemes may vary widely aroundthese central themes. The Mandatory Renewable EnergyTarget scheme in Australia is an example of the Wrst type,and the German feed-in mechanism (FIM) an example ofthe second. It is the latter which has been responsible forthe largest national REE capacity addition to date (Menan-teau et al., 2003).

2.1. Tradable permits and Green certiWcates

It is important to note a distinction between the use oftradable permits for environmental pollution reduction,and the use of tradable certiWcates for such commodities asgreen electricity. Tradable permits have a long history ofenvironmental application, as for example in acid rainreduction programs (Clarke, 2002). In the classical model,regulatory limits are applied to a range of pollution emit-ters with diVering compliance costs. Were regulation aloneto be applied, then the total compliance cost could beunnecessarily high, as high abatement cost Wrms would beobliged to abate as much as low abatement cost Wrms. Per-mit trading systems allow trade to take place between high-and low-abatement cost Wrms, with high cost Wrms able tobuy permits from those Wrms able to generate them at lowerabatement cost. The process of trade thus facilitates totalcost reduction in achieving the required emission reduc-tions (Pearce and Turner, 1990; Tietenberg, 1980).

Renewable energy certiWcates diVer however in so far asthey are directed at a speciWc segment of GHG emissions,those induced by Wrms through their consumption of fossil-fuel-based electricity. Commonly, such Wrms (and individu-als) are required to purchase a common fraction of theirenergy supply from renewable sources of lower (or zero)induced emissions. There exists an element of marketchoice, in that consumers are able to either provide theirown renewable energy, or purchase from others whose costof provision is lower. The tradable (or green) certiWcatesattest to the production of the REE, and the consequentreduction of fossil-fuel-based energy (Bertoldi and Huld,2006; Morthorst, 2003, 2000).

Importantly however the broader total cost minimisa-tion achievable by the tradable permit system does notoccur. Energy consumers required to purchase or generateREE may well possess other abatement avenues of lowercost than that associated with increased use of REE butcannot substitute those for their purchase or generation ofREE. It is only when an element of fungibility is introducedthrough the interfacing of certiWcate systems with broadlybased emissions trading systems that true cost minimisationmay become possible. Such a combination of systems is atpresent far from universal.Notably also the certiWcate supply side diVers to that in atrue tradable permit model. In that model, potential providers

328 G. Kelly / Geoforum

of emission reduction are likely to be already in the Weld inwhich emission reductions may be created and traded and,at least within national schemes, reasonably informed as tothe nature and risk of the requisite reduction activity. In thedeveloping REE Weld however, most signiWcant activitiesimply investment in new projects, often of long leadtimes,with the risk attendant to any new project development,and often dependent on political undertakings for longterm commitment of funds. In essence, green certiWcateschemes depend on inducing the supply of an environmen-tal service (the generation of REE) by private investors and overall scheme success in turn depends on the eVective-ness with which that is achieved.

3. The countries

The countries discussed are relatively high-income,OECD member countries with a long engagement in inter-national climate change initiatives. The UK and New Zea-land have both ratiWed the Kyoto Protocol althoughAustralia has not progressed to that stage (UNFCCC,2005). Their indigenous energy resources diVer markedly inscale, New Zealand having least and in particular havingrapidly diminishing gas reserves, leaving coal as the princi-pal non-renewable fuel source (IEA, 2004/1). Australia pos-sesses large reserves of both hydrocarbon fuels and coal,and is a major world coal supplier (IEA, 2004/1). The UK isthe largest producer of petroleum and natural gas in theEU, although it is predicted that it will shortly become a netimporter. The UK also has substantial coal reserves,although the industry has reduced radically in scale follow-ing privatisation in the 1990s (EIA, 2005). Selected charac-teristics of the three countries are shown in Table 1.

Several variables deserve comment. First, both high elec-tricity usage and per capita greenhouse gas emission ratesin Australia reXect the major role played by coal basedenergy within the Australian economy, mirroring theexport importance also of coal to that country (supplying28% of world coal exports in 2003 (EIA, 2004)). The Aus-tralian electricity supply industry contributes around 37%of the countrys total greenhouse gas emissions (Nolleset al., 2002). Second, New Zealands emission data is nota-ble for the contribution of agriculture, indicative of its rolein the New Zealand economy, and shown also by the agri-cultural component of total exports.

4. The United Kingdom

4.1. Overview: UK RE support programs

In a major environmental irony the Wrst UK step to pro-mote RE arose from moves to advantage nuclear power. In1990, to beneWt state-owned nuclear generation, a tax wasimposed on nuclear powers principal competitor, coal-based power, together with a purchase quota for the more

expensive non-fossil-fuel-based power. The initiative wasframed in terms of non-fossil-fuel-based power generally, 38 (2007) 326338

as the Wrst round of the Renewable Non-Fossil Fuel Obli-gation (NFFO) (Mitchell and Connor, 2004).

The NFFO was a quantity regulation coupled with atax, the Fossil Fuel Levy (FFL), to pay for purchase of thehigher priced non-fossil-fuel-based power. REE genera-tors tendered for the supply of speciWed quantities ofpower against quotas for diVerent types of REE (Meyer,2003). Over eight years REE capacity targets were raisedto a Wnal target of 1500 MW for the year 2000 (Connor,2003). NFFO achievements though fell far below thattarget.

The Blair government in 1997 adopted a policy for REto supply 10% of Britains electricity by 2010, leading in2002 to a new program the Renewables Obligation (RO),essentially reversing the process of the NFFO. Where theNFFO eVectively contracted capacity for generation at setprices for diVerent renewables, the RO imposed an REEquota on bulk power purchasers, who in turn negotiatedREE prices. Accredited generators were granted Renew-ables Obligations CertiWcates (ROCs), for each MW h ofgenerated REE. ROCs were separable to the electricity, sogenerators might sell the power and associated certiWcate todiVerent purchasers (Mitchell and Connor, 2004). A pen-alty/buyout mechanism allowed Wrms to buy out their RO

Table 1Selected variables

a Units are listed in Appendix 2.

Variable UK Australia NZ Note

GDP/capita ($US, PPP, 2003) 27,490 28,520 22,920 1Electricity use per capita

(kW h/person)a6158 10,502 9088 2

CO2 emission per capita(tCO2/person)fuel combustion only

8.94 17.36 8.55 2

Total energy/GDP (PPP)(toe/thousand 1995$US)

0.16 0.23 0.23 2

GDP contribution %Agriculture 1 3.4 4.6 3Manufacturing 26.3 28.2 27.4Services 72.7 68.4 68

Export contribution %Agriculture 6.6 22.8 58.2 4Manufactures 82.8 24.1 31Mining 10.6 37.6 4.9

Emission sources %Agriculture 7.9 19.8 54.4 5, 6, 7Energy use 85.4 74.7 38Industry and waste 6.6 5.4 7.7

Note Source

1 The Economist (2005)2 IEA (2005)3 CIA (2005)4 WTO (2005)5 CoA (2002)6 HM Government (2001)7 MfE (2001)obligation for 30/MW h, receipts being redirected to com-panies who had met their obligation. Further incentive

G. Kelly / Geoforum

came in the exemption of REE from the Climate ChangeLevy (CCL), a tax on electricity consumption levied onnon-domestic sectors (Meyer, 2003).

There were therefore four price factors for potential REgenerators to consider the price of the energy generated,the value of the CCL exemption, the price of the ROCs, andthe receipts from buyout payment redistribution. In 2003terms, the approximate value of each was

energy 1.51.8 p/kW h, CCL exemption 0.086 p/kW h, ROC value 3.0 p/kW h, recycled buyout 1.5 p/kW h.

The third and fourth components both signiWcant were exposed to signiWcant price uncertainty from the mar-ket for ROCs, and suppliers buyout decisions. Furtherprice risk became evident in 2003 when two major electric-ity suppliers failed owing large buyout payments, whileother suppliers were late in paying buyout obligations sothat recycle funds were not available (Mitchell and Con-nor, 2004).

Adoption of the certiWcate scheme marked a shifttowards greater market inXuence on RE development,assigning determination of the RE technology developmentpath to market forces. Early results of this second approachwere little diVerent to those of the Wrst, less than 2.5% oftotal generation in 2003/4 being REE (the largest compo-nent being from landWll gas, technology unlikely to oVerlong term growth). Capital grants were commenced to tech-nologies viewed as having long term potential, but not via-ble under the RO regime alone. Some 117 million wasdirected to oVshore wind energy to 2005, that technologybeing targeted as the largest component of REE in pro-jected 2010/11 generation. Generation was projected toalmost reach the governments 10% REE target in 2010,contingent on assumptions on the potential barriers toprogress in the implementation process (NAO, 2005).Those assumptions have not been tested, and several of thebarriers rest on operational features of the ROC schemeitself, including wholesale electricity market pricing, andquestions over the value of ROCs. Achievement of declaredtargets would however depend on implementation rates farhigher than any to date.

The success of the REE initiatives may also be measuredin their eYciency as reXected in delivered RE prices,although the evidence on outcome prices at Wrst sightappears mixed. Tendered prices under the NFFO hadindeed declined, suggesting the approach may have pro-vided eYciency forcing through competitive bidding (Con-nor, 2003). On the other hand, prices being delivered by themarket-based RO process in 2003 were similar to pricesfrom the German feed-in model (FIM), embodying eVec-tively risk free prices determined by regulation. It is alsomost relevant that many of the tendered NFFO projects

were never built, partly for price reasons (Mitchell andConnor, 2004). 38 (2007) 326338 329

4.2. Barriers and success factors in RE deployment

The 15 years of structured REE initiatives in the UK to2005, under two markedly diVerent approaches, deliveredresults well below declared targets. Various factors havebeen suggested as contributing to the low deploymentachieved.

4.2.1. Perceptions of low investment securityPrivate investment depends on the perceived security of

returns. Risk factors present in REE development includedprice risk, sales volume risk, and the potential for the valueof output to be inXuenced by market rules. In the marketbased RO regime, unlike the NFFO, contracts were com-monly of short duration, with prices generally lower as con-tract length increased. Overarching speciWc market risk wasthe uncertainty of government policy the actual change tothe RO system of itself demonstrating a substantial policyshift, with later indications in the 2003 Energy White Paperof a further policy shift to carbon trading (Mitchell andConnor, 2004). The potential for such policy shifts is a cleardisincentive to high Wxed cost REE investment. Inducementof private investment (in this case in the supply of an envi-ronmental service), can only succeed where there is ademonstrable Wnancial advantage to all parties (Baileyet al., 2004) (italics added).

4.2.2. Energy market interactions and pricesIn addition to cost pressures from the NFFO itself,

generators also faced cost pressure from newly deregu-lated electricity markets. In 2001 the New ElectricityTrading Arrangements (NETA), a construct for electric-ity trading which sought to mimic commodity markets,was introduced. Under NETA, REE generators enjoyedno diVerent status to fossil fuel generators and were dulypenalised for any supply variability. Initial results fromNETA showed an average revenue reduction to smallgenerators of 34.8% (Mitchell and Connor, 2004). REEproviders operating under the RO scheme faced the samediYculty a problem not only for existing REE genera-tors, but of arguably greater consequence as a disincen-tive to investment. An objective conXict was evidentbetween the use of market constructs designed to reduceprices, and the REE deployment deterred by that pro-cess.

A further incompatibility with competitive marketoperation was evident with the principal technologybeing deployed, wind generation. With typically over 85%of the delivered cost of wind power ascribable to invest-ment costs, output costs were virtually determinedthrough ex ante equipment eYciency, operators havingminimal ability to respond to competitive pressures.Given that, it was not apparent why one should set upa complicated green certiWcate market for installations,

which have no Xexibility to compete in this market(Meyer, 2003).

330 G. Kelly / Geoforum

4.2.3. DiYculty in securing planning approvalsProblems with planning approvals for REE generation

(particularly windpower) could be argued to be generic tosuch development, and independent of the promotionsystem employed. Certain issues arose however whichwere due in part to the nature of the NFFO and the RO.The pursuit of short timeframes for development, and anemphasis on lowest prices, necessarily encouraged devel-opment of the most promising sites. This led to a seemingwind rush with many applications in a short timefor development in only few sites. This in turn created anegative public response (Mitchell and Connor, 2004)which might arguably have been mitigated had theapproach to cost allowed a broader range of locations tobe addressed. The haste for development also led to largescale importation of generation equipment, to the majordetriment of the local supply industry (Menanteau et al.,2003).

4.2.4. Technology selectionWhile the NFFO provided diVerentiated treatment for

various REE technologies, the RO scheme essentiallynarrowed opportunity to near-market technologies,being technology indiVerent and rewarding lowest cost.This eVectively precluded REE options with supplydiversity values, and those with development potential,neither value being incorporated in short term marketprices. Measures were taken to address this through acomplementary capital grant process, where alternativetechnologies might receive eVective capital subsidies.Early major beneWciaries were oVshore wind installa-tions, and bioenergy projects, some 169 million beingdirected to those two technologies alone. This explicitdiversion from market-based development may well rep-resent acknowledgement of the inadequacies of thatmechanism in securing coherent RE development (Con-nor, 2003).

4.2.5. PlayersThe signiWcant risks facing individual REE generators

in the open RO system market eVectively biased participa-tion towards vertically integrated, larger electricity Wrmsable to accept greater Wnancial risk and internalise thatrisk (Meyer, 2003; Mitchell and Connor, 2004). Whilearguably delivering cheaper REE in the short term byfocusing on the larger projects of likely interest to suchWrms, the approach discourages smaller Wrms unable tocarry the requisite risk, or raise Wnance. It is these, how-ever, who may provide broader market development, boththrough their focus on REE generation only (having nocompeting conventional generation) and by addressingsmaller scale initiatives with attendant geographical andsupply diversity, and future development potential. Whilea range of capital grants is being provided to encourage

such sources, these grants do not diminish market risk inlater operation. 38 (2007) 326338

4.3. Prospects

The UK RE programs were implemented against chal-lenging objectives which they have yet to meet. While a sec-ondary objective of nominal RE cost reduction appears tohave been achieved, this has arguably been at the expenseof the primary objective of RE deployment (Mitchell andConnor, 2004). A recent National Audit OYce review indi-cated that the 2010 REE target of 10% of generation maybe met, but acknowledged the possibility of a shortfall of atleast 25%. Achieving the objective required a stepchange in the level of renewable generation and theaddressing of the various barriers to development discussedabove (NAO, 2005). It is notable that more recently tar-geted capital grants have been used to address technologiesnot being sustained by the RO scheme, suggesting thatsolely market based approaches may not be capable ofdelivering desired policy outcomes, in the presence of multi-ple objectives.

5. Australia

5.1. Overview: Australian RE support programs

From 1990 the Australian Government approached REpromotion through a range of education and grant initia-tives, many of a modest scale, the largest (RenewableEnergy Development Initiative of 2004) having seven yearfunding of $A100M (IEA, 2003). Virtually all signiWcantexpenditure delivered capital or operating subsidies. Amajor program emerged in 1997 when, shortly before theKyoto COP3 Conference1 the Howard governmentreleased a range of climate change measures. Among themwas a commitment to set a mandatory target for energyretailers [and other large electricity buyers] to source anadditional two percent of their electricity from renewablesources by 2010. In addition to promoting RE uptake, theinitiative was argued as providing for the development ofindustries able to compete internationally (CoA, 1997). Ini-tial aims were clearly broad.

The Mandatory Renewable Energy Target (MRET)came into operation from April 2001. Its core was arequirement for large electricity purchasers to proportion-ately contribute towards a target of 9500 GW h of REEpurchase by the year 2010, and for a further 10 years. Com-pliance was demonstrated by the purchase (or generation)and surrender of Renewable Energy CertiWcates (RECs),each equivalent to 1 MW h generated by accredited REEgenerators. RECs were created by generators registeringthe generation of the appropriate amount of energy, whichcould take place some considerable time after actual gener-ation. The ability of generators to bank eligible generationfor later REC creation has connotations for REC market1 COP3 the Third Conference of the Parties to the United NationsFramework Convention on Climate Change (UNFCCC).

G. Kelly / Geoforum

pricing, implying as it does an information asymmetrybetween suppliers and purchasers.

The MRET target increased over nine years from 2001.Liable parties who did not fulWl their obligations faced apenalty or buyout payment of $A40/MW h,2 around halfthat of the UK scheme (3 p/kW h) (Oxera, 2005). Unlike theUK scheme receipts went to government rather than com-plying Wrms. The MRET program was projected to becomethe second largest contributor to Australias overall sta-tionary source GHG reduction. (AGO, 2003) and is thefocus of this discussion as the principal vehicle for volumeRE development in Australia.

DeWnition of the MRET objective was contentious.Through major industry pressure, the headline Wgure of 2%of national generation became a Wxed Wgure of 9500 GW h,which in reality represented a projected level of 0.2% in2010, the focal year of the program. It was further predictedthat by 2020, the end of the program, the 9500 GW hwould not have prevented an actual reduction of 1% in theRE component through demand growth (AGO, 2003). Incomparison, the UK objective in 2004 was an increasein RE contribution by 2010 of a little over 7% from2003 levels, with the announced intention to extend theRenewables Obligation requirement by a further 5% by2015/6 subject to the cost being acceptable to theconsumer (HM Government, 2004). Implementationdemands implied by the UK program were thus signiW-cantly greater.

The MRET program had been only brieXy in existencewhen it was subject to a government review, the ParerInquiry of 2001, which recommended termination of theMRET among other schemes and replacement with anemissions trading system. The recommendation was notadopted, but caused signiWcant disquiet among RE inves-tors regarding future government policy (AGO, 2003). Asecond review (the Tambling Review) was carried outafter two years of operation, and made a number of recom-mendations, of which four were signiWcant addressingaspects considered problematic with the program at thattime. They were

1. to extend the MRET scope to reach a target of20,000 GWh by 2020;

2. to extend the scheme past 2020 such that investors mightrecoup investments made after 2005;

3. to allow generators which commenced operation before2005 to generate RECs until 2020, at which time theirbaselines would be reset; and

4. to index the buyout charge for inXation from 2010 to2020 (AGO, 2003).

While other administrative recommendations wereeither agreed or referred to other existing funding initia-

2 The penalty payment is non-deductible for tax purposes and hence its

eVective value depends on the corporate tax rate of the time (McLennanMagasanik, 2002). 38 (2007) 326338 331

tives, the four central recommendations were all rejected bygovernment, emphasising that it would not extend orincrease the MRET (AGO, 2004).

Discussing the issue in June 2004 an energy White Paperstated a view that a better path is to build on the suc-cessful outcomes of MRET to more directly promote thedevelopment and demonstration of a broader range of low-emission technologies (CoA, 2004). Vehicles for thispurpose were $A100 million funding for solar electricityand hot water development, and a Low Emission Technol-ogy Development (LETD) Fund of $A500 million over 15years.

LETD criteria included a permissible development time-frame up to 15 years, and a minimum GHG reduction con-tribution of 9.5 Mt CO2e per annum. Technologiesenvisaged were those which were low emissions technol-ogies that will underpin the value of Australias resourcebase (AGO, 2005). Given the nature of RE technologies,and the public good characteristic of the resources con-cerned, a focus on renewables would appear unlikely undersuch criteria, leaving renewables development in Australiato rest on the MRET program and its 9500 GW h target.

5.2. Scheme outcomes

The outcome of the MRET to 2004 is not adequate tojudge its long term eVectiveness. Administratively thescheme had functioned as intended by 2004, slightly over7.7 million RECs had been created, against the Actsrequirement of 3.2 million. Around $A900 millionappeared to have been invested, with $A1100 million fur-ther investment appearing Wrmly committed (Rossiterand Wass, 2004). There had been no signiWcant failure tocomply with the provisions of the Act. By early 2004 thenumber of approved RE generators had approximatelydoubled (Kent and Mercer, 2006). These indications werepositive, but underlying them were potentially problematicissues for the MRET in its role of long term RE develop-ment.

5.2.1. Hydro generationUnlike the UK, large existing hydro generators were not

excluded from the scheme, despite its aim of inducing newRE investment. For the Wrst three years of the MRT, some53% of eligible generation came from hydro (Rossiter andWass, 2004), the two principal suppliers of which were bothpublicly owned (Snowy Hydro, 2005; Hydro Tasmania,2005). The next highest amount (around 17%) arose fromthe deemed lifetime contribution of solar water heaterscredited at the time of purchase (Rossiter and Wass, 2004),suggesting that the contribution to actual generation fromhydro in that period was much higher than 53%.

The role of hydro had earlier been the subject of majorcontention, with suggestions that much if not all of its eligi-ble generation could be achieved from existing facilities,

due to two issues around the baselines determined forhydro plant. First, these were claimed to have been set

332 G. Kelly / Geoforum

lower than their already achievable output. Second, perfor-mance requirements against baselines were asymmetric. Allgenerated energy over the determined baseline capacity waseligible for RECs. When suppliers generated at levels belowbaseline however, no requirement existed to make up thedeWcit. Combined, these factors were suggested as making itpossible for nearly one quarter of the total MRET demandto be provided by existing hydro plant without any capacityaddition, in part on a business as usual basis (BCSE,2003). The major role played by hydro generators alsopotentially aVected REC market operation as discussedbelow.

5.2.2. Investor conWdenceSeveral factors posed risk to the investor conWdence nec-

essary for mobilisation of private capital. First, the over-arching policy framework for RE development appeared inquestion initially from the Parer Reports recommenda-tion for MRET termination (CoA, 2002) and later from theGovernments own espousal of targeted but modest capitalsubsidy funding for alternative technologies (CoA, 2004).Debate on these alternatives in the early years of a longterm program could not positively inXuence investor conW-dence in long term industry returns. Second, the REC mar-ket process itself made room for uncertainty over themarket price for RECs, the basis of investment return. Cer-tain improvements had arisen from the Tambling Reviewin relation to market transparency in regard to potentialREC supply from hydro (AGO, 2003). While this addressedan information issue, the situation remained where RECmarket prices could be far more inXuenced by the actionsof large hydro generators than by other smaller renewablegenerators. That situation might further impact on investorconWdence through uncertain REC pricing over the time-frame required to amortise capital.

5.2.3. Technology focusThe technology neutral approach of the MRET essen-

tially mandated technologies with the lowest immediate pri-vate cost, thereby excluding the valuation of externalitiesassociated with particular forms of RE. These includedequipment industry development, fuel supply industrydevelopment, long term cost reduction and various envi-ronmental values including salinity and weed control asso-ciated with energy crops. The Tambling Review in seekingextension of the MRET argued clearly for such issues to berecognised, noting that wind energy in Australia for exam-ple could account for some 41% of Australias renewableenergy (AGO, 2003). Others were even more positive, sug-gesting that by 2010 Australia might have 5000 MW ofwind generation, some 6% of the countrys total electricityconsumption (AusWEA, 2004) Implicit in those expecta-tions was recognition of experience elsewhere that windgeneration costs decline substantially with industry scale.Current markets however do not incorporate future pricing

eVects, to the detriment of such technologies and industrydevelopment. 38 (2007) 326338

In the Wrst three years of the MRET the number ofapproved RE generators nearly doubled but almost halfthat increase comprised landWll gas and photovoltaicsources, unlikely to provide a long term volume base(Kent and Mercer, 2006). Wind development remained asthe most likely candidate for volume RE electricity pro-duction in Australia (BCSE, 2003) but program settingsfailed to provide a coherent development path for that tooccur.

5.3. Prospects

The MRET appears likely to deliver its Wrst objective of9500 GW h of RE generation by 2010, although it was sug-gested that banking generation in earlier years might leadto a 1000 GW h shortfall in that year (AGO, 2003). Otherimplicit objectives however were less likely to be achieved.Curtailment of the program to its original scope impliesthat its contribution to industry development (both in fueland equipment supply) is likely to be minimal. Investmentto meet the target is expected to tail oV by 2007 (AGO,2003). No basis exists therefore for the development of anequipment supply industry. The program has also beenconstrained in its ability to bring forward technologiesother than near-market technologies, that role now seemingto have been allocated to capital subsidy funding programssuch as the Low Emissions Technology DevelopmentFund, in a manner similar (albeit on a much smaller scale)to developments in the UK program.

In all, the MRET program appears to have delivered itsmodest initial energy goal. However notwithstanding itsinnovativeness as the Wrst mandatory national certiWcateprogram (Rossiter and Wass, 2004) it appears unlikely in itspresent form to be a vehicle for major renewables develop-ment in Australia.

6. New Zealand

6.1. Overview: NZ RE support programs

New Zealands initiatives to address climate changeeVectively commenced with the Energy EYciency and Con-servation Act of 2000 which led to a National EnergyEYciency and Conservation Strategy in September 2001(EECA, 2001). This adopted three core policy componentsto pursue sustainability energy eYciency, energy conser-vation, and development of renewable energy systems. Itincorporated New Zealands Kyoto undertaking to reduce2008 to 2012 average CO2 emission levels to those of 1990.As shown in Table 1, New Zealands emissions are unusualfor their high agricultural component, and correspondinglylower energy use component. That proWle constrained theactions which could be taken to pursue the Kyoto targetand forced greater emphasis on options such as renewableenergy development. That option also however had con-

straints, New Zealand already having a high (29%) propor-tion of RE generation.

G. Kelly / Geoforum

The Strategy faced signiWcant demands as emissions hadrisen substantially through the 1990s and business asusual (BAU) growth was projected to continue at 1.7%annually (EECA, 2001), although early analyses had indi-cated that New Zealand would achieve its Kyoto undertak-ings. RE development was seen as playing a major role asone of three main instruments. These were an emissionscharge (a carbon tax), negotiated emission reduction agree-ments with industry as an alternative to emissions charges,and the Projects to Reduce Emissions program. The emis-sions charge was to commence in 2007, but was subse-quently rescinded in late 2005 (NZCCO, 2005). Negotiatedindustry agreements and the Projects program were both inoperation by 2004 (NZ Government, 2004). It is the Pro-jects program, and its RE development component, whichis the focus here.

The Projects program sought to lower New Zealandsoverall emissions by, inter alia, encouraging development ofRE, principally for power generation. A potential addi-tional contribution of 2555 PJ/a to the existing of renew-able energy generation was considered feasible, a nominaltarget of 30 PJ/a being adopted (NZ Government, 2004).That objective was of a similar order to that adopted byAustralia, whose 9500 GW h/a target equated to some34 PJ/a (EECA, 2001). Comparison to UK objectives couldbe seen in the target percentage for RE supply. The UKRenewable Obligation consultation paper posed a target of10% of all electricity generation by 2010 (Connor, 2003) ascompared to the NZ Strategy target of an additional 6.5%(of 2001 levels) (EECA, 2001). Given the already high levelof renewable generation, the target was challenging.

New Zealand shared with the UK and Australia a com-mon orientation towards wind generation as the principalRE supply, although its relative potential was consideredsigniWcantly higher than either. Early assessments even sug-gested the possibility for wind to supply total electricitydemand. Technically feasible wind generation was believedto be around 100,000 GW h/a, (three times New Zealands2001 consumption), due to a combination of the countryslong coastline, and location across the path of prevailingnorth westerly winds (EECA, 2001/1). Wind was thereforeexpected to play a major role in future RE supply.

The New Zealand scheme diVered to others in the originof its certiWcates. Where the UK and Australia created aform of regulatory property for trade by virtue of mandatednational consumption levels, New Zealand built its certiWcateprocess on the basis of its Kyoto undertakings. There, trad-able quantities were expressed as Assigned Amount Units,Assigned Amounts being those assigned against each coun-try according to its commitment in the Wrst Kyoto Commit-ment Period, 20082012 (UNFCCC, 2004). Each certiWcatethus represented an emission equivalent of 1 t of CO2, and adebit against New Zealands Assigned Amounts.

In the Projects program the Government made availableto project developers these certiWcates as an incentive for

projects which would reduce New Zealands emissionlevels. CertiWcates may be sold separately to any related 38 (2007) 326338 333

electricity or other energy. Program eligibility groundsincluded economic and environmental additionality pro-jects could not be Wnancially feasible on a BAU basis, andmust contribute a minimum reduction of 10,000 t of CO2equivalent emission in the period 20082012. CertiWcateswere awarded to competing projects through a tender pro-cess, the incentive amount to successful bidders being basedentirely on the potential sale value of the certiWcate at end2004, around $NZ15 internationally (NZCCO, 2005).

6.2. Scheme outcomes

The Wrst two program tender rounds were conducted in2003 and 2004, making available four and six million unitsrespectively, representing potential abatement of 10 milliontonnes of CO2 emission in the period 20082012. Selectioncriteria for the Wrst round included preference for projectscontributing to energy supply security, and with emissionreduction before 2008. Second round criteria were relaxedto encourage wider participation, with both preferencesremoved. Instead, projects were assessed on the basis of abid price (the emission units sought per tonne of emissionreduction) and project risk (NZCCO, 2005).

Wind projects accounted for 31% of the Wrst roundawards, other major projects being cogeneration (31%),geothermal generation (20%) and landWll gas based genera-tion (9%) (NZ Government, 2004/1). The Wrst successfulprojects from the second round included landWll gas collec-tion, mini hydro, and wind installations, reXecting again therole on renewables in the program (NZCCO, 2004). It isclearly too early to judge the implementation success of theProjects program given the need for development stages tobe negotiated, but early outcomes demonstrated success inbringing forward emission reduction projects which mightotherwise not have arisen. Several aspects of the approachadopted deserve comment including the type of credit used,the barriers encountered, and the nature of the generationindustry.

6.2.1. Use of emission creditsThe decision to base the tradable certiWcate scheme on

Kyoto units was taken at a time when analysis of New Zea-lands nett position showed New Zealand to be in creditagainst its Kyoto commitment. In a 2005 reappraisal how-ever the perceived surplus became a roughly similar deWcit(NZ Government, 2005; NZ Government, 2004). The posi-tion reversal implied also a reversal of expected tradingreturns, from receipts of some $NZ500 million to potentialexpenditure of the same order, based on $15/tonne CO2prices. The extent to which the decision to utilise Kyotoemission credits as incentives was based on the perceptionof availability of surplus credits is not clear.

6.2.2. Potential barriers to implementationSteps were taken to address several of the barriersto project implementation encountered elsewhere. Theseincluded

334 G. Kelly / Geoforum

controversy over environmental amenity in terms ofwind, hydro and power transmission generally (Keenan,2005; Blechynden, 2005) was already widespread. TheClarke Government sought to address that throughamendments to New Zealands core environmental man-agement legislation, to ensure that broader nationalinterests were given due weight alongside more speciWclocal interests (MfE, 2005);

market compatibility: technical and commercial diYcul-ties associated with renewable energy sources such aswind within quasi-commodity markets for electricitywere recognised and work commenced to address poten-tial barriers. In a major Wrst report (Wind Energy Inte-gration in New Zealand (EnergyLink/MWH, 2005))potential problems and methods of approach were iden-tiWed as the basis for continuing study. The general tenorof the report was summarised in a quotation from a USstudy (Kema-Xenergy, 2004) noting that the impacts oflarge-scale wind energy generation are viewed not asan obstacle to development, but rather as obstacles thatmust be overcome.

6.2.3. Industry ownership and behaviourIn markets elsewhere there was recognised a potential

disadvantage to smaller renewable generators in competingand dealing with established generators in short term elec-tricity markets. That issue would appear of lesser impor-tance in New Zealand, given the continuing major presenceof government-owned supply companies in those electricitymarkets. In 2004 those companies accounted for over 60%of total power generation, owned the national transmissiongrid, and serviced over 50% of retail customers nationally(Aurora Energy, 2005). In that situation conXict betweennational energy objectives and market operation would bea lower risk than in those countries with substantially pri-vate market participants.

6.3. Prospects

While still at an early stage, the relatively ambitious REprogram commenced in New Zealand has shown successin bringing forward projects of the type required to moveto a lower carbon generation base, with wind showingindications of being the principal long term addition toexisting RE generation. Initial steps had been taken toaddress certain of the issues encountered as problems else-where, and these, together with the additional incentive togovernment provided by worsening emission projections,suggested the potential for continuing RE development inNew Zealand.

7. DiVering systems, common elements

The three RE development schemes discussed hereshare a common theme in their use of tradable certiWcate

processes, to pursue cost eYciencies in the adoption of lowemission energy forms. The UK and Australian schemes 38 (2007) 326338

diVer from the New Zealand scheme in both the supplyand demand side of the market. (A summary of schemecharacteristics is given as Appendix 1.) On the supplyside, in the UK and Australian schemes certiWcates attestto the generation of 1 MW h of REE; in the New Zealandcase, certiWcates are denominated directly as one tonne ofCO2 equivalent emission. Both certiWcate types may betraded separately to their associated energy product.While often there may be a close equivalence in eVectiveemission value between the certiWcate types (AGO, 2003/1),there is an attractive clarity and lack of ambiguity in theemission based deWnition. Emission based systems alsointegrate more readily with broader international tradingschemes.

On the demand side, the UK and Australian schemes arequota schemes of the Renewable Portfolio Standard type,where governments mandate the purchase of certain quan-tities of renewable-based energy (Berry, 2002). The renew-ables standard creates a demand side for a market wherebythose liable parties unable to generate their own renewableenergy may purchase certiWcates created by others. Marketsare therefore domestic in operation, and the certiWcates reg-ulatory property created by the relevant government. InNew Zealands case, the demand side of the market hasbeen created through the Kyoto Protocol. The creditsissued by the New Zealand government are therefore inter-nationally tradable with other countries which have ratiWedthe Kyoto Protocol, oVering access to broader and moreliquid markets.

Importantly also, the eVect on national AssignedAmounts under Kyoto diVers materially. CertiWcate sys-tems in England and Australia in no way aVect those coun-tries Assigned Amounts (a hypothetical issue in Australiascase as Australia is one of the two developed countries notto have ratiWed the Kyoto Protocol). In New Zealands casehowever the beneWt granted project developers in the formof tradable credits is in fact a transfer of property rightsfrom the nation to the individual developer. Each certiWcateissued under the New Zealand scheme represents thereforea reduction in New Zealands available Assigned Amountunder the Kyoto Protocol.

The decision on the type of certiWcate system to use iscomplex and undoubtedly inXuenced by a countrys per-ception of their diYculty in meeting their Kyoto limits. InNew Zealands case, the decision to use Kyoto-based cer-tiWcates was made at a time when there was projected to bea surplus in entitlements. In Australias case, the questionwas, as noted, hypothetical. In the UK, while data sug-gested the probability of the UK achieving its Kyotoundertakings, the government had also committed to inter-nal goals more stringent than its Kyoto undertakings andthere was doubt over their achievement (HM Government,2004).

All three schemes depend for their success on inducingthe provision and consumption of an environmental ser-

vice, that of renewable energy based electricity (REE).Of the three schemes, the more comprehensive UK scheme

G. Kelly / Geoforum

best serves to illustrate the factors impacting on that suc-cess. While several of those factors addressed the demandside of the market, most were of principal concern to poten-tial suppliers.

Issues impacting on the demand side included

the level of the buyout price, directly aVecting purchasedecisions and ampliWed in its eVect through the recyclingof buyout revenue, eVectively meaning an REC mighthave a value in excess of the buyout price;

a further incentive component through RE exemptionfrom the Climate Change Levy, an example of positiveprogram synergy; and

a clear espousal of long term aims for the program,allowing both consumers and producers to developtheir actions in a framework of some perceived consis-tency.

Such factors on the demand side were broadly positive,in contrast to a number of supply side issues less conduciveto supply development. They included

cost pressures on potential suppliers, Wrst in the NFFOtender process, and later in the RO open marketapproach. While apparent cost reductions were achieved,this appeared to be at the expense of RE deployment,and, in association with excessively short developmenttimeframes, to have contributed to adverse public reac-tion to concentrated development in few high-returnsites;

the lack of diVerentiation of treatment for alternativetechnologies tended, when coupled with cost pressures,to handicap those technologies of potential supply diver-sity and employment opportunity as it failed to internal-ise expected long run improvements in supply coststructure;

perceived risk to long term investment returns from anumber of sources certiWcate market operation, elec-tricity market operation, and concerns over policy con-sistency as demonstrated by moves to other instrumentssuch as capital subsidy funding;

a tendency for that risk to favour the participation oflarger Wrms better able to Wnance development andinternalise risk, thereby limiting the role of smaller andmore diverse supply sources; and

the parallel operation of other policy instruments which,while of beneWt on the demand side, tended to add toperceived risk to supply-side investors in terms of policystability.

It is notable that most of these issues are not a productof the use of certiWcates per se, but of the regulatory frame-work within which the certiWcate scheme was establishedand operated.

Notwithstanding the seeming supply side diYculties,

there was a degree of conWdence in the achievement of 38 (2007) 326338 335

UK REE supply objectives albeit with the aid of addi-tional policy instruments such as capital subsidies (Con-nor, 2003). Early results fell far short of target, implying amajor increase in implementation rates if targets were tobe achieved. By comparison, the Australian scheme(MRET) appears likely to relatively readily meet itsobjective, while sharing most of the potential supply sidehandicaps noted above. The Australian mechanism alsooVers a lesser demand side incentive, with a penalty/buy-out approach both lower in its direct amount, and notsubject to the buyout revenue recycling of the UK system.This apparent anomaly can be largely ascribed to twocomplementary factors the much lower target adopted,coupled with the ready availability and inclusion of pre-existing generation sources able to supply a substantialportion of that target. This well illustrates the extent towhich the outcomes of certiWcate schemes may as muchbe aVected by their surrounding regulations (their policysettings) as by the underlying nature of the certiWcatescheme itself. (ODoherty et al. (2003) note the same issueimpacting on another attempt to establish the supply ofan environmental service the UK packaging recyclingsystem.) It would be reasonable to expect that, were theAustralian scheme objective of a larger scale, then theissues shown problematic in the UK system would haveemerged there also.

New Zealands certiWcate/credit scheme by its diVerentnature obviates a number of the issues noted above. Buy-out of obligations does not arise, the implicit expectationbeing that generation oVered to the grid will be bought,with market rules prescribing the value at which supplybids will be made (EnergyLink/MWH, 2005). That in turnmay be argued as conWning potential suppliers risk to themarket for certiWcates, and to the risk of government pol-icy shifts. In terms of the former, participation in largerand more liquid markets for emission certiWcates is likelyto be of lesser risk than participation in smaller, local mar-kets able to be aVected by local circumstances and actions.The risk of the latter may be limited by execution of agree-ments with government by individual suppliers, as an out-come of supply tender processes. Overall risk to potentialsuppliers should therefore be lower than either of the othertwo systems. On the other hand, the issue of non-diVerenti-ation of technologies is shared with other schemes, thelikely outcome being the development of near-market tech-nologies only. The New Zealand scheme is a further exam-ple of the extent to which the overall nature of an initiativemay be shaped more by regulatory deWnitions in this casethe nature of the certiWcate than by the underlying natureof the policy instrument itself. The devil is indeed in thedetail.

8. Concluding comment

The three national RE approaches discussed here diVer

markedly. In the UK, challenging targets have been

(RE as % of total generation)CertiWcate basis 1 MW h RE based

generation11g

Origin of certiWcate right National law NMarket for trades National NSource of subsidy funds Users through

distributors2Ud

Compliance penalty/buyout price as% average 2000 electricity price

75%2,3 5d

Compliance penalty/buyout priceinXation indexed

Yes1 N

Recycling of buyout to conformingsuppliers

Yes2 N

Existing generators includedin scheme

No Y

Selection of RE source Open/approved RE OMajor existing hydro included

in schemeNo Y

Note S1 M2 M3 U4 M5 E6 NMW h RE basedeneration

1 t CO2e emission

ational law Kyoto agreementational Internationalsers through

istributorsNational asset transfer6

0%3,4 not taxeductible7

Not applicable

o4 Not applicable

o Not applicable

es (with set baselines) No

pen/approved RE Tender processes No

ourceitchell and Connor (2004)eyer (2003)K Electricity Association (2000)cLennan Magasanik (2002)

ECA (2001)Z Government (2004)Feature UK Australia New Zealand

Objective (addition by 2010) 10% of 20101 level 2% of 1997 level4 6.5% of 2001 level5,6336 G. Kelly / Geoforum 38 (2007) 326338

adopted, alternative instruments tested, and mixed successachieved against those targets. SigniWcant issues are seen tobe present which are potential impediments to the develop-ment of REE supply. Those issues appear relevant in theAustralian context also, in the MRET program, the onlyAustralian RE program of signiWcance. They have not pre-vented a likely achievement of national targets, which maybe attributed to a combination of a modest target, andadmission of existing RE generators to the supply side.While the underlying schemes are very similar, the regula-tory settings associated with each have produced quitediVerent outcomes. In New Zealands case, the Projectsprogram was one of only two national initiatives in GHGreduction, no doubt reXecting early perceptions that NewZealand was in credit in its Kyoto obligations. The NewZealand scheme is wholly voluntary, has no deWned bindingtarget, and relies on Kyoto allocated emission amounts andKyoto emission trading provisions to provide a nationalmechanism for emission reduction. While certiWcate based,the scheme diVers materially to both the UK and Austra-lian systems, and has yet to be tested against commercialimplementation.

The three schemes illustrate the extent to which deWni-tional and regulatory diVerences between schemes similar

in their basic mechanism may materially inXuence themanner in which schemes operate, and their expected out-comes. That in turn suggests that development of eVectivepolicy instruments depends not only on the selection ofbasic policy instruments, but at least as strongly on theregulations or policy settings governing the application ofthe instruments. Policy analysis and prescription thereforeneeds to be addressed at least as much at the design ofimplementation frameworks, as at the core principlesadopted.

The IEA (2004) notes a further nine countries whichadopted tradable certiWcate systems for RE developmentover the period 20002003. This suggests further assess-ment of those countries schemes would be of value togauge the extent to which the various operational settingsand regulations governing the schemes have impacted ontheir success in RE deployment. Further, an examination ofthose countries which have applied pricing systems wouldallow the impact of regulatory settings on those schemes tobe gauged. It may well be that eVective program develop-ment depends at least as much on the regulatory parame-ters deWned around the central certiWcate instrument, as onthe choice of instrument itself.

Appendix 1. Features of national certiWcate schemes

G. Kelly / Geoforum

Appendix 2. Units and abbreviations

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Renewable energy strategies in England, Australia and New ZealandIntroductionInstruments for RE developmentTradable permits and Green certificates

The countriesThe United KingdomOverview: UK RE support programsBarriers and success factors in RE deploymentPerceptions of low investment securityEnergy market interactions and pricesDifficulty in securing planning approvalsTechnology selectionPlayers

Prospects

AustraliaOverview: Australian RE support programsScheme outcomesHydro generationInvestor confidenceTechnology focus

Prospects

New ZealandOverview: NZ RE support programsScheme outcomesUse of emission creditsPotential barriers to implementationIndustry ownership and behaviour

Prospects

Differing systems, common elementsConcluding commentFeatures of national certificate schemesUnits and abbreviationsReferences