GREEN ENERGY PRICING

ISSUE PAPER ERRA TARIFF/PRICING

COMMITTEE

2006

GREEN ENERGY PRICING

ERRA Köztársaság tér 7

Budapest 1081, Hungary http://www.erranet.org

Issue Paper on Green Energy Pricing

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This publication was prepared by the members of ERRA Tariff/Pricing

Committee:

Mr. Kastriot Sulka (Albania)

Mr. Armen Arshakyan (Armenia) Mr. Almir Imamovic (Bosnia and Herzegovina)

Commissioner Svetla Todorova (Bulgaria)

Commissioner Ivona Štritof (Croatia)

Ms. Klarika Siegel (Estonia)

Mr. Iveri Shalamberidze (Georgia)

Mr. Ede Treso (Hungary)

Mr. Anatoly Shkarupa (Kazakhstan) Mr. Djeksenbek Sydykov (Kyrgyz Republic)

Mr. Ainars Cunculis (Latvia)

Ms. Aistija Zubaviciute (Lithuania)

Ms. Evgenija Kiprovska (Macedonia)

Ms. Lidia Zestrea (Moldova)

Ms. Ganchimeg Mujaan (Mongolia) Mr. Branko Kotri (Montenegro) Mr. Tomasz Kowalak (Poland)

Mr. Adrian Borotea (Romania)

Mr. Maxim Peshkov (Russian Federation)

Mr. Çetin Kayabaş (Turkey)

Commissioner Yuriy Kyyashko (Ukraine)

This publication was made possible through support provided by the Energy and Infrastructure Division of the Bureau of Europe and Eurasia under the terms of its Cooperative Agreement with the National Association of Regulatory Utility Commissioners, No. EE-N-00-99-00001-00. The opinions expressed herein are those of the authors and do not necessarily reflect the views of the U.S. Agency for International Development or the National Association of Regulatory Utility Commissioners.


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TABLE OF CONTENT

TABLE OF CONTENT...................................................................................................... 2 Green Energy Pricing.......................................................................................................... 3

1. Background ................................................................................................................. 3 2. European Directive on renewable energy ................................................................... 4

2.1. National targets .................................................................................................... 5 2.2. Support schemes .................................................................................................. 5 2.3. Guarantees of origin............................................................................................. 6 2.6. External costs and subsidies/Summary report on implementation ...................... 7

3. Green pricing .............................................................................................................. 8 3.1. History of green pricing ....................................................................................... 8 3.2. Policy mechanisms............................................................................................. 11 3.3. Feed-in pricing ................................................................................................... 13 3.4. Net metering system .......................................................................................... 15 3.5. Quota system...................................................................................................... 16 3.6. Comparison between the two major supporting systems................................... 20 3.7. Requirements for successful green pricing policy ............................................. 26 3.8. Importance of consistent, long-term policies..................................................... 27

4. Conclusions and Recommendations ......................................................................... 28 4.1. General ............................................................................................................... 28 4.2. Developing Countries ........................................................................................ 30

5. Green Energy Pricing in ERRA Member Countries................................................. 32 5.1. By Countries ...................................................................................................... 32 5.2. Benchmarking .................................................................................................... 44

6. References................................................................................................................. 49 Appendix 1 - Current support systems.......................................................................... 50 Appendix 2 - Average Prices (€/MWh) paid for renewable electricity in 11 European Countries ....................................................................................................................... 53 Appendix 3 - Status of renewable technologies - Characteristics and Cost ................. 55

Appendix 4 - Renewable Energy Promotion Policies............................................... 57 Appendix 5 - "Green energy" Pricing in ERRA member countries ......................... 60


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Green Energy Pricing Prepared by:

Ms. Svetla Todorova State Energy and Water Regulatory Commission (SEWRC) of Bulgaria, and

Mr. Armen Arshakyan Public Services Regulatory Commission of Armenia

1. Background It is widely known and accepted by experts that current levels of dependence on

fossil fuels are unsustainable. The main driving forces that necessitate a change in our energy consumption patterns include natural resource depletion, climate change, a need for security of supply, lack of access to basic energy services by one third of the world’s population and the predicted economic growth of emerging markets, especially in the BRIC countries1.

Regardless that "greenhouse theory'' is not accepted by all scientists2, most of the

literate world today regards global warming as both real and dangerous. The transition to a sustainable global energy system is one of the largest challenges to face mankind in the present century. Increased electricity generation from renewable energy sources (RES) contributes substantially to the easing of geo-, climate- and energy-political areas of conflict and should therefore be prioritized at all levels - local, national and global.

The European Union has set an ambitious target of 21 % of RES in 2010, obliging

all member states to intensify efforts and reach the common objective. The European Commission’s report entitled “The share of renewable energy in the EU” concludes however that: “Only a few member states have until now implemented an attractive framework for renewable energy sources. In view of the meager results so far the Commission calls on member states to ensure the fulfillment of the 2010 targets by the implementation of appropriate measures”.

During the past decade, the world has witnessed double-digit growth in the wind

and photovoltaic (PV) industries, significant advances in these technologies, and dramatic cost reductions. Today half a dozen countries represent roughly 80 percent of the world market for these technologies. Those countries have demonstrated that it is possible to

1 BRIC is a term used to refer to the combination of Brazil, Russia, India, and China. General consensus is that the term was first prominently used in the thesis of the Goldman Sachs investment bank. The main point of this 2003 paper was to argue that the economies of the BRICs are rapidly developing and by the year 2050 will eclipse most of the current richest countries of the world.

2 Richard S. Lindzen, Professor of Meteorology at the Massachusetts Institute of Technology “Global Warming: The Origin and Nature of the Alleged Scientific Consensus”


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create vibrant markets for renewable energy and to do so very rapidly; but the record also shows that the renewable energy policies of most countries have been unsuccessful to date.

This paper gives an overview of the “green pricing history and examines which

policies have been most effective in promoting renewable energy around the world. It focuses also on the current practices in the South-East countries.

2. European Directive on renewable energy The idea of an internal market for energy appeared on the agenda of the European

Community in the mid-1980s with the Delors3 report and began to be transposed in the 1990s. Since that time, many directives have been adopted in this area, with the emphasis clearly on increasing competition; this process is far from being finished.

It is in this context that electricity from renewable energy sources appeared on the

agenda, partly because it was clear that renewable energy sources (RES) had little chance to develop under intensified competition and therefore needed a special regime, partly because climate change as well as considerations of security of supply – i.e. growing import dependence on fossil energy resources in the first decades of the 21

st century –

made it desirable to merge and harmonize national support policies which already existed in quite a few member states.

After defining renewable energy sources the directive sets national indicative

targets for the consumption of RES by 2010, lays down some principles for national support systems and provides for a guarantee of origin of RES-electricity. It requires member states to introduce simplified, transparent and non-discriminatory administrative and grid practices. Finally, it provides for a report on implementation referring to external costs.

The directive defines renewable energy sources as “non-fossil energy sources

(“wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases”). The original Commission proposal (2000) limited hydro to 10 MW; later this provision was eliminated. Biomass is further specified to mean “the biodegradable fraction of products, waste and residues from agriculture (including vegetal and animal substances), forestry and related industries, as well as the biodegradable fraction of industrial and municipal waste”. This was included upon the 3 Jacques Lucien Jean Delors (born July 20, 1925 in Paris) is a French economist and politician, the only person who served two terms as President of the European Commission (1985 - 1995). Delors became the President of the European Commission in 1985. During his presidency, he oversaw important budgetary reforms and laid the groundwork for the introduction of a single market within the European Community, which came into effect on January 1, 1993.


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insistence of the Dutch, British, Italian and Spanish governments against the opposition of both Commission and Parliament. The proportion of electricity produced by renewable energy sources in such plants may now also be considered as RES if the waste treatment hierarchy is respected.

2.1. National targets Historically, national commitments to renewable energy varied greatly with the

vagaries of the oil market. Crash programs in the 1970s and early 80s were generally followed by a decline in activities following the oil price decrease in 1986. The progress of renewable energy technologies also differed significantly among member states; breakthroughs were rare and incomplete. One of the ideas of the green and white papers on renewable energy sources was to reduce the costs of these technologies by achieving mass production on a European level (reinforced by exports once leadership was reached in this area); this in turn required a Community-wide effort. To achieve this effect, mandatory targets were seen as an appropriate instrument. This case was argued with great perseverance by the European Parliament. On the other hand, nearly all member states were unwilling to accept such targets (Denmark and later on Germany were the only exceptions).

Art. 3 of the directive proposes only indicative targets, with member states required

to “take the appropriate steps ... in proportion to the objective to be attained” and to document their efforts in regular reports (no later than 27 Oct 2003, the date by which the directive is to be transposed into national law, and thereafter every two years) which the Commission shall evaluate. If member states fail to live up to their targets without valid reasons, the Commission shall make appropriate proposals which may include mandatory targets.

The table in Annex 1 represents reference values for Member States’ national

indicative targets for the contribution of electricity from renewable energy sources to gross electricity consumption by 2010.

2.2. Support schemes

Besides the issue of targets, this was one of the most hotly contested provisions of the directive. At first, it was planned to progressively liberalize the area of RES in order to arrive at a community-wide harmonized regime fairly soon. It was also a conflict over renewable energy certificates combined with quotas versus fixed feed-in tariffs. The first draft proposals submitted by commissioner Christos Papoutsis 4 made clear that only support schemes which relied on “competition” were judged compatible with electricity liberalization. This referred to the tendering systems practiced at that time in some member states and ignored that there is competition also under fixed feed-in tariffs. These

4 Energy commissioner, representative of Greece


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tendering schemes consisted in prospective RES-generators submitting competitive bids for fixed-price contracts. Such a system was practiced in Britain (where the NFFO5 system was no great success in expanding production of RES), France (where results were simply dismal) and Ireland (where this system still exists). Britain and France in particular had low rate of completion of accepted projects, even though they dispose of the best wind resources in the EU. This contrasted with the successful market introduction of RES achieved by those states which relied on fixed feed-in tariffs, i.e. Denmark, Germany and Spain, responsible for about 80-90 percent of wind power installations in the EU.

Later on, Papoutsis seems to have favored a quota/tradable certificate approach.

Under such an approach, generators of RES-electricity would sell, on the one hand, the physical electricity they produced; on the other, they would sell certificates embodying the “greenness” of that electricity, which could then be traded on an exchange so that a market price would result. This in turn would promote trade of RES-electricity within the EU, encourage its development in those regions where conditions were most favorable and thus reduce costs. At the time the directive was discussed, such a system was favored by Denmark, the Netherlands, the United Kingdom, Italy and the Flemish part of Belgium; it also had supporters in Sweden and Austria. It was opposed mostly by Germany.

The directive now provides that the Commission shall evaluate the various national

support mechanisms and present a report on their success (by October 2005), including their cost-effectiveness. If necessary, it shall at this point make a proposal for a Community framework with regard to support schemes which shall promote RES-electricity in a simple and effective way. This proposal will have to provide for transitional period of at least seven years, so that no harmonized regulation can enter into force before 2012.

2.3. Guarantees of origin Art. 5 of the directive, regulates the way in which member states shall set up

systems of guaranteeing the authenticity of RES-electricity. The term “certificates” was avoided as some member states viewed this as a first step towards introducing a system of tradable certificates/quota-based support schemes.

5 The NFFO (Non-Fossil Fuel Obligation) was introduced in England and Wales by the 1989 Electricity Act. The Act allowed the Secretary of State to order the Public Electricity Suppliers (PES) to purchase a certain amount of electricity produced from non-fossil fuels and also established a mechanism, the Fossil Fuel Levy (FFL), to compensate the PES for the NFFO.


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2.4. Administrative procedures Art. 6 provides that member states shall evaluate their regulatory frameworks for

RES-electricity (authorizations, permits, support decisions etc.) with a view to reducing regulatory barriers, streamlining procedures and ensuring that rules are objective, transparent and non-discriminatory, taking into account the particularities of the various renewable energy technologies. 2.5. Grid access

Art. 7 regulates the relation between RES-electricity producers and operators of the

transmission and distribution system. Its purpose is to make sure that there is no discrimination against such producers taking into account all the costs and benefits of RES-E, e.g. in grid access, connection costs or transmission and distribution fees. Prospective connection costs must be communicated to RES generators and standard rules on costs published. The original Commission proposal – supported by Parliament provided for priority access. The Council changed this to “guaranteed access”, although priority access may still be granted. In dispatching generating installations, transmission system operators shall give priority to RES producers insofar as the operation of the national electricity system permits. This clause is important as in many areas grid operators are hostile to RES and try to impede its deployment. Member states shall report on measures taken to facilitate access to the grid in the report referred to in the preceding subsection.

2.6. External costs and subsidies/Summary report on implementation Art. 8 provides for the Commission to submit a summary report on implementation

on the basis of the member states’ reports at the end of 2005, and thereafter every five years. Such a report “shall consider the progress made in reflecting external costs of electricity from non-renewable sources and the impact of public support granted to electricity production” as well as progress on achieving national targets and discrimination between different energy sources.

The chief purpose of the directive is to make RES competitive for the internal

electricity market. Now the competitiveness of this form of electricity is greatly inhibited by the fact that the generation of electricity from conventional sources is not charged with its full external costs, and often receives subsidies on top of that. Research conducted for the EU in the ExternE project shows that the cost of electricity generated from coal and oil in the EU would on average double if external costs to environment and health were included; from gas, it would increase by 30%. In addition, fossil and nuclear generation is often subsidized by a variety of mechanisms. Without these market distortions, RES would not need the same amount of support.


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3. Green pricing

3.1. History of green pricing The story of Green Pricing began in the 1970s, when the President Jimmy Carter

decided to solve the United State’s energy problems by encouraging energy conservation and a decreased dependence on foreign energy sources. As a means to reach that goal, the Public Utility Regulatory Policies Act of 1978 (PURPA) was signed into law on November 9, 1978.

PURPA created a market for power from non-utility power producers, known as

“qualifying facilities.” Before that law, only utilities could own and operate power generating plants. PURPA also required utilities to interconnect with and buy energy from “qualifying facilities,” including renewable energy plants, at incremental or avoided costs of production.

Since PURPA was enacted, the cost of green power has decreased, but expansion

still has not occurred as quickly as previously expected. Power price trends, especially falling generating costs, can be blamed for impeding green power introduction. Also, the push towards electricity deregulation has urged electric utilities to restructure to improve efficiency, which puts even more prices on electricity prices. These factors have worked unfavorably for RES by undermining their competitiveness in the electricity market.

One new way to introduce more green power into the market is by embracing the

spirit of “greenness.” Now more than ever, the public is making its preference for environmentally conscious products clear. It is a revolution known as green consumerism. Symbolic behaviors of green consumerism include recycling, preferential buying of products made out of recycled materials, and buying low-chemical farm products among others. Electric utilities are joining the movement through green pricing programs. This advent of green consumerism is intersecting with the introduction of deregulation of the electricity industry, which is providing consumers with choices as to who their power supplier will be and the content of the power product. Ironically, as the ongoing wave of electric utility deregulation forces utilities to scramble for the lowest-cost power, some companies have found they can sell power at a higher economic cost if it has a low environmental cost. More and more utilities are starting green pricing programs, which offer RES to interested customers at a premium price. In other words, one kilowatt-hour is suddenly different from another. Since green power is generally more costly, in terms of production, than conventional coal or gas-fired power, customers who participate in green pricing programs usually agree to pay a premium on their electricity bill to cover the extra expense.


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In a green pricing program, the power provider gives customers the option to buy electricity generated from clean, environmentally friendlier sources such as solar, wind, geothermal and some types of biomass and hydro energy resources. These programs are based on the principal that consumers are voluntarily willing to pay more for electricity which is produced in an environmentally neutral manner. Consumers can usually choose to purchase all or a percentage of their electricity as “green.” The electricity supplier, in return, guarantees that each unit of electricity corresponds to a unit entering the electricity supply network from a green power plant.

Green pricing programs provide numerous benefits. Among them are: 1. Education - Utilities can act as a vital resource to consumers seeking information

about energy sources, efficiency, and conservation. Many utilities successfully market their green power product as part of an energy efficiency or conservation campaign. Through this type of education, consumers are able to make wiser choices about their energy use and become more knowledgeable about energy in general.

2. Investments - By encouraging environmentally-oriented people to put their

money in clean, renewable power sources and in the same time encouraging electricity marketers to develop national educational campaigns that promote clean energy. As utilities come under increasing pressure to reduce emissions that contribute to acid rain and global climate change, green pricing programs offer a golden opportunity to offset some of the adverse environmental effects of conventional power generation. In addition, investing in renewable power diversifies the energy mix, reducing dependence on fossil fuels and their inherent price fluctuations, and providing long-term rate stability.

In the same time pioneering utilities are faced with various marketing challenges

when it comes to green pricing programs: 1. While a few consumers are willing to pay a premium for green goods, most are

not. This apprehension stems from the fact that such environmental benefits as cleaner air or water are difficult to immediately see, feel or experience. With renewable forms of power, the product itself is not seen. Also, because the renewable energy is simply added to the communal power grid in place of fossil fuel-generated electricity, consumers do not actually receive the product they pay the premium for.

2. Many consumers lack awareness of exactly what types of energy are harnessed in

producing the electricity coming into their homes and are even less aware of the environmental issues associated with its production. Examples of such misleading beliefs are that electricity won't be available if the wind doesn't blow, renewable energy requires channeling a second set of power lines into homes, or tapping wind energy in a major way will somehow upset global climate patterns.

3. Credibility represents another challenge. Customers question paying a premium

for "green electricity" because they feel current rates are high enough. They want to know precisely how funds will be used. But customers aren’t the only people hesitant to fully


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embrace the concept of green pricing. Some renewable energy advocates have taken opposing stances as well. They say that increased use of renewable energy provides benefits to all customers, and therefore all customers should share in the cost of development.

Preconditions for successful green pricing programs are numerous: specifics of

program design, product pricing, the extent and quality of market research, the credibility of the utility, the simplicity of the program, the tangibility and visibility of the RES projects, and program implementation and marketing efforts, particularly with community organization partnerships.

1. The design and marketing of the "green power" product is considered a crucial

element of success. Product design involves several different elements such as the type of program offered, whether customers can obtain all of their electricity from RES, and exactly how much of the premium paid by customers actually goes toward developing new renewable energy sources.

2. Another key factor is whether the program creates "personal value" for customers. Customers are more apt to accept some additional cost for RES as long as they perceive some gain in personal value. Otherwise, customers may wonder why they are being singled out to pay for something that they perceive benefits all customers. Since utilities with green pricing programs are essentially asking individual customers to pay the cost of providing the benefits of a cleaner environment to all customers, many utilities are finding ways to add value to their green pricing products and generate private benefits for participating customers. Those benefits include tax deductibility of the extra charges, personal recognition in program newsletters and advertisements, instilling civic and community pride and price protection from fuel price increases.

3. Pricing is another vital element that is linked to success. A utility’s green pricing program should reflect the difference between the utility’s cost of acquiring the renewable energy and its alternative cost of power. The increased availability of state and federal subsidies and incentives is allowing many utilities to reduce their green pricing program premiums. Tax incentives can directly lower the costs of green power and can improve profit margins for marketers, enabling them to more easily compete in the market and undertake more aggressive marketing campaigns. Despite the numerous variables involved in determining premiums, one thing remains certain - pricing should be tied directly to the investment promised for new projects. Customers want to know that the dollars they are contributing result in additional and meaningful renewable energy development6. A similar scenario can be observed in charitable giving. Those contributing want the assurance that the money they donate is supporting the actual cause being solicited for rather than fundraising and program administration.

6 Swezey Blair and Lori Bird. NREL, “Utility Green Pricing Programs: What Defines Success?”, September 2001.


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4. Another critical factor to its success is the way a green pricing program is implemented. Successful implementation not only demands creative and continuous marketing efforts to build awareness, but also requires ease of participation and a long term commitment to expanding the program to meet customer demand. While many consumers seem to favor RES, the majority may not know very much about renewable energy technologies. Programs that are overly complicated or that combine different environmental objectives may confuse already uncertain customers.

5. Another key issue program organizers must consider involves deciding which customers to target. While residential customers are generally the focus, a green pricing program's ability to attract business customers could determine its ultimate impact. Business and other non-residential customers such as governments, institutions, faith-based groups, and non-profits who were initially considered too price sensitive to pay more for green power, are now recognizing that purchasing green power can help meet both corporate and institutional goals related to environmental improvement and sustainable business practices. Some programs have drawn as much as half of their support from businesses. About a quarter of the total power sold through green power programs is to non-residential customers. The study also suggests that by carefully analyzing the motivations and preferences of potential participants, utilities can target specific green pricing programs to appeal to wide segments of their customer base. The extent to which a utility partners with the community and other outside groups to publicize the program is also important.

All these potential success factors are focused on what the green power supplier can

do to get customers. However, another problem exists for the customers of utilities that want green power, but whose markets aren’t deregulated or whose utilities don’t offer green pricing options.

3.2. Policy mechanisms Governments have a number of options that they can use to promote renewables.

The first is to support the use of voluntary measures, particularly through education and information dissemination. This option has varying and limited effects. Second are environmental standards or energy taxes. The third option is to promote renewable energies through direct support, which is the focus of this paper. Generally, a mix of instruments is essential and a key to success. The combination of policies needed depends on the costs of the technology used, location and conditions.

There are five major categories of relevant policy mechanisms:

• Regulations that govern capacity access to the market/electric grid and

production or purchase obligations; • Financial incentives; • Industry standards, permitting and building codes; • Education and information dissemination;


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• Stakeholder involvement. There is not necessarily a direct link between these policy mechanisms and specific

obstacles to greater use of renewable energy, as some of the policy options tackle a combination of barriers. An additional critical element is the need or a general change in government perspective and approach to energy policy. Government investments in research and development are important as well.

Following are key points to frame the policy mechanisms. The concluding section

includes more findings and policy recommendations. 1) Experience to date has demonstrated that considerable intervention in energy

markets is required to introduce significant amounts of renewable energy into the mix. Every country that has succeeded thus far in developing renewable energy on a substantial scale has been committed over the long-term to this goal, with consistent policies that include a package of policy mechanisms (consisting of all of the above-mentioned types).

2) The effectiveness of government policies depends on how well they are designed

and whether or not they are enforced. The use of a particular policy type does not guarantee success. In addition, policy makers must be cognizant of the projects and technologies they are trying to promote as such decisions determine the policy framework that is needed. For example, to promote technologies such as PV, solar thermal, heat pumps and wind turbines on a small-scale, distributed basis, support should be granted to the end customer; to promote large wind, biomass, geothermal, or marine technologies, the investment is more likely to be channeled through a large entity or company. Further, each country has unique circumstances and must design its own system, and enact a combination of policies, based on needs, circumstances and available resources.

3) The experiences of countries such as Denmark, Germany, Japan, Spain and

Brazil have demonstrated that the key to steady and significant cost reductions is the development of consistent and reliable markets. Such conditions allow for the entry and maturation of small- and medium-scale enterprises, which have provided the bulk of the technological innovation that has driven down renewable energy costs. In addition to the “global learning curve” that exists for technologies such as wind turbines and PV cells, there is a “national learning curve” as individual countries develop domestic industries that are able to manufacture, install and maintain renewable energy systems using local equipment and labor. Those countries that do not yet have sizeable industries in place can expect dramatic price reductions in the first few years after effective new policies are introduced.

4) Most of the policies involve some sort of subsidy, direct or indirect. Energy

markets are not now and never have been fully competitive and open, and today’s markets include substantial institutional barriers, as well as long-term subsidies for conventional energy, that act as obstacles to renewable energy. Even market-oriented countries such as the United States and United Kingdom now agree that subsidizing


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renewable energy makes sense. Support for RES is important not only to incorporate the external costs (environmental, social and security) of energy production and use, and make up for decades of past support for conventional energy. It is also essential to account for the environmental, social and security benefits associated with RES — including the reduced risk of fuel price volatility, a more diversified portfolio of energy options, a cleaner environment and better health, and job creation and economic development. Well-designed, modest production-based subsidies provided up front can work rapidly to close the cost gap between RES and conventional energy systems.

5) To date, feed-in pricing has been responsible for most of the additions in

renewable electricity capacity and generation, while driving down costs through technology advancement and economies of scale, and developing domestic industries. The record of quota systems is more uneven thus far, with a tendency of stop-and-go, and boom and bust markets. It is important to recognize that both quota and pricing systems involve subsidies. But pricing systems have provided increased predictability and consistency in markets, which in turn have encouraged banks and other financial institutions to provide the capital required for investment.

6) In developing countries, markets are apt to be particularly sensitive to the need

for relatively uncomplicated access to the electric grid and low transaction costs. Pricing laws allow for ease of entry into the marketplace and tend to favor smaller companies and incremental investment, making them particularly suited to developing countries, where power markets are often small and dispersed. As in the industrial world, it is critical to focus on models of development that are viable, sustainable, and replicable, and that emphasize local participation and ownership; to date, donor aid projects have tended to reduce the perceived value of renewable energy while inhibiting commercial markets.

3.3. Feed-in pricing The precursor to the pricing law was enacted in California during the 1980s. In that

state, the implementation of PURPA involved the use of standardized long-term contracts with fixed (and, in some cases, increasing) payments for all or part of the contract term. The costs of the contracts were covered through higher electric rates for consumers. While these contracts proved costly, it is widely believed that the alternative (nuclear power) would have been even more expensive. The time length of the contracts (15 to 30 years for wind projects), combined with fixed energy prices for much of that time, assured producers of a market for their product and finally gave them something they could take to the bank to obtain financing. While most other U.S. states saw little development during the 1980s, California for a time became the world’s leader in renewable energy use. General description of Standard Offer Contracts in California during the 1980s is presented in Appendix 2.

In the late 1980s German Federal Ministry for Research and Technology (known by

its German abbreviation, BMFT) established 250 MW research program with a premium for the environmental and research value of new wind generating capacity. Initially 100


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MW, the program was so popular that it was increased to 250 MW before it was superseded by the law on feeding-in electricity in 1991.

The Aachen model of premium payments, that is payments above "avoided cost",

was introduced in Aachen Germany for photovoltaics in 1989. At that time that was the highest payment per kWh for renewable energy generation anywhere in the world. The tariffs were limited to the city of Aachen, but the process was eventually repeated in other German cities, including Bonn and Nuremberg.

In 1991 the German Parliament adopts the law on feeding-in electricity

(Stromeinspeisungsgesetz). Germany's ground breaking Renewable Energy Tariffs or Feed-in law specified that renewable generators had the right to connect and how they would be paid for their generation based on a percentage of the retail price of electricity. Wind energy generation was paid 90% of the full retail rate; hydro and biomass - 75%. In 1994 the German Feed-in law was modified and hydros' and biomass' payment increased to 80% of the retail rate.

Between 1980s and 1990s Denmark uses a complex mix of Renewable Energy

Tariffs (RET), exemptions from the carbon dioxide tax, and tax benefits to pay for wind generation. The Renewable Energy Tariff was 85% of the retail rate. This system was used until the introduction of a Renewable Portfolio Standard (RPS) and renewable energy credit trading system in 2000. The RPS eventually led to the collapse of the Danish domestic demand for wind turbines and was abandoned in 2004.

In 1997 Spain permits private power production. Spain introduces Renewable

Energy Tariffs with Royal Decree in 1998. The early pricing laws in Europe, in Denmark and Germany required that utilities

give small wind and other private generators access to the electric grid, and they guaranteed producers a minimum share of the retail rate.

The German system was revised in 2000. Renewable Energy Sources Act

(Erneuerbare Energien Gesezt, EEG) replaced the first Feed-in law and introduced Advanced Renewable Energy Tariffs. These differed from the simpler approach of the original Stromeinspeisungsgesetz by specifying the actual prices that would be paid for generation from each of several different renewable technologies independent of the retail price for electricity. Different prices were also introduced within each technology band depending upon the size of the project or the resource base. For example, there were several prices for biomass plants of varying size. This strategy allowed premiums sufficient for developing all renewable technologies, including photovoltaics.

In 2004 Germany's EEG and Spain's Royal Decree on renewable generation

included tariffs for offshore wind. Laws similar to Germany’s pricing law have been enacted in several other European

countries, including France, Austria, Portugal, and Greece, in addition to South Korea.


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Recently, Brazil enacted a law that combines pricing laws and quotas (specific capacity targets).

Today most pricing laws provide a fixed payment for renewable electricity that

varies by technology type, plant size, and occasionally by location (e.g., wind energy), and is generally based on the costs of generation. Payments guaranteed to new projects decline annually, and are adjusted periodically. The tariffs last for 15-20 years from date of project installation.

The costs of higher payments to RES are covered by an additional per kilowatt-hour

(kWh) charge on all consumers according to their level of use (e.g., Spain, Germany as of 2000), a charge on those customers of utilities required to purchase green electricity (e.g., Germany until 2000), or by taxpayers, or a combination of both (Denmark through feed-in rates and reimbursement of the carbon tax).

It is important to note that pricing laws have not succeeded in every country that has

enacted them. At the same time, to date, those countries that have experienced the most significant market growth and have created the strongest domestic industries have had pricing laws. In order to succeed, tariffs must be high enough to cover costs and encourage development of particular technologies; they also must be guaranteed for a time period long enough to assure investors of a high enough rate of return. The success of pricing laws is also determined by factors such as charges for access to the electric grid, limits set on qualifying capacity and the ease of permitting (influenced by the existence and specifics of national or regional standards).

3.4. Net metering system A variation on pricing laws, “net metering,” permits consumers to install small

renewable systems at their homes or businesses and then to sell their excess electricity into the grid. This excess electricity must be purchased at wholesale market prices by the utility. In some cases, producers are paid for every kilowatt hour (kWh) they feed into the grid; in other cases they receive credit only to the point where their production equals their consumption. This option is available in Japan, Thailand, Canada, and many U.S. states. It is of benefit to electricity providers as well as system owners, particularly in the case of PV, because excess power generated during peaking times can improve system load factors and offset the need for new peak load generating plants.

Net metering differs from the access and pricing laws in Europe primarily in scale

and implementation. Success in attracting new renewable energy investments and capacity depends on limits set on participation (capacity caps, number of customers, or share of peak demand); on the price paid, if any, for net excess generation; on the existence of grid connection standards; and on enforcement mechanisms. Without other financial incentives, net metering is not enough to advance market penetration. Neither California nor Texas saw much benefit from net metering for wind power, let alone for more costly RES like solar PVs, until other incentives were added to the mix. However,


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net metering might have a greater impact if private generators were to receive time-of-use rates for the electricity they put into the grid—particularly in the case of PVs, which generate electricity at peak demand times when the value of their power is highest. Mandated targets or quotas, discussed below, and net metering can be used simultaneously.

3.5. Quota system 3.5.1. General principles

Pricing laws establish the price and let the market determine capacity and

generation. Under Quota system model the government sets a target and lets the market determine the price. Typically, governments mandate a minimum share of capacity or generation of electricity (generally grid-connected only), or a share of fuel, to come from renewable sources. The share required often increases gradually over time, with a specific final target and end-date. The mandate can be placed on producers, distributors or consumers.

The simplest form of quota system is one in which the government imposes a

mandate on one producer/supplier. For example, during the 1990s, the Minnesota Public Utilities Commission ordered the electric utility Northern States Power to install successive amounts of wind energy capacity, thereby helping to open up the wind market in that U.S. state. Quotas have also been used to promote the use of RES off the grid, including alternative fuels. Several European countries now require that a specific share of diesel fuel contain biodiesel, and Brazil has become the world leader in ethanol production and use by requiring that ethanol make up a set share of all fuel sold (in combination with other support).

Quota system for renewable electricity is a relatively new type of policy, first

introduced in the late 1990s, so there is relatively little experience with quota systems to date. 3.5.2. Main types of quota systems

There are two main types of quota systems used today for electricity generation: 1. Obligation/certificate. The Renewable Portfolio Standard (RPS), widely used

in U.S. states, is in the former category. Under an RPS, a political target is established for the minimum amount of capacity or generation that must come from RES, with the amount generally increasing over time. Investors and generators then determine how they will comply - the type of technology to be used (except in the case where specific targets are established by technology type), the developers to do business with, and the price and contract terms they will accept. At the end of the target period, electricity generators (or suppliers, depending on the policy design) must demonstrate, through the ownership of credits that they are in compliance in order to avoid paying a penalty. Producers receive


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credit - in the form of “Green Certificates”, “Green Labels”, “Green Tags” or “Renewable Energy Credits” - for the renewable electricity they generate. Such credits can be tradable or sellable, to serve as proof of meeting the legal obligation and to earn additional income. (Some countries have set floors and/or ceilings for the value that these certificates can achieve.) Those with too many certificates can trade or sell them; those with too few can build their own renewable capacity, buy electricity from other renewable plants (which generally involves a bidding process), or buy credits from others. Once the system has been established, government involvement includes the certifying of credits, and compliance monitoring and enforcement.

2. Tendering systems. Under those systems, regulators specify an amount of

capacity or share of total electricity to be achieved, and the maximum price per kWh. Project developers then submit price bids for contracts. The UK’s Non Fossil Fuel Obligation was an early example of this type of policy. Governments set the desired level of generation from each resource, and the growth rates required over time. The criteria for evaluation are established prior to each round of bidding. In some cases, governments will require separate bids for different technologies, so that solar PV is not competing against wind energy projects, for example. Generally, proposals from potential developers are accepted starting with the lowest bid and working upwards, until the level of capacity or generation required is achieved. Those who win the bid are guaranteed their price for a specified period of time; on the flip side, electricity providers are obligated to purchase a certain amount of renewable electricity from winning producers at a premium price. The government covers the difference between the market reference price and the winning bid price. Each bidding round is a one-time competition for funds and contracts. In contrast, under the RPS, companies and projects must constantly compete in the marketplace, with existing and new projects, unless they have signed long-term contracts.

Both types of quota systems give customers who want to invest in green power the

opportunity to do so, even if their own utility doesn’t offer such a program. Green certificates represent the environmental and social attributes of green power.

Green power costs more than conventional power, but also provides environmental

benefits. Therefore, it’s possible to say that customers who purchase green power are really getting two things: the electricity needed to power their home or facility, and the environmental benefits associated with this power. In the same manner, a customer who is willing to pay more for an organic apple is really paying for the apple and then paying extra for the environmental benefits such as decreased fertilizers and pesticides in the ground.

The electricity generated from green power can be sold at that same price as

conventional power in the wholesale market if the environmental attributes are separated out. This power is then said to be generic, null or commodity power. However, it still costs more to generate green power. Selling the environmental attributes as green tags can make up the extra cost.


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The green certificates correspond to an amount of green power that was generated and sold into the market where it originated. They represent the real savings in carbon dioxide (CO2) and other pollutants that occur when green power replaces the burning of fossil fuels. 3.5.3. How Green certificates work

Utilities that offer a green power alternative sell the power and the environmental benefits in one package at a higher price than conventional power is sold. In this case, the utility handles all transactions with the generating facilities. Conversely, utilities are not involved in green certificate transactions. Green certificates are either sold directly to the customer by the green power generating facility, by a nonprofit organization working with the generating facility, or by a private business hoping to take advantage of the financial opportunities presented by green tags. These organizations are collectively called green certificate marketers.

The customer makes a payment to their electric utility for the market cost of the

power, and also makes a payment to their green certificate marketer to promote the flow of more green power into the power grid. 3.5.4. Challenges Facing Green Tags

Green tags face challenges that fall into three basic categories. Among them are: legal property rights to the intangible environmental attributes; customer protection from misrepresentations and fraud; development of a system that will protect against double counting or double selling of the same green certificate.

In the absence of an accepted set of rules, laws, policies or other guidelines to direct

the legalities of owning and trading green tags, many issues arise. In some cases, groups entering into green certificate deals create their own specific contracts to handle the transaction. This may work for commercial customers, but it’s impractical for residential and small business customers that lack sophistication in legal matters.

Green certificates will only simplify the process of selling green power as long as

there is a third party to certify that there are only as many green tags as there is green power being generated. Otherwise the market will be bogged down with uncertainty.

Customers won’t be confident they’re getting what they’re paying for and green

certificate marketers won’t be sure what their rights are in handling disputes. In such a situation, lawsuits will inevitably crop up. Currently, there is no official set of standardized definitions, processes, or rules that govern the green certificate market.

Ownership is one issue that standards need to address. One solution could be that a

green certificate’s existence should be recognized either when the meter output of the generating facility is read or when the electricity is delivered into the power grid. At that


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time, the green certificate should belong to the owner of the green power generating facility.

The transfer of green certificates should be handled through the use of specific

contractual agreements. This is useful in determining ownership and recording and maintaining records of transfers. The ideal solution would be a cradle to grave tracking system. While this would probably add administrative costs, it may be necessary to maintain customer confidence and prevent double counting.

Another issue is “banking” of green tags. Banking is a tool that gives utilities or

marketers flexibility in compliance with specific renewable program mandates. It essentially allows the obligated party to purchase the RES in advance of their obligation and hold or bank the green certificates to be applied at a later date. For example if a state has an energy-based renewable portfolio standard, then a utility might be allowed to purchase green certificates in 2005 to be applied toward their obligation in 2006. Similarly, a utility might be allowed to purchase enough green tags in one quarter to meet their green pricing demand for the entire year. The converse, borrowing, could be allowed to facilitate compliance, e.g. applying 2006 purchases toward the 2005 obligation.

Generally, some period of green certificate banking is necessary to overcome

problems created by the seasonality of renewable energy generation and the necessity of maintaining a competitive and liquid market. Some RES, such as wind, solar and hydro, experience seasonal output fluctuations. Therefore, allowing some amount of banking between periods of high output and low output can help utilities and marketers meet their obligations with renewable resources by allowing green certificates to be banked in periods of high output and applied toward the obligation in periods of low output.

Green certificates also present many customer protection concerns. Green

certificates present a potential problem for abuse because they are an intangible product that customers may have difficulty understanding. A lack of customer sophistication leaves customers open to misrepresentations and fraud. Add this to the fact that the definitions and information associated with green tags, and the rules and processes for working with green certificates are not standardized and customer misunderstandings become a huge risk.

Customer education and disclosure is of utmost importance if the market will be

successful. The problem is that there are many kinds of customers and they all have very different reasons for purchasing green tags. So, the information needed by particular customers may vary widely. In addition, it is possible to give a customer more information than they can handle, leading to confusion and distrust.

Some green certificate advocates believe that customers should be told the type of

technology they are supporting and where power is being generated. Some say customers should know if certain attributes like CO2 benefits have been unbundled from the other attributes on their green tag. Some think it would be a good idea to inform the customer


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of when the plant that generated the green power was built as well as when that specific power was generated. All told, advocates are consumers might feel cheated by green tag purchases that don’t meet their expectations.

One obvious way customers could be cheated through the use of green certificates

is by double counting. Double counting is the sale of one green tag to more than one customer. Every green certificate should be equivalent to an amount of green power that was generated and sold into the market. Otherwise, the green certificate is essentially worthless. Double counting can either be purposeful, as in outright fraud, or it can be accidental, such as through computer error or confusion. Whether it’s purposeful or not, it can cause severe damage to the green certificate market. Customers are already skeptical of new power companies that are emerging in restructured markets. Even the perception of double counting could push these customers to a point where they never trust that they’ll get what they’re paying for.

Green certificates also face many of the same challenges that other green markets

have faced in the past. Namely, definitions of which renewable resources are valuable in the market and eligible for various programs often cause disagreement. The relationship between green certificates and RPS or emissions credit trading is not clear. On the same note, multi-state independent system operators (ISOs) each have different regulations with different approaches, definitions and procedures for credit trading.

So far, only the UK seems to have introduced a quota/certificates system that is

clearly attractive to RES industry – and even here many important issues remain unsolved. As a result, many observers conclude that market-based instruments have not really proven their worth so far.

3.6. Comparison between the two major supporting systems 3.6.1. Costs, prices and competition

It had been argued that it is difficult to control the costs of pricing laws over the

short term, whereas subsidies can be controlled under bidding or quota systems. For example, if tariffs are set too high, they can encourage significant development and dramatically increase electric rates; if they are not high enough, the policy will bring about little development. The pricing law could be more expensive than tendering programs or an RPS per kWh of electricity produced.

In addition, it is argued there is less competition and cost minimization under

pricing laws than with quota systems, in which developers must compete to win bids or gain contracts. Historically, it has been assumed that pricing laws do not inherently encourage cost or price reductions, and do not ensure least-cost development. The pricing law can drive down costs by driving economies of scale and innovation, and manufacturers and developers will compete for the lowest possible costs in order to achieve higher profit margins, which promote cost reductions. Yet, developers have little


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incentive to pass these cost savings onto consumers as long as tariffs remain unchanged. Furthermore, under pricing systems, utilities and customers in resource-rich areas can experience the brunt of costs associated with renewable energy development.

However, most of these limitations can be overcome depending on how pricing

systems are set up. Pricing policies can address cost and price issues through regular adjustments to tariffs for renewable energy in response to changes in technologies and the marketplace. This is now the case in Germany, where the law was changed from a percentage of the retail rate to fixed tariffs; the French and Portuguese pricing laws have also adopted many of these features. In addition, they can be established with help from research institutes (neutral consulting) and the RES industry (with insight into the costs of production) as in Germany. The introduction of declining tariffs has brought the costs of the pricing and quota systems much closer together. And, at least one analyst believes that pricing laws have delivered renewable electricity more cheaply than have quota or green-certificate policies7.

There is also some evidence, that it may be cheaper to provide significant national

investment for renewable energy (through the German pricing law, for example) over a period of perhaps 15-20 years to bring renewable energy technologies rapidly down their learning curves8, and thus reduce costs very quickly, rather than to introduce renewable energy relatively slowly and over a longer period of time - with an associated slower reduction in costs.

Further, pricing systems encourage development of local manufacturing industries,

which leads to a large number of companies and in it creates competition. And even where pricing laws are more expensive per unit of energy produced, they drive technological development and strengthen or establish new businesses, thereby supporting industry and agriculture (biomass), leading to job creation and furthering economic growth. The use of well-designed pricing laws can avoid the need for a host of other additional subsidies. They also help to “internalize external costs” of conventional energy and compensate for the benefits of renewable energy. Pricing laws encourage higher growth rates in early years than quota systems generally do, and encourage long-term innovation. Finally, concerns about heavy burdens in resource-rich areas can be addressed, as was the case in Germany, by spreading the costs around the entire country so that each region pays according to its total electricity consumption, rather than according to its resource base.

Quota systems are generally credited with encouraging competition and

dramatically driving down the cost and price of renewable energy. This appears to be true in a number of cases. One example often cited is the decline in wind energy prices under 7 Environment Daily, 2003 8 The learning curve effect and the closely related experience curve effect express the relationship between experience and efficiency. As individuals and/or organizations get more experienced at a task, they usually become more efficient at them. Both concepts originate in the old adage, "practice makes perfect", and both concepts are opposite to the popular notion that a "steep" learning curve means that something is hard to learn. In fact, a "steep" learning curve implies that something gets easier quickly.


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the UK’s Non-Fossil Fuel Obligation. Wind bids declined dramatically, from US$ 0.189/kWh in the first round to US$ 0.043/kWh in the last9. At the same time, it is unclear whether these reductions came about through the quota system. There is evidence that at least part of the reductions were due to the pricing policies of other countries, which drove technological improvements and brought down costs. In addition, some of the later cost reductions under the NFFO were due to changing terms and conditions, including a longer contract period.

There is also speculation that the low costs and prices driven by the RPS in parts of

the United States and Australia are due, at least in part, to the availability of wide-open spaces with good resources. This would explain the difference in wind energy costs between those countries and Germany and Spain. Taking into account the relationship between wind speeds and the resultant power output (wind power is proportional to the cube of wind speed), costs under quota systems will come more in line with those of pricing laws once the best resources are no longer available.

Particularly early on, when a country has few domestic manufacturers or

developers, only a small number of companies might respond to bidding rounds, limiting choice and competition. According to some sources, a high degree of concentration of participants can lead to cartels and the abuse of market power. And if the price of credits or certificates is high, this can increase the electricity price paid by consumers, as is the case with pricing laws. However, this would likely be a short-term situation as higher certificate prices would encourage more development, thereby reducing certificate prices. Finally, if purchase obligations are large enough, quotas can lead to economies of scale, thereby reducing both costs and prices.

There is some evidence that in quota systems which lack differentiation among

technologies, such as the current Renewable Obligation Certificate (ROC) program in the United Kingdom, there is a tendency to over-subsidize lower-cost renewables such as onshore wind and biomass waste-to-power, a factor that will lead to higher costs10. Under the ROC system, the price paid for renewable electricity (most of which is wind power, in a country with the best winds in Europe) is similar to payments for wind energy in Germany. As a result, a great deal of development is underway. But this makes it clear that the costs of renewably generated power are at least as dependent on how a particular policy is structured as they are on the system that is chosen. Quota based systems are not inherently cheaper, nor are pricing systems inherently more costly; the costs per unit of electricity produced depend on the details of those systems. 3.6.2. Financial security

Under a pricing system, the long-term certainty that results from guaranteed prices

over perhaps 20 years means that companies are willing to invest in technology, to train staff, and establish other services and resources with a longer-term perspective. This certainty also makes it easier to obtain financing, as banks and other investors are assured 9 Wiser et al, 2000 10 Kleiburg, 2003


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a guaranteed rate of return over a specified period of time. In fact, even banks in Germany lobbied the Bundestag for a continuation of pricing laws in 2000.

With quota systems, there are potential uncertainties through many steps in the

process from project planning to operation. For example, there can be substantial preparation costs for projects submitted for bids, adding an element of risk and uncertainty that many potential developers cannot afford. Without long-term contracts, under quota systems existing developers could be undersold by future projects, and will always be competing against new developments. While some see this is as a disadvantage, others view this as an incentive to reduce costs. This challenge has been resolved in Texas with 10-25 year contract requirements. But unless such contracts are standardized, renewable energy developers must negotiate contracts with utilities or suppliers on an individual basis. While this could be a problem, to date in several U.S. states and elsewhere this does not seem to be a major drawback.

Under quota systems potential investors must assess future supply and demand

balance during the lifetime of the project (often 20 years or more) by developing a forward price curve. Yet, demand is created by political targets, which could change, thereby resulting in a degree of uncertainty. In addition, estimating supply is a complex process that requires an understanding of a broad range of factors. These include the current competitiveness of all eligible energy technologies; future costs – determined by learning curve effects; cost-resource curves, or the impact on costs when the best resources are no longer available and projects must be sited where wind speeds are lower, or rely on more expensive biomass feedstock, for example. All of these factors add to the level of uncertainty. Finally, if renewable technologies enjoy subsidies or other types of support (e.g., grid connection costs, tax credits, accelerated depreciation), whose continuation over the project lifetime is also uncertain, the risks to investors will be higher, requiring a higher projected rate of return. Under these circumstances, banks will also be less willing to provide financing for RES projects.

Sources of income are two-fold under a certificate-based quota system: first, is

payment for the sale of renewably generated electricity and, second is income from the sale or trade of renewable energy certificates. The price of credits or certificates can fluctuate significantly with changes in the marketplace or meteorological variability, rising when there is a shortage of renewable electricity and falling when there is a surplus. Diversifying sources and location of projects can also reduce fluctuations due to meteorological variability. Establishing minimum and maximum certificate prices can help, but does not eliminate investor uncertainty. Trading in international markets can also work to stabilize prices, and risks can be limited through long-term contracts, or borrowing or banking of credits. Some of these solutions, however, can increase the complexity of the system. Seasonal variations in output lead to variations in income from fixed tariffs as well, and market fixes are not built into the pricing system as they are with certificate models. Over time, however, these variations will also be smoothed out. Further, under quota systems financial security is reduced if there is uncertainty around rules relating to green certificate trading. For instance, as system designs are altered—such as changes in penalties, borrowing or banking provisions, and the status of


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imports—prices can be affected dramatically. In general, many believe that the higher risks and lower profits associated with quota systems make them less attractive for investors than pricing laws.

Some analysts believe that quota systems provide more regulatory and financial

stability and security than do pricing systems, which could change with the political winds11. For example, long-term purchasing contracts with private entities are enforceable under the law, which might be safer than relying on consistency of government policy.

Others believe that pricing systems provide a greater sense of security than quota

systems, particularly in developing countries, because there is not the same assurance that a market for renewable energy credits will exist and that they will be of value. Targets established under quota systems are also policy dependent and can change over time, affecting the value of certificates and creating uncertainty. In addition, payment systems and levels are known at the outset under a pricing system; this is not necessarily the case under a quota system with certificate trading. What is most important is political stability, and long-term, credible, consistent policies.

3.6.3. Ease of implementation In general, pricing laws are easy to administer and enforce, and they are highly

transparent. As with quota systems, policy makers are required to establish targets and timetables, and to determine which technologies are qualified (type and scale). Pricing laws also require the setting of tariffs for each technology type, which can be done with the help of research institutes and industries, as in Germany. Once the system is established, the only government follow-up required is regular adjustments of tariffs.

Under quota systems, many of the requirements are far more challenging. Picking

optimal target levels is critical (if they are set too high, they can push prices up dramatically; if they are too low, they will not produce the economies of scale needed to reduce costs), as is the choice of timetables. The same can be said for the setting of tariffs under pricing laws. However, they can be established with input from research institutes and industries, and pricing laws can be created to allow for adjustments as necessary. As discussed below, targets set under quota systems are not as flexible. In addition, policy makers must decide which technologies are eligible, and if there should be technology-specific targets—this will depend on the readiness of technologies, their costs, available resources, and other factors. In order to make successful choices, it is also important to understand the cost and learning curves for the relevant renewable technologies. Policy makers also need to determine which category of parties must meet the obligation (e.g., retail suppliers, grid companies, or distribution companies), and whether all or just a few of those parties are required to meet the targets. The penalty for non-compliance must be established, and the tradability, life-span and price (floor- or ceiling-prices?) of certificates or credits chosen. These decisions will all determine the impact of the quota

11 Lauber, 2003


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system. Once these matters are resolved, government agencies (or other bodies, e.g. Regulator) must certify renewable energy producers, issue and control certificates, monitor compliance, and collect penalties, all of which increases administrative requirements, complexities and costs.

Some argue that quota/certificate systems tend, by their very nature, to be more

complex than pricing systems, difficult to administer, and open to utility manipulation, and that such problems could be even more significant in developing countries. On the other hand, others have noted that the system for cost-equalization under the German Renewable Energy Law is neither simple nor transparent. Finally, it has been argued that bidding processes are bureaucratic, have significant transaction costs, and are time-consuming for authorities and renewable energy developers.

3.6.4. Flexibility

Historically, pricing laws have been criticized for being inflexible. For example, once tariffs are established, it could be difficult to reduce them. However, it is possible to set up the system such that payments can be adjusted on a regular basis to reflect changes in technologies and market conditions. This flexibility was incorporated into the German system in 2000, and is now featured in other national pricing systems as well. Thus, once a government sets the price to be paid for RES electricity, it is possible in the future to adjust these payments up or down to affect the amount of new capacity coming on line as desired.

On the other hand, with a quota system, once targets and timetables are established,

they are difficult to adjust. Even as markets change and technologies advance, experiencing major breakthroughs in efficiency and/or cost, it is highly unlikely that targets or timetables can be altered - or, at least made more ambitious—particularly without lead-times of several years.

3.6.5. Summary of pricing and quota systems analysis

Pricing systems

Arguments in favor

Arguments against

• To date, they have been most successful at developing renewables markets and domestic industries, and achieving the associated social, economic, environmental, and security benefits • Flexible – can be designed to account for changes in technology and the marketplace • Encourage steady growth of small- and medium-scale producers • Low transaction costs • Ease of financing • Ease of entry.

• If tariffs are not adjusted over time, consumers may pay unnecessarily high prices for renewable power • Can involve restraints on renewable energy trade due to domestic production requirements.


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Quota systems

Arguments in favor Arguments against

• Promote least-cost projects - cheapest resources used first, which brings down costs early on • Provide certainty regarding future market share for renewables (often not true in practice) • Perceived as being more compatible with open or traditional power markets • More likely to fully integrate renewables into electricity supply infrastructure.

• High risks and low rewards for equipment industry and project developers, which slows innovation • Price fluctuation in “thin” markets, creating instability and gaming • Tend to favor large, centralized merchant plants and not suited for small investors • Concentrate development in areas with best resources, causing possible opposition to projects and missing many of the benefits associated with renewable energy (jobs, economic development in rural areas, reductions in local pollution) • Targets can set upper limits for development – there are no high profits to serve as incentives to install more than the mandated level because profitability exists only within the quota • Tends to create cycles of stop-and-go development • Complex in design, administration and enforcement • High transaction costs • Lack flexibility—difficult to fine-tune or adjust in short-term if situations change.

3.7. Requirements for successful green pricing policy

Pricing law Quota system

Ensure regular adjustments of tariffs – incremental adjustments built into law

Apply to large segment of market

Establish tariffs according to technology (and location) with input from research institutes and renewables industries;

Include specific purchase obligations and end-dates

Provide tariffs for all potential developers, including utilities

Establish adequate penalties for non-compliance, and enforcement

Ensure that tariffs are high enough to cover costs and encourage development

Set different bands by technology type

Guarantee tariffs for long enough time period to ensure high enough rate of return

Require long-term contracts to reduce uncertainty for project developers

Ensure that costs are shared equally across country or region

Establish minimum and maximum certificate prices

Eliminate barriers to grid connection

Do not allow time gap between one quota and next


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The most important for both systems is political stability, and long-term, credible, enforceable and consistent policies.

3.8. Importance of consistent, long-term policies It is important to note that policies enacted to advance renewable energy can slow

the transition if they are not well formulated or are inconsistent, piecemeal, or not sustained. For example, because early investment credits in the U.S. state of California were short-lived and extensions were often uncertain, many equipment manufacturers could not begin mass production for fear that credits would end too soon. When incentives expired, interest waned and the industries and markets died with them. In the case of wind power, the impact was felt as far away as Denmark, which relied on the California market for sales of Danish turbines. The U.S. Production Tax Credit for wind energy has been allowed to expire several times, only to be extended months later. As a result, the credit has stimulated wind capacity growth but has created cycles of boom and bust in the market. Such cycles lead to suspension of projects, worker lay-offs, and loss of momentum in the industry.

This on-and-off approach to renewables has caused significant uncertainties,

bankruptcies, and other problems and has made the development of a strong industry in the United States a challenge, at best. In India, uncoordinated, inconsistent state policies and bottlenecks imposed by state electricity boards have acted as barriers to renewables development. Even in Denmark, years of successful wind energy growth ended in 1999 when the government changed course, and uncertainty overtook years of investor confidence. The future of some planned offshore wind farms is now uncertain, as is Denmark’s target to produce half its electricity with wind by 2030, and the number of jobs in the domestic industry is now in decline.

Consistent policy environments are necessary for the health of all industries.

Consistency is critical for ensuring continuous growth and stability in the market, enabling the development of a domestic manufacturing industry, reducing the risk of investing in a technology, and making it easier to obtain financing. It is also cheaper. With stop-and-go policies, each time around the funds must be appropriated, a new program must be administered, and the information must be distributed to stakeholders, and so on. As a result, costs of administering the program could approach those of the incentives themselves.

Clearly, government commitment to develop renewable energy markets and

industries must be strong, and long-term, with a clear intent to advance these technologies, just as it has been with fossil fuels and nuclear power.


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4. Conclusions and Recommendations

4.1. General For renewable energy to reach its full potential—to make as large as possible a

contribution to economic development and job creation, improving domestic energy security and reducing oil dependence, and reducing the health and environmental impacts of energy production and consumption—it is essential to create the conditions that allow for development of sustained markets and industries which, in turn, will result in increased renewable capacity and generation, and will drive down costs.

To date, feed-in systems have been responsible for most of the additions in

renewable energy capacity and generation, while also driving down costs through technology advancement and economies of scale, and developing domestic industries and jobs. Pricing systems, where well-implemented, have provided increased predictability and consistency in markets, which in turn has encouraged banks and other financial institutions to provide the capital required for investment, and has attracted private investment.

The record of quota systems is more uneven thus far. Quota systems, if designed

well, have the potential to work effectively. But they are harder to get right and have a tendency to lead to stop and go, and boom and bust markets. Once renewable electricity markets and industries are well-established, and renewables can compete favorably with conventional energy, quota systems will likely be the most appropriate means for furthering the development and use of renewable energy technologies.

A combination of policies is required, whether for grid-connected electricity or

other uses, including production-based incentives and financing support to lower initial investment costs and reduce risk, whether real or perceived. Ultimately, the effectiveness of policies in promoting renewable energy will depend on their design, enforcement, how well they address needs and national circumstances, and the extent to which they are reliable and sustained. Long-term, consistent and clear government commitment to renewable energy is imperative.

Following are recommendations for policies to advance a range of renewable

energy technologies: • Establish regulatory frameworks needed to provide access to relevant markets

and favorable climates for investment, such as well-designed quota or pricing systems for grid-connected renewable electricity. Recommendations specific to pricing and quota systems are listed in section 3.7.


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• Provide net metering for small-scale renewable systems (California provides net metering for systems up to 1 MW) where pricing laws are not in use. Time-of-use metering should be implemented for PVs.

• Provide financing assistance to reduce costs through production payments (rather than tax credits) for more-advanced technologies, and long-term, low-interest loans with investment rebates (rather than tax credits) for more-expensive technologies and/or those that are off-grid such as solar PV. Investment incentives should always be tied to technology and/or production standards. It can also be useful to require reporting of operational data for subsidized projects on a regular basis. Regarding rebates, a fixed amount per unit of capacity might be preferable to a percentage of investment costs for encouraging the most efficient and least-cost options, and thus for reducing costs. All subsidies must be “smart subsidies” that gradually phase out over time—subsidies are not likely to lead to sustainable markets unless they help create the conditions in which they eventually are not needed.

• Be careful if setting capacity limits on large-scale projects in the context of financing assistance and quota or pricing laws. At a minimum, capacity restrictions should allow for project sizes that can achieve cost reductions through scale economies; otherwise, they can discourage development of some renewable resources. When capacity restrictions are necessary, they might be addressed better under regulations, with variations by region and technology where appropriate.

• Research, educate and disseminate information regarding resource availability, the benefits and potential of renewable energy, capacity and generation statistics, government incentives (for renewable and conventional energy), and policy successes and failures on local, national, and international levels. Establish a centralized global clearinghouse for such information. That could be national training programs in vocational schools, universities and other appropriate institutions.

• Encourage stakeholder/public ownership and participation in renewables policy formulation and in project planning and decision making. Citizen involvement can be critical to project development and viability, while introducing the concepts of democracy and self-determination to the process of energy procurement.

• Establish standards for technology performance, safety and create or strengthen building codes to improve efficiencies and encourage the integration of renewable technologies into structures. Standards must also be set for grid connection to eliminate burdensome utility interconnection requirements and charges.

• Incorporate external costs and benefits of energy technologies and fuels in pricing structures and consider them when developing policy objectives. In addition to environmental, health and employment benefits, considerations should include factors such as reliability and security benefits associated with modular, distributed, and smaller-scale renewable technologies, the reduced risk of fuel price volatility, and benefits of a more diversified (and domestic) portfolio of energy options.

• Shift government subsidies from conventional to renewable energies, in line with previous point.

• Increase government procurement of renewable energy. Governments could purchase ever-larger shares of energy from renewables and install renewable technologies on public buildings and in public spaces (where appropriate) to set an example, increase


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public awareness, reduce perceived risks associated with renewable technologies, and reduce costs through learning and economies of scale.

The details could be critical, and certain types of policies can be successful or not

depending on how they are implemented. For any of the above policies to be effective, they must be:

• Predictable, long-term and consistent, with clear government intent. These characteristics are critical to provide certainty in the market to draw investors into the industry, and to provide enough lead-time to allow industries and markets to adjust to change.

• Appropriate. The right types of support are needed—policies must match objectives and might vary by resource potentials, location, technology type, and timing. It is also important that the level of support not be too high or too low.

• Flexible. It is essential to design policies such that adjustments (fine-tuning, but not wholesale changes or elimination of policies) can be made on a regular, pre-determined time schedule if circumstances change. Governments/Regulators must be able to address existing barriers as they become apparent and new barriers as they arise. Policies also must be designed to allow developers/generators flexibility for meeting government mandates.

• Credible and enforceable. If policies are not credible, or are not enforceable (or enforced), there will be little incentive to abide by them.

• Clear and Simple. Policies must be easy to implement, understand, and comply with. Procedures of permission and administration, where necessary, must be as clear and simple as possible.

• Transparent. Transparency is important for suppliers and consumers of energy and is necessary to avoid abuse. It facilitates enforcement, maximizes confidence in policies, and helps ensure that mechanisms are open and fair.

4.2. Developing Countries

Additional recommendations that are specific to developing countries are provided below.

In developing countries it is essential to bring down the costs of renewable energy,

increase confidence and awareness, attract investment, build local capacity, and develop supporting infrastructure (i.e., legal and regulatory systems, transport and communications). At least for the short run, sustainable and replicable business models, and consistent and growing markets for renewable energy, are more important than quantity. Perhaps the most critical factors for achieving these goals are consistent, long-term policies and a clear government commitment to renewable energy.

For grid-connected electricity, developing countries face many obstacles and policy

options similar to those in industrial countries. The keys to development include creation of a favorable investment climate that provides long-term stable tariffs, and a regulatory framework for independent power producers that provides open grid access with fair


© ERRA 2006 31

transmission charges, and permits wheeling. Such factors have helped to catalyze the wind industry in India, and small hydropower in Brazil. While experience with them is very limited in the developing world, a few countries have begun to implement quota (China and India) and pricing systems (Brazil) to provide the necessary regulatory frameworks. Financing is also crucial, as are production-based incentives to encourage optimal performance and sustainability. Ultimately, large and expanding domestic industries are necessary to overcome regulatory, technical, contractual and operational challenges.

Success stories for off-grid electricity programs are still limited, but there are

examples of programs that have succeeded in providing electricity for rural areas through mini-grids. For instance, Argentina’s government offers concessions through which the winning company gains a monopoly in a given region, and the government provides grants to cover lifecycle costs. Benefits of this system include creation of a large market to provide critical mass for commercially sustainable business and to reduce unit costs through scale economies (for equipment, transactions, operation and maintenance), as well as its appeal to large companies that have their own sources of funding. This system has been duplicated in several other countries, including Cape Verde, Togo, Benin, and South Africa. The Philippines and Bangladesh have networks of consumer-owned and -managed cooperatives that receive financial incentives in exchange for meeting annual performance targets and providing electricity to members and the local community. Results have been mixed in both countries.

The Chinese government has undertaken an ambitious program to electrify—with

mini-grids—more than 1,000 townships within 20 months, beginning with township “seats,” followed by an additional 20,000 administrative villages. Nearly 30 percent of the total funds ($340 million) are earmarked for institutional development and training, which will focus on certifying Master Trainers who will then instruct others on a local basis.

For rural markets, whether for electrification or other needs, there are four key

dimensions to entrepreneurship. Marketing can be challenging and expensive, particularly in rural areas, and is discussed further below. Business financing is necessary to overcome the barrier of up-front costs for small dealers. Financing can be more difficult to obtain in remote areas, particularly if bankers lack knowledge of renewable energy, and interest rates are often extremely high.

Possible solutions include partnering with larger dealers, micro-finance lending, and

partial credit guarantees. Bundling of renewables with existing products can reduce costs. And a policy framework for rural electrification is essential—for example, the primary barriers to renewable energy are often unrealistic promises of grid access and subsidies for kerosene.

A relatively high density of projects is also required to support the establishment of

local businesses with trained technicians, which also necessitates that renewable technologies be affordable for consumers. Microcredit, leasing and prepaid meters are the


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most promising options to date. China offers revolving credit, with repayment linked to timing of a household’s income stream. India provides low-interest loans that vary by technology, with the most favorable terms available for PV. For the poorest populations, additional subsidies may be needed as well.

Some key recommendations from the literature about renewable energy in

developing countries include the following (note that there are several additional and relevant recommendations in section 4.1. that are not incorporated below):

• Support should focus on institutions rather than individual projects, as project-

specific funding tends to create cycles of boom and bust and does not generally build institutional capacity.

• Distorting subsidies should be reduced or eliminated. Subsidies that remain must be carefully targeted to those who truly need them. For example, the Argentinean government subsidizes minimum rural household electricity consumption of 10 kWh/month; beyond that level there is no support.

• Marketing assistance is essential in the early phases. Local governments played a significant role in Argentina by preparing detailed market studies, disseminating information, and preparing studies regarding reliability of DC appliances to help overcome barriers created by a lack of awareness and high marketing costs.

• Develop the capacity for local regulation and certification. Poor production quality can result from a lack of standards.

• Ease import procedures and eliminate or reduce import duties for renewable technologies and components to reduce project costs and time delays.

• Remove barriers to joint-ventures with foreign companies, as India has done. • Encourage local production, which provides jobs, local investment, and

significantly reduces costs of renewable energy technologies. One option for promoting local production is to provide purchase subsidies for locally manufactured technologies.

• Bundling can be used to attract bi- and multilateral financing assistance, as India has done. China’s “Brightness program” is funded jointly by China’s Finance Ministry and the German state-owned development bank.

• Government procurement of renewable energies can help achieve a sustainable market and industry, while increasing public awareness and reducing perceived risk. Government and national utilities can also incorporate solar home systems, for example, into rural electrification planning.

5. Green Energy Pricing in ERRA Member Countries

5.1. By Countries

«Green energy» means energy from renewable energy sources, i.e. energy from non-fossil fuel that depends on weather conditions (solar, wind); energy from non-fossil fuel that is not dependent on weather conditions (hydroenegy and geothermal energy) that is renewed without obvious depletion in the course of its utilization; and also power from vegetal or animal biomass, including biogas and industrial and municipal waste energy.


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A “green tariff” is a special tariff for electricity and heat generated using

alternative energy sources. The main goal of introduction of the “Green tariff” is promotion of development

of alternative energy sources in order to save local fuel and energy resources and to ensure energy security of the state.

At present, development of these types of energy is in the focus of attention in the

countries of Central and Eastern Europe. Definitely, each country has its own priorities in terms of use of «Green energy». Armenia

The most realistic areas for green energy development in Armenia are:

1. Small hydro 2. Wind power 3. Biomass.

But hydro energy is promoted especially actively. Small Hydro Power Plants

(SHPPs) in Armenia are constructed on rivers, irrigation pipelines, on drinking water pipelines.

For further liberalization of the sector, in 2003, Armenia converted from

calculated tariffs to so-called “cap” tariffs. From 2003 cap tariffs for electricity supplied from small hydro are: a) constructed on rivers – 5.4 US cent/kWh, b) on irrigation pipelines – 3.6 US cent/kWh, c) on drinking water pipelines - 2.4 US cent/kWh. Tariffs for end-users is 4.7 US cent/kWh. After the decision on cap tariffs was made in Armenia, it became possible to talk

about the construction boom that occurred. The Commission received 57 applications for licenses for construction of small HPPS, i.e. upon completion of construction in Armenia output of these HPPs would be about 10% of the total generation of electricity in the country.

At present, in the Republic there are 32 SHPPs in operation, and 51 are projected.

All SHPPs belong to private investors. Certain work is being done in the Republic also with respect to development of

alternative sources of electricity.


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Several wind-driven power plants were built. Relevant tariffs were calculated for electricity supplied from future power plants

using technology “municipal solid waste – biogas - electricity». Albania

The Albanian government began the process of revising the legislation in order to

establish more favorable conditions for renewable energy. It is expected that on this basis the price for green energy would be set.

On the basis of the law «On Electricity» the following would be considered to be

eligible electricity generators:

• Generators using sources of renewable energy, and in case of hydro – up to 10 MW,

• Generators using cogeneration schemes with installed capacity not more than 100 MW,

• Autoproducers, for excess of electricity provided they use a renewable source of electricity with installed capacity not more than 10 MW. There is an agreement with GRTN Italy, which has to be ratified by the new

government in order to facilitate renewable energy between two countries. Bulgaria

Companies licensed to supply electricity have to purchase full amount of

electricity generated at the power plant that uses renewable energy sources, except for the amount used for internal needs of the plant and for participation in the balancing market.

Holders of supply licenses have to buy electricity generated at power plants using

renewable energy sources, including HPPs with total installed capacity under 10 MW, at preferential prices.

The Commission sets preferential prices for electricity generated from renewable

energy sources taking into account characteristics of various renewable energy sources and electricity generation technologies:

Hydro – 5 US cent/kWh Wind: - for generators with efficient hours of operation under 2250 – 11.3 US

cent/kWh - for generators with efficient hours of operation more than 2250 – 10.1 US

cent/kWh


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Preferential prices comprise not less than 80 % from the average sale price of electricity for the previous calendar year for consumers using electricity for residential needs.

Mandatory purchase of electricity at preferential prices should be applied until the

system of issuance and trade in green certificates is in place. The draft law on amendments to the Law on Energy states that green certificates would not be applied for the time being, as there is no liquid electricity market in Bulgaria. Bosnia & Herzegovina

At present, the electricity sector regulation is being reformed in Bosnia &

Herzegovina. Correspondingly, new regulation in this field is expected, it would be harmonized with EU directives.

At present, there is a legal basis for renewable energy sources (Government decision). Tariffs are set by the adjustment factor according to tariffs for electricity at 10(20) kV voltage level, which is 4.87 US cent/kWh.

Type of plant Adjustment factor Purchase tariff US cent/kWh

Small HPPs 0.80 3.90

Plants using biogas 0.77 3.75

Windmills 1.00 4.87

Solar 1.10 5.36

Distribution companies purchase all electricity generated from renewable energy

sources, but prices are regulated by the government decision, and by the electricity market. In the future the situation would change, and the trade in «green certificates» would be introduced. Hungary

Preferential prices and obligatory purchase are used.

Starting from September 1, 2005, the Law on Electricity set a preferential price of

23 HUF/kWh (11,67 US cent/kWh) for electricity generated from renewable energy

sources (which is by 20 % higher than the previous price).On the first day of each

subsequent year CPI-based indexation has to be applied (consumer price index). (In case

of hydro power the preferential price can be applied up to 5 MW of nominal capacity).

The public wholesale company and public supply companies have to buy

electricity generated for sale by power plants (except for the amount that is necessary for


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plant’s own needs) using renewable energy sources (and CHP) and are connected to the

transmission or distribution network.

The Hungarian Energy Office (HEO) has the right to set the amount of electricity,

which has to be purchased from each power plant using renewable energy sources.

The preferential price (and forecasted for the future) envisioned in the law

provides certainty to investors.

However, there are no criteria for differentiation of prices by various renewable

energy sources (additional profit for power plants that are already in operation and at the

same time additional expenses for consumers).

At present the following tariffs are used:

• Renewables (among them windmills) - 13,64 US cent/kWh,

• [Hydro >5 MW – 7,83 US cent/kWh (public wholesale price)].

The current practice remains in effect until the law is changed. (Expected date of

entering new law on electricity: 01. 07. 2007.

The price of 11.67 US cent/kWh turned out to be very attractive for wind power

plant investors, as immediately after the price was published the Hungarian Energy

Office registered interest to install 1700 MW of new wind capacity. (For comparison, in

2004, total installed generating capacity was 8777 MW). Such amount of unbalanced

capacity might lead to serious problems in the course of the system regulation, so the

capacity to be realized was limited and licenses issued to 330 MW for a time.

Georgia

In spite of the fact that the Law on Green Energy has not been passed yet in

Georgia, the new electricity (capacity) market rules envision the obligation on purchase of electricity generated by small (under 10 MW) hydro power plants.

The main method for setting prices is so-called “cost plus” method. Meanwhile, from July 1, 2006, application of cap tariff was introduced; for certain power plants and their groups upper (ceiling) caps are set.

For small hydro power plants tariffs are set from 2.8 to 4.1 US cent/kWh.


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Kazakhstan As there is no major need in «Green energy» in Kazakhstan (excessive energy

system, low share of “green” power plants), there are no suggestions on the topic «Green Energy Pricing». Kosovo

The method of setting and calculating prices for green energy pricing has to be

developed.

The Law on Electricity envisions that the Electricity Regulatory Office of Kosovo (ERO) can issue certificates of origin for electricity generated from renewable energy sources and that the energy company that has to serve the population has to buy this electricity at the regulated price. This is an equivalent of use of the “feed-in price”, as it is done in many EU member states. Under this system electricity generated from renewable sources is purchased at the premium price in the competitive wholesale market.

In accordance with the Energy Community Treaty of the countries South-Eastern Europe (ECSEE):

The energy company that has to serve the population should purchase the whole amount of electricity at the regulated price (“feed-in tariff”), and ERO issues a certificate of origin for that (for renewable energy sources).

Global indicative planned task for EU member states: 12% from the total domestic consumption of electricity by 2010. At present the tariffs are as following: HPPs – 0.63 US cent/kWh, Windmills – 3.63 US cent/kWh. There is no “feed-in tariff” yet.

It would be very interesting to determine the price which would allow to promote renewable generators, and would not contain too high premium in comparison to the cost of energy generated by conventional producers.

If the price for green energy depends on the quota, then at present there are no minimal requirements set by the Ministry of Energy and Mining. Possibly, there would be different prices for wind and hydro power, power from biogas …


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Macedonia

The current regulatory basis for electricity prices adopted by the Energy Regulatory Commission of Macedonia (ERC) in 2004, does not distinguish between conventional energy resources and renewable energy sources.

The new «Law on Electricity» had to be introduced in the 1st quarter of 2006. The new «Law on Electricity» would provide a clear definition of «Green energy» and would envision trade in green certificates.

Before the mechanism for trade in green certificates, ERC should set (preferential) tariffs for electricity generated from renewable energy sources.

ERC should develop a methodology for calculation of prices for electricity from renewable energy sources in the first half of 2006.

At present supply license holders (suppliers of consumers connected to the distribution network) have to buy full amount of electricity generated at the power plant using renewable energy sources.

Supply license holders purchase electricity generated from renewable energy sources on regulated terms and conditions (agreements on purchase of electricity with generating companies that generate electricity from renewable energy sources, approved by ERC).

Under the new «Law on Electricity» until the creation of mechanism for functioning of trade in green certificates, supply license holders have to purchase electricity generated from renewable energy sources at preferential tariffs.

Supply license holders would acquire green certificates as percentage of their annual sales of electricity (MWh). This percentage would be determined by the Ministry of Economy (Agency on Energy Efficiency) in accordance with the set of rules for use of renewable energy sources. If there are no green certificates, supply license holders (according to the set of rules for use of renewable energy sources) have to pay in cash, which would be used to finance new renewable energy sources. Lithuania

The regulator sets the purchase price for “green energy” based on the practical

experience. The Law on Electricity introduces obligation on utility services, thus, making the

state to motivate generators to produce electricity from renewable energy sources:

• The holder of a supply license has to buy electricity generated from renewable energy sources and waste and to sell it to consumers


© ERRA 2006 39

• This obligation is also applicable to eligible consumers that import electricity. There is a special strategy to promote generation of «green energy» (until 2009).

Current purchase prices of renewable energy, (USD cents/kWh)

Power Plants, using renewable and waste energy resources

Price, USD cents/kWh

(1USD=2.8LTL) Hydro Power Plants 7,14

Wind Power Plants 7,86 Power Plants, using biofuel 7,14

Operating Power Plants, which supply electricity to 0,4 kV voltage network for 10 years period,

when the date is counted since the connection to electricity network

Price fixed in Power Purchase-Sale Agreement on 31/12/2001

Other Power Plants, using renewable or waste energy resources

Price is set by separate NCC

decision Poland

«Green energy» is regulated by the national legislation. A system for acquiring «Green Certificates» was introduced at the Polish Capacity Exchange.

If a company does not acquire certificates, then it should pay for a substitute at a special rate. The revenues are transferred to a separate bank account of the National Environmental Nature and Water Resource Protection Fund. These obligations are applicable to any company (either generating or distribution), which sells electricity to end-users. Obligations of companies on purchase of „green” certificates increase each year.

There is also a notion of «Certificates of origin». Small „green” sources have to present «certificates of origin» to the President of the Energy Regulatory Office of Poland (ERO) for buy out.

The prices are uniform for all renewable energy sources: An average price in the competitive market in 2005 is 3.6 US cent/kWh announced by the President of ERO annually. This price is related to the physical flow of energy introduced by „green” sources. 5.4 US cent/kWh is an average price for a «certificate of origin» in the Polish capacity exchange.


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The introduction of the system of „green” certificate led to increase in prices for electricity. Russia

At present, in Russia no specifics for pricing of electricity from “green” generating sources have been set.

Therefore, the aforementioned generating sources can participate in the electricity market on general terms.

Due to the fact that the cost of production at such generating sources is by several times higher than cost of generation of electricity at thermal, and all the more so at hydro power plants, participation of such sources in the electricity market is almost on zero level.

At the same time, projects start to appear (but as of now only at the stage of discussions) on creation of “green” generating sources to supply electricity to communities located in hard to reach or isolated territories of Russia (mostly Far Eastern regions of Russia). Romania

The prices are set based on so-called «supporting scheme», which is used as a combination of mandatory quota for energy and retail «green energy» certificates. Both the quota level and the cost of «green energy» certificates are set in GEO of 958/2005.

«Supporting scheme» relates to electricity generated from the following resources: wind, solar, geothermal, wave, tides, small hydro (less than 10 MW of installed capacity, and also upgraded or those that took the obligation to start operations in 2004), hydrogen from renewable hydrogen.

Obligations on trade in «green energy» should be in compliance with:

the commercial electricity code, regulation on acquisition of rights for priority production.

Upon the request of the «green energy» generator, the network operator has to

purchase full amount of generated electricity at the regulated price.

The price set as an average price of the annual day-ahead market (Decree of the National Electricity and Heat Regulatory Authority of Romania (ANRE))

«Support scheme» has a number of advantages, in particular:


© ERRA 2006 41

Introduction of mandatory quota provides control needed to achieve the national planned figure for Romania ensures efficient use of potential renewable energy sources.

The price for green certificates is kept on the lower cap to protect interests of

generating companies and buyers, and is set through competitive market mechanisms, ensures competition between generating companies (however, due to the market competition, certain risk is present for generating companies). Current tariffs: Minimal – 7.56 US cent/kWh, Maximal – 9.83 US cent/kWh. For 2010 a quota is set in the amount of 8.3 % to ensure in 2012 the quota of 33 % of electricity generated from alternative energy sources. Serbia

Eligible generators are generators of electricity using renewable energy sources and waste:

Small Hydro Power Plants (SHPP) (installed capacity up to 10 MW), Combined Heat and Power Plants (CHPP) provided they meet the energy efficiency criteria.

At present there are no price setting mechanisms. The Ministry of Energy and

Mining should be doing that; however due to the low price for electricity in the country such law has not been adopted yet.

There are no obligations on purchase of renewable power according to the «Law on Electricity» generators of renewable power have benefits in the market compared to generators selling electricity on equal terms.

With respect to generating companies (mostly hydro), distribution system operators should purchase electricity generated from these sources. A negotiated price is set between the owner of the generating company and the distribution system operator. Turkey

The Law on Renewable Energy Sources came into effect in March 2005; the goals of the law are as following:

• Development and use of renewable energy sources for generation of electricity, • Safe, economical and qualified utilization of these sources, • Increased diversification of energy sources, • Reduction of greenhouse gas emissions,


© ERRA 2006 42

• Assessment of industrial waste, • Protection of environment and development of the relevant generation sector to

implement these goals. Generation licenses should be issued by EMRA together with the “Certificate for

renewable energy sources” (RES certificate) in order to identify and monitor the source of purchase and sale of electricity generated using renewable energy sources in the domestic and external market.

Electricity generated from renewable energy sources should be purchased by legal

entities that have licenses for retail trade; they do it on the basis of bilateral agreements. Information on the amount of electricity certified as RES should be published by

EMRA on the annual basis. Each license holder for retail trade has to buy renewable energy to the amount set by EMRA, as proportion of electricity sold by it during the previous calendar year to the total amount of electricity presented in the market by all legal entities that are licensed to carry out retail trade in Turkey. If the total volume of electricity with RES certificates is sufficient, then the retail trade license holder should purchase electricity from RES, at least 8 % of electricity sold by it during the previous calendar year.

By the end of 2011: • Price used for electricity purchased in each calendar year should be equal to the

average wholesale electricity price set by the Energy Market Regulatory Authority of Turkey in the previous year. The Council of Ministers has the right to increase this price by 20 % at the beginning of each year. This price methodology is not applicable to generators that have RES certificates, and are in operation for more than 7 years.

• On the basis of this law, holders of licenses for retail trade have to buy electricity with RES-certificates. If the amount of purchased electricity is less than the share indicated in the article, they have to bring the amount up to the indicated value (through bilateral agreements at the market price, which does not exceed the average wholesale price for electricity in Turkey).

Ukraine

At present, the Parliament of Ukraine examines the draft law “On Making

Amendments to the Law on Electricity" (with respect to setting a special tariff for electricity - "green tariff"). The main goal of introduction of “green” tariff is to promote development of alternative sources of energy in order to save fuel and energy resources, strengthen energy security of the state.


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Tariffs are regulated by NERC. Tariffs are approved in accordance with the Provisional methodology for determining costs and tariffs for electricity generated at wind-driven power plants and Methodological recommendations for designing tariffs for power generated at hydro power plants and pumped storage plants.

Tariffs:

HPPs - 0.63 US cent/kWh, Windmills – 3.63 US cent/kWh.

NERC carries out detailed analysis of financial and economic results of activities

of regulated companies.

Purchase and sale of electricity generated at wind power plants is done in the wholesale electricity market of Ukraine in accordance with the Law of Ukraine «On Electricity».

Funding of construction of wind power plants in the framework of the Comprehensive program of wind power plants is done at the expense of target price premium in the amount of 0.75% to the current electricity tariff.

Creation of conditions for introduction of electricity generation technologies using alternative sources of energy, implementation of innovation programs in the field of use, attraction of foreign investments.

Use of alternative sources of energy increases the level of energy independence of the country, contributes to reduction of hazardous emissions in environment in the energy sector, and also promotes use of energy potential of small rivers, biomass potential, methane from coal deposits and solar energy. Croatia

Tariff setting methodology is being developed at present.

The transmission/distribution system operator has to accept the full amount of electricity, generated at a power plant using renewable energy sources. Montenegro

Use of energy from renewable sources is at the stage of development. However, the Law on Electricity authorizes the Energy Regulatory Agency of Montenegro (ERA) to require license holders to purchase energy from renewable sources. ERA has not used this right yet.

The Ministry of Economy is the competent body authorized to set prices for «Green energy», but the price is not set yet.


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At present, the Government is preparing a strategy for construction of small hydro

power plant, which is expected to be put into operation by the end of this year. The strategy would specify main issues related to «Green Energy». Estonia

The current law specifies the price for electricity generated from renewable

energy sources. The price for electricity generated from renewable energy sources is 6.23 US

cent/kWh. The price was calculated in accordance with EU-related obligations set by 2010

5% of consumption represented by electricity generated from renewable energy sources. The System Operator should purchase electricity generated from renewable

energy sources at the price of 81 Estonian cents per kWh.

5.2. Benchmarking Benchmarking studies of the experience in the field of “green energy” pricing in

ERRA member countries discussed at the Tariff/Pricing Committee meeting in Warsaw in February 2006.

Out of 22 ERRA member countries, Latvia, Moldova and Kyrgyz Republic failed

to present data.

5.2.1. Stages of regulation In 13 countries, renewable energy sources are regulated on the basis of national

legislations:

1. Armenia 8. Poland 2. Bulgaria 9. Romania 3. Bosnia & Herzegovina 10. Turkey 4. Hungary 11. Ukraine 5. Kosovo 12. Croatia 6. Macedonia 13. Estonia 7. Lithuania

In Serbia, Georgia and Kazakhstan this field is not regulated. In Albania and Montenegro, the process of revision of the legislation was

launched, in order to promote construction of renewable energy sources, in particular, small hydro.


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In Russia, projects on creation of “green” generating sources to supply electricity

to communities located in hard to reach or isolated territories of Russia (mostly Far Eastern regions of Russia) are being discussed.

5.2.2. Tariff calculation principles

In Kosovo, Macedonia, Croatia and Montenegro, methodologies for calculation of tariffs for “green energy” are not developed yet.

There are methodologies for calculation of tariffs for “green energy” in Armenia

and Ukraine. In Armenia, in 2003, they converted from calculated tariffs to so-called “cap” tariffs for the purpose of further liberalization of the sector.

As for the other countries, they also have certain approaches to tariff calculation.

For example, in Lithuania tariffs are set on the basis of practical experience. Bulgaria and Hungary rely on feed-in (preferential) tariffs. In Hungary, feed-in

(preferential) prices are set from September 1, 2005, and are by 20% higher than the previous price. On the first day of each subsequent year, indexation is applied based on the CPI. In Bulgaria preferential prices for electricity generated from renewable energy sources are set taking into consideration characteristics of various renewable energy sources and power generation technologies.

Poland and Estonia adopted uniform prices for all renewable energy sources. In Bosnia & Herzegovina, tariffs are set with the help of applying adjustment

factors to the electricity tariff at 10(20) kV voltage. In Estonia the price is designed according to the EU-related obligation to reach by

2010, 5% of all consumed electricity should be electricity consumed from renewable energy sources.

At present, in Macedonia, rules of electricity price regulation do not distinguish

between conventional and renewable energy sources. In Turkey price for electricity purchased in each new calendar year should be

equal to the average wholesale price of electricity in the previous year. At the beginning of each year, the Council of Ministers of Turkey has the right to increase this price by 20 %.

5.2.3. Green energy purchase obligations

According to the procedures set by the market rules, in Armenia, Bulgaria, Bosnia & Herzegovina, Kosovo, Macedonia, Lithuania, and Croatia all power (capacity) generated at power plants using renewable energy sources is subject to be purchased. In


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some countries, according to the valid rules, purchase of all generated green energy is not obligatory. They use system of quotas (Hungary and Romania).

In Turkey purchase of generated green electricity is done on the basis of bilateral

agreements between the generator and legal entities that hold licenses for retail trade. In Poland purchase of generated green electricity is done based on the system of

annual percentage obligations.

5.2.4. Size of tariffs

The size of tariffs is shown in diagrams below and in the table in Appendix 5.


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Tariffs for wind power plants

in US cents/kWh:

Armenia - 8.4 Bulgaria - 7.5 Bosnia & Herzegovina - 4.87 Hungary - 11.67 Lithuania - 7.86 Ukraine - Estonia - 6.23

Тарифы ветряных электростанций

7,5

4,87

11,67

7,866,23

8,4

0

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© ERRA 2006 48

Tariffs for biofuel electricity in US cents/kWh:

Armenia - 8.4 Bosnia & Herzegovina - 3.75 Lithuania - 7.14 Estonia - 6.23

As the diagrams show: • tariffs for electricity generated at small HPPs:

minimal in Ukraine – 0.63 US cents/kWh, maximal in Lithuania - 7.14 US cent/kWh,

• tariffs for electricity generated at windmills: minimal in Poland – 3.6 US cent/kWh, maximal in Hungary – 11.67 US cent/kWh. High prices for wind power in Hungary turned out to be very attractive. Immediately after the price was published the Hungarian Energy Office registered 1700 MW of installed capacity. (For comparison, in 2004, total installed generating capacity was 8777 MW).

• tariffs for electricity generated at plants using biofuel: minimal in Poland – 3.6 US cent/kWh, maximal in Armenia – 8.4 US cents/kWh. In Bosnia & Herzegovina there is also a tariff for solar power - 5.36 US cent/kWh.

Тарифы электроэнергии на биотопливе

3,75

6,237,14

8,4

0

1

2

3

4

5

6

7

8

9

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центов США

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© ERRA 2006 49

6. References Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced for renewable energy sources in the internal electricity market. Official Journal of the European Communities, 27.10.2001, L 283/33.

Lauber, Volkmar, Institut für Politikwissenschaft - University of Salzburg, “The EU Directive on Electricity from Renewable Energy Sources”

Gipe, Paul, Executive Director of the Ontario Sustainable Energy Association in Toronto, Canada

Janet L. Sawin, Worldwatch Institute, “Policy Lessons for the Advancement & Diffusion of Renewable Energy Technologies Around the World”, 2004

Commission of the European Communities, Communication from the Commission, “The support of electricity from renewable energy sources”, Brussels, 2005

Martinot, Eric, lead author, Worldwatch Institute, ”Renewables 2005 global status report“


© ERRA 2006 50

Appendix 1 - Current support systems

Table 1: Overview of the main policies for renewable electricity in EU-15 Country Main electricity support

schemes Comments

Austria Feed-in tariffs (now terminated) combined with regional investment incentives.

Feed-in tariffs have been guaranteed for 13 years. The instrument was only effective for new installations with permission until December 2004. The active period of the system has not been extended nor has the instrument been replaced by an alternative one.

Belgium Quota obligation system / TGC27 combined with minimum prices for electricity from RES.

The Federal government has set minimum prices for electricity from RES. Flanders and Wallonia have introduced a quota obligation system (based on TGCs) with the obligation on electricity suppliers. In Brussels no support scheme has been implemented yet. Wind offshore is supported at federal level.

Denmark Premium feed-in tariffs (environmental adder) and tender schemes for wind offshore.

Settlement prices are valid for 10 years. The tariff level is generally rather low compared to the previously high feed-in tariffs.

Finland Energy tax exemption combined with investment incentives.

Tax refund and investment incentives of up to 40% for wind, and up to30% for electricity generation from other RES.

France Feed-in tariffs.

For power plants < 12 MW feed-in tariffs are guaranteed for 15 years or 20 years (hydro and PV). For power plants > 12 MW a tendering scheme is in place.

Germany Feed-in tariffs. Feed-in tariffs are guaranteed for 20 years (Renewable Energy Act). Furthermore soft loans and tax incentives are available.

Greece Feed-in tariffs combined with investment incentives.

Feed-in tariffs are guaranteed for 10 years. Investment incentives up to40%.

Ireland Tendering scheme. It has been announced that the tendering scheme will be replaced by a feed-in tariff scheme.

Tendering schemes with technology bands and price caps. Also tax incentives for investment in electricity from RES.

Italy Quota obligation system / TGC. Anew feed-in tariff system for photovoltaic valid since 5th August 2005.

Obligation (based on TGCs) on electricity suppliers. Certificates are only issued for new RES-E capacity during the first eight years of operation.

Luxembourg Feed-in tariffs.

Feed-in tariffs guaranteed for 10 years (for PV for 20 years). Investment incentives also available.

Netherlands

Feed-in tariffs.

Feed-in tariffs guaranteed for 10 years. Fiscal incentives for investment in RES are available. The energy tax exemption on electricity from RES ended on 1 January 2005.

Portugal

Feed-in tariffs combined with investment incentives.

Investment incentives up to 40%.


© ERRA 2006 51

Spain

Feed-in tariffs.

Electricity producers can choose between a fixed feed-in tariff or a premium on top of the conventional electricity price, both are available over the entire lifetime of a RES power plant. Soft loans, tax incentives and regional investment incentives are available.

Sweden

Quota obligation system / TGC.

Obligation (based on TGCs) on electricity consumers. For wind energy, investment incentives and a small environmental bonus are available.

UK

Quota obligation system / TGC.

Obligation (based on TGCs) on electricity suppliers. Electricity companies which do not comply with the obligation have to pay a buyout penalty. A tax exemption for electricity generated from RES is available (Levy Exemption Certificates which give exemption from the Climate Change Levy).

Table 2: Overview of the main policies for renewable electricity in EU-10

Cyprus

Grant scheme for the promotion of RES (since February 2004) financed through an electricity consumption tax of 0.22 E/kWh (since Aug. 2003).

Promotion scheme is fixed only for a 3-year period.

Czech Republic

Feed-in tariffs (since 2002), supported by investment grants Revision and improvement of the tariffs in February 2005.

Relatively high feed-in tariffs with 15-year guaranteed support. Producer can choose between a fixed feed-in tariff or a premium tariff (green bonus). For biomass cogeneration, only the green bonus applies.

Estonia

Feed-in tariff system with purchase obligation.

Feed-in tariffs paid for up to 7 years for biomass and hydro and up to 12 years for wind and other technologies. All support schemes are scheduled to end in 2015. Together with relatively low feed-in tariffs this makes renewable investments very difficult.

Hungary

Feed-in tariff (since January 2003) combined with purchase obligation and tenders for grants.

Medium tariffs (6 to 6.8 ct/kWh) but no differentiation among technologies. Actions to support RES are not coordinated, and political support varies. All this results in high investment risks and low penetration.

Latvia

Quota obligation system (since 2002) combined with feed-in tariffs.

Frequent policy changes and the short duration of guaranteed feed-in tariffs result in high investment uncertainty. The high feed-in tariff scheme for wind and small hydropower plants (less than 2 MW) was phased out in January 2003.

Lithuania

Relatively high feed-in tariffs combined with a purchase obligation. In addition good conditions for grid connections and investment programmes.

Closure of the Ignalina nuclear plant will strongly affect electricity prices and thus the competitive position of renewables as well as renewable support. Investment programmes limited to companies registered in Lithuania.


© ERRA 2006 52

Malta

Low VAT rate for solar.

Very little attention to RES-E so far.

Poland

Green power purchase obligation with targets specified until 2010. In addition renewables are exempted from the (small) excise tax.

No penalties defined and lack of target enforcement.

Slovak Republic

Programme supporting RES and energy efficiency, including feed-in tariffs and tax incentives.

Very little support for renewables. The main support programme runs from 2000, but there is no certainty as to the time frame or tariffs. The low support, lack of funding and lack of longer-term certainty make investors very reluctant.

Slovenia

Feed-in system combined with long-term guaranteed contracts, CO2 taxation and public funds for environmental investments.

None.

Table 3: Overview of the main policies for renewable electricity accession countries

Bulgaria

Combination of feed-in tariffs, tax incentives and purchase obligation.

Relatively low levels of incentive make penetration of renewables especially difficult as the current commodity prices for electricity are still relatively low. A green certificate system to support renewable electricity developments has been proposed. Bulgaria recently agreed upon an indicative target for renewable electricity, which is expected to provide a good incentive for further promotion of renewable support schemes.

Romania

Subsidy fund (since 2000), feed-in tariffs.

Normal feed-in tariff modest, but high tariff for autonomous small wind systems (up to 110-130 €/MWh). Romania recently agreed upon an indicative target for renewable electricity, which is expected to provide a good incentive for further promotion of renewable support schemes.

Source: COMMISSION OF THE EUROPEAN COMMUNITIES, Brussels, 2005, Communication from the Commission, “The support of electricity from renewable energy sources”


© ERRA 2006 53

Appendix 2 - Average Prices (€/MWh) paid for renewable electricity in 11 European Countries

Country Small Hydro Wind Biomass PV Other Austria

25 (pool price + green certificate) or 32 (R*)

73.5-109 (R; and investment costs)

47.7-174.5 (S)

358-726 (R)

Denmark 57.6 (rate under old pricing system)

Farm biogas: 80 (for 10 years)

France

Pre-2001: 28.81 (summer - su); 71.65 (winter - w); Post-2001: 44.5/84.2 (su/w; <500kVA); 40.1/75.8

(su/w; >500kVA)1

83.8 (first 5 years); 30.5-83.8 (depending on output; for next 10 years)

2

Landfill gas only: 57.2 (< 2MW); 45 (>6 MW)

87 (<10 kWp); 152.5 (to start soon, if not already in effect); 305 (Corsica & overseas)

Great Britain

39 (pool) + 49 (green

certificate)3

Ireland4

64.1 (weighted average price)

47.23-52.97 (<3 MW); 45.47-48.12 (>3 MW)

37.65-59.16

Italy

46 (pool price) + 67

(green certificate)5

Netherlands

77.1 (Pool + green certificates)

Portugal6

69.1 (up to 10 MVA)

75.56-83.1 (depending on hours in operation; up to 2800 h)

61.984

393.84 (<5kW); 229.56 (>5kW)

Wave 223.391

Spain7

(up to 50 MW)

63.827 (up to 10 MW)

62.806; or market price + 2.89 (premium)

Primary biomass: 61.724; Other: 3.5% less

3978 (<5kW);

217 (>5kW)

Sweden

24 (market price) + 10 (for plants <1,500 kW) + 10% of investment cost



24 (market price) + 10 (for plants <1,500 kW)

1 Additional bonus of 7-7.5 €/MWh in winter for regularity.

2 For plants up to 1,500 MW; 10% decrease for larger plants.

3 Maximum value for Green Certificates, calculated according to expected penalty.

4 Contract prices under the Alternative Energy Requirement tendering competitions.

5 Maximum price for 2002. Green certificates work for the first 8 years; from then on

producers receive only pool price. 6 Fixed prices are updated monthly, according to inflation. Fixed prices for PV are in

place until total capacity reaches 50 MW; wave prices in place up to 20 MW of national capacity.


© ERRA 2006 54

7 These are fixed prices, except for the market price plus premium listed included here for

wind. Spain’s support system also offers hourly pool electricity price plus a fixed premium. 8 Available until Spain reaches total PV capacity of 50 MW.

Average prices (€/MWh) for renewable electricity in Germany 2003 and 2004

Germany (2002) (tariff duration 20 years)

76.7 (<500 kW); 66.5-76.7 (500kW-5

MW)9

89 (first 5 years); 61 (yrs 6-20)

General biomass: 84-101 (S); Landfill & sewage: 66-77 (S)

481

Geothermal 89 (< 20 MW); 72 (>20 MW)


76.5 (<500 kW); 66.3 (< 5 MW)

89 (first 5 years onshore; first 9 years offshore); 60 (final tariffs)

100 (<500 kW); 90 (500-5,000 kW); 85 (5-20 MW). Landfill/ sewage gas: 76.5 (<500 kW); 66.3 (< 5 MW)

457 Geothermal 89.3 (<20 MW); 71.4 (> 20 MW)


76.5 (<500 kW); 66.3 (< 5 MW)

88 (first 5 years onshore; first 9 years offshore); 59 (final tariffs) (tariff duration 20 years)

99 (<500 kW); 89 (500-5,000 kW); 84 (5-20 MW). Landfill/ sewage gas: 76.5 (<500 kW); 66.3 (< 5 MW)

457 + 117 (roof installations <30kW); 93 (roof; >30 kW);

50 (facades)10

Geothermal 89.3 (<20 MW); 71.4 (> 20 MW)

9 Fixed prices apply for plants commissioned during 2002, for a period of 20 years,

except for hydropower, which receives prices permanently. 10

Additional payment is to take the place of 100,000 roof program, which ended summer 2003. A total capacity limit of 1,000 MW (to receive tariffs) has been eliminated.

* R = depending on region of plant S = depending on size of plant;. Sources: Janet L. Sawin, Worldwatch Institute, Thematic Background Paper, 2004


© ERRA 2006 55

Appendix 3 - Status of renewable technologies - Characteristics and Cost Technology Typical

characteristics Typical costs (cents/kWh)

Cost trends and potential for cost reduction

Power Generation

Large hydro Plant size: 10 MW–18,000 MW 3–4 Stable. Small hydro Plant size: 1–10 MW 4–7 Stable. On-shore Wind

Turbine size: 1–3 MW Blade diameter: 60–100 m

4–6

Costs have declined by 12–18% with each doubling of global capacity. Costs are now half those of 1990. Turbine size has increased from 600–800 kW a decade ago. Future reductions from site optimization, improved blade/generator design, and electronics.

Off-shore wind

Turbine size: 1.5–5 MW Blade diameter: 70–125 m

6–10 Market still small. Future cost reductions due to market maturity and technology improvement.

Biomass Plant size: 1–20 MW 5–12 Stable. Geothermal

Plant size: 1–100 MW Type: binary, single flash, double-flash, or natural steam

5–12

Costs have declined since the 1970s. Costs for exploiting currently economic resources could decline with improved exploration technology, cheaper drilling techniques, and better heat extraction.

Solar PV (module)

Cell type and efficiency: single-crystal: 17%, polycrystalline: 15%, thin film: 10–12%

- Costs have declined by 20% for each doubling of installed capacity, or by about 5% per year. Costs rose in 2004 due to market factors. Future cost reductions due to materials, design, process, efficiency, and scale.

Rooftop solar PV

Peak capacity: 2–5 kW

20–40

Continuing declines due to lower solar PV module costs and improvements in inverters and balance-of-system components.

Solar thermal power (CSP)

Plant size: 1–100 MW Type: tower, dish, trough

12–18 (trough)

Costs have fallen from about 44 cents/kWh for the first plants in the1980s. Future reductions due to scale and technology.

Hot Water/Heating

Biomass heat Plant size: 1–20 MW 1–6 Stable. Solar hot water/heating

Size: 2–5 m2 Type: evacuated tube/flat-plate Service: hot water, space heating

2–25

Costs stable or moderately lower due to economies of scale, new materials, larger collectors, and quality improvements.

Geothermal heat

Plant capacity: 1–100 MW Type: binary, single- and double-flash, natural steam, heat pumps

0.5–5

See geothermal power, above.


© ERRA 2006 56

Biofuels

Ethanol

Feedstocks: sugar cane, sugar beets, corn, or wheat (and cellulose in the future)

25–30 cents/liter gasoline equivalent

Declining costs in Brazil due to production efficiencies, now 25–30 cents/equivalent-liter (sugar), but stable in the United States at 40–50 cents (corn). Other feedstocks higher, up to 90 cents. Cost reductions for ethanol from cellulose are projected, from 53 cents today to 27 cents post-2010; modest drops for other feedstocks.

Biodiesel

Feedstocks: soy, rapeseed, mustard seed, or waste vegetable oils

40–80 cents/liter diesel equivalent

Costs could decline to 35–70 cents/liter diesel equivalent post-2010 for rapeseed and soy, and remain about 25 cents (currently) for biodiesel from waste oil.

Rural (off-grid) Energy

Mini-hydro

Plant capacity: 100–1,000 kW 5–10

Stable.

Micro-hydro

Plant capacity: 1–100 kW 7–20

Stable to moderately declining with efficiency improvements.

Pico-hydro

Plant capacity: 0.1–1 kW 20–40

Stable to moderately declining with efficiency improvements.

Biogas digester

Digester size: 6–8 m3

n/a

Stable to moderately declining with economies of construction and service infrastructure.

Biomass gasifier

Size: 20–5,000 kW

8–12

Excellent potential for cost reduction with further technology development.

Small wind turbine

Turbine size: 3–100 kW 15–30

Moderately declining with technology advances.

Household wind turbine

Turbine size: 0.1–1 kW

20–40

Moderately declining with technology advances.

Village-scale mini-grid

System size: 10–1,000 kW Options: battery backup or diesel

25–100

Declining with reductions in solar and wind component costs.

Solar home system

System size: 20–100W

40–60

Declining with reductions in solar component costs.

Note: All costs are economic costs, exclusive of subsidies and other policy incentives. Typical energy costs are under best conditions, including system design, siting, and resource availability. Some conditions can yield even lower costs, e.g. down to 2 cents/kWh for geothermal and large hydro and 3 cents/kWh for biomass power. Less-optimal conditions can yield costs substantially higher than the typical costs shown. Typical solar PV grid-connected costs are for 2,500 kWh/m2 per year, typical for most developing countries. Costs increase to 30–50 cents/kWh for 1,500 kWh/m2 sites (i.e., Southern Europe) and to 50–80 cents for 1,000 kWh/m2 sites (i.e., UK).


© ERRA 2006 57

Source: Martinot, Eric, lead author, Worldwatch Institute, ”Renewables 2005 global status report“

Appendix 4 - Renewable Energy Promotion Policies Country

Feed-

in tariff

Renewable portfolio standard

Capital subsidies, grants, or

rebates

Investment excise,

or other tax credits

Sales tax, energy tax,

or VAT reduction

Tradable renewable

energy certificates

Energy productio

n payments

or tax credits

Net metering

Public investment,

loans, or financing

Public competitive

bidding

Developed and transition countries

Australia x x x x Austria x x x x Belgium x x x x x Canada (*) (*) x x x (*) x (*) Cyprus x x Czech Republic x x x x x x Denmark x x x x Estonia x x Finland x x x x France x x x x x x x Germany x x x x x Greece x x x Hungary x x x x Ireland x x x x x Italy x x x x x Israel x Japan (*) x x x x x Korea x x x Latvia x x Lithuania x x x x Luxembourg x x x Malta x Netherlands x x x x x New Zealand x x Norway x x x x


© ERRA 2006 58

Poland x x x x x Country

Feed-

in tariff

Renewable portfolio standard

Capital subsidies, grants, or

rebates

Investment excise,

or other tax credits

Sales tax, energy tax,

or VAT reduction

Tradable renewable

energy certificates

Energy productio

n payments

or tax credits

Net metering

Public investment,

loans, or financing

Public competitive

bidding

Portugal x x x x Slovak Republic x x x Slovenia x Spain x x x x Sweden x x x x x x x Switzerland x United Kingdom

x x x x

United States (*) (*) x x (*) (*) x (*) (*) (*)

Developing countries

Argentina x x

Brazil x x Cambodia x China x x x x x x Costa Rica x Guatemala x x India (*) (*) x x x x x Indonesia x Mexico x x Nicaragua x x Philippines x x Sri Lanka x Thailand x x x x Turkey x x

Notes: (a) Only enacted policies are included. However, for some policies shown, implementing regulations may not yet be developed or effective, leading to lack of

implementation or impacts. (b) Entries with an asterisk (*) mean that some states/provinces within these countries have state/province-level policies but there is no national level policy. (c) Some policies shown may apply to other markets beside power generation.


© ERRA 2006 59

(d) The table omits policies known to be discontinued; for example Norway’s feed-in policy for wind discontinued in 2003, Denmark’s capital grants discontinued in 2002, and Belgium’s feed-in tariffs (Green Frank system) discontinued in 2003.

(e) Several African countries have subsidy policies supporting modest amounts of rural solar PV, including Mali, Senegal, Tanzania, and Uganda (also microhydro). South Africa had a policy for subsidies to rural energy service concessions for solar PV that now appears dormant.

(f) Several developing countries are planning renewable energy strategies and/or are expected to enact new or additional policies in the future, including Algeria, Armenia, Colombia, Egypt, Guatemala, Jordan, Macedonia, Mexico, Peru, South Africa, Vietnam, and Yemen.

Source: Martinot, Eric, lead author, Worldwatch Institute, ”Renewables 2005 global status report“


© ERRA 2006 60

Appendix 5 - "Green energy" Pricing in ERRA member countries

Country Types of renewable

energy sources in the legislation

Stage of green energy regulation

Tariff setting principles in the

field of green energy

Size of tariffs About purchase Other

2 3 4 5 6 7 8

ALBANIA

solar power, wind power, hydro power,

geothermal energy, biomass and biogas,

municipal waste energy

The Government of Albania began revision of the

legislation in order to promote

development of renewable energy

sources

Not developed Tariffs are not set

An agreement on exchange of types

of renewable energy with Italy is being

ratified by the Government

On the basis of the Law «On Electricity» qualified power generators are:

• generators using a renewable source with the installed capacity not more than 25 MW, and in

case of hydro power – up to 10 MW, •generators using cogeneration schemes with the

installed capacity not more than 100 MW, • generators using sources of renewable energy

with the installed capacity not more than 100 MW.

ARMENIA

Small hydro, wind power,

power plants using the technological cycle:

municipal waste-biogas-electricity

This field is regulated by the law

of the RA "On Energy"

There is a methodology for

calculation of tariffs for electricity

generated by small hydro

Cap tariffs: small hydro – 3.6 US

cent/kWh, small hydro on natural stream flows – 5.4 US

cent/kWh, windmills – 8.4 US

cent/kWh, power plants using

power plants using the technological cycle:

municipal waste-biogas-electricity – 8.4

US cents /k

Mandatory purchase of generated power


© ERRA 2006 61

BULGARIA


geothermal energy, power from vegetal or

animal biomass (including biogas),

power from industrial and residential waste

This field is regulated by the

national legislation

Preferential prices comprise not less than 80% from the average sale

price of electricity for the previous calendar year for consumers using

electricity for residential needs

Preferential prices: hydro power – 5 US

cent/kWh, windmills:

- for generators with efficient hours of

operation up to 2250 – 11.3 US cent/kWh - for generators with

efficient hours of operation more than

2250 – 10.1 US cent/kWh

Mandatory purchase of generated power,

except for the amount used for internal needs

It is planned to establish a system of issuance and trade in "green certificates"

Companies licensed to supply electricity, have to buy full amount of electricity having a

certificate of origin generated at the plant using renewable energy sources, except for the amount

used for internal needs or participation in the balancing market.

BOSNIA & HERZEGOVINA


geothermal energy, tidal energy,

biomass and biogas

This field is regulated by Government

Decisions. At present the power

sector regulation is undergoing reforms.

Tariffs are set with the help of

adjustment factors to the electricity tariff by voltage levels 10(20) kV

(4.87 US cent/kWh)

small hydro – 0.8x4.87=3.9 US

cents/kWh, biogas –

0.77x4.87=3.75 US cent/kWh,

windmills – 1.0x4.87=4.87 US

cents/kWh, solar – 1.1x4.87=5.36

US cent/kWh


In the future: 1. Prices should be determined by the electricity

market, 2. Electricity purchase obligations

2. Trade in "green certificates" is scheduled


© ERRA 2006 62

HUNGARY


geothermal energy, biomass and biogas

gas from waste storages or rural disposal fields

The field is regulated by the law

"On Electricity"

Preferential prices are set from

September 1, 2005, they are

20% higher than before. On the first day of each subsequent year they are indexed

on the basis of the CPI.

Preferential prices hydro power – 5.51

US cent/kWh, windmills – 11.67 US

cents/kWh

Hungarian Energy Office sets amounts of purchased power.

High prices for wind power turned out to be very attractive. Immediately after the price was

published the Hungarian Energy Office registered 1700 MW of installed capacity. (For comparison, in 2004, total installed generating

capacity was 8777 MW).

GEORGIA solar power, wind power, hydro power

There is no law on regulation of green

energy so far

small hydro - from 2.8 up to 4.1 US cents/kWh

According to the new rules of the

electricity market, purchase of

electricity generated at small HPPs

(below 10 MW) is mandatory

KAZAKHSTAN No suggestions

KOSOVO

solar power, wind power,

geothermal energy, wave power, tidal energy,

energy from gas resulting from

biodegradation of waste,

sewage treatment plant gas, biogas


"On Electricity"

Calculation methodology not

developed yet

Preferential prices tariffs for

hydropower: for consumers at 20

kV – 5.04 US cents/kWh,

for consumers at 110кВ – 2.52 US

cents/kWh,

According to the Energy Community

Treaty of South-East Europe

generated electricity has to be purchased

at the regulated price - "feed-in

tariff". A certificate of origin is issued for this purpose. Global indicative

plan for EU member states is 12% from the total internal consumption of

electricity by 2010.

According to the Law on Electricity, the Electricity Regulatory Authority of Kosovo can issue certificates of origin for green energy. A distribution company buys this power at the

regulated price. Under this system green energy is purchased with premium in the competitive

wholesale market.


© ERRA 2006 63

LITHUANIA




"On Electricity"

Prices are set based on practice

hydro power – 7.1 US cents/kWh,

windmills – 7.86 US cents/kWh,

plants with biofuel -7.14 US cents/kWh


A special green energy promotion plan (by 2009)

MACEDONIA



New Law on Electricity is being developed (almost

completed)

Calculation methodology is being developed

Prices according to agreements with

generating companies


Preferential tariffs would be set for green energy. Then it is planned to introduce "green certificates" trading system. Supply license holders should acquire Green certificates (MWh) as percentage of their annual sales of electricity. This percentage would be determined by the Ministry of Economy (Energy Efficiency Agency) of Macedonia in accordance with the rules on use of renewable energy sources. If there are no green certificates, supply license holders should pay money according to the rules on use of renewable energy, that would be used to finance new renewable energy sources


© ERRA 2006 64

POLAND

wind, hydro power, solar from PV and solar

panels, geothermal,

biomass and biogas



Uniform prices for all renewable energy

sources - 3.6 US cent/kWh

Average price for a "green certificate"

(certificate of origin)- 5.4 US cent/kWh

Unit payment for a substitute -

6.8 US cent/kWh

There are percentage

obligations on annual purchase of

energy.

At Polish capacity exchange a system for acquisition of "green certificates" was

introduced. If a company does not acquire certificates, then it should pay for a substitute at a special rate. These certificates are presented to the Energy

Regulatory Authority of Poland to be bought out at the current year. Introduction of the system

of "green certificates" led to some price increase.

RUSSIA

At present projects start to appear (at

the stage of discussions) related

to creation of "green" generating sources to supply

electricity to communities

located in hard to reach or isolated

territories of Russia (mostly Far Eastern regions of Russia


© ERRA 2006 65

ROMANIA

solar, wind,

geothermal, hydro power, wave power, tidal energy,

power from gas from biodegradation of

waste, power from sewage treatment plant gas,

biogas



There is a support scheme:

combination of mandatory quotas

on energy and retail green

energy certificates.

Minimal price 7.56 US cent/kWh,

Maximal price 9.83 US cent/kWh

National Electricity and Heat Regulatory

Authority of Romania sets both quota levels and

price for certificates.

Taking green energy in the market should happen in accordance with the Regulation

Commercial Code in connection with acquisition of rights for priority generation. If a

green energy generator requires, the network operator should purchase full volume of

generated electricity at the regulated price, which is set as an average annual day-ahead

market price A quote is set for up to 2010, as 8.3% to ensure in 2012 a quota in the amount of 33% from the

amount of generated electricity.

SERBIA

Eligible generators of electricity using

renewable energy sources and waste for

generation of electricity, small hydro

generators (installed capacity up to 10

MW), co-generators of

electricity and heat, provided they meet

the energy efficiency criteria.

There is no law on regulation of green

energy

There is no calculation

methodology Negotiated prices

There are no purchase

obligations, however, renewable

energy producers have benefits as

compared to those who sell electricity

on equal terms

TURKEY


geothermal energy,


"On renewable energy sources"

Price used for electricity purchased in each calendar year

Each retail sale license holder has to

buy renewable energy in the

Until 2011, the Energy Market Regulatory Authority of Turkey, together with the

generation license, issues "Renewable energy sources certificates" (RES certificates).


© ERRA 2006 66

wave power, tidal energy,

biogas and biomass

should be an average wholesale electricity price set by the Energy Market Regulatory Authority of Turkey in the previous year. The Council of Ministers has the right to increase this price by 20 % at the beginning of each year. This price methodology would not be applied to generators that have RES certificates, and are in operation more than 7 years.

amount set by the Energy Market

Regulatory Authority Turkey, as energy sold by him last calendar year to the total

amount of electricity which all

legal entities licensed for retail trade present for sale in Turkey.

If the total amount of electricity with RES certificates is sufficient, then the retail trade license holder should buy RES electricity not

less than 8 % of electricity sold by him last calendar

year.

For retail sale companies should by electricity that has RES certificate on the basis of this law. If the amount of purchased energy is less than the share indicated in the article, they should

buy the remaining amounts until they reach the mentioned share through bilateral agreements at

the market price not exceeding average wholesale price for electricity in Turkey. •The Council of Ministers has the right to

increase this price by 20 % at the beginning of each year.


© ERRA 2006 67

UKRAINE

solar power, hydro power,

biomass power, methane power of

coal deposits

At present, the Parliament of

Ukraine examines the draft law “On

Making Amendments to the Law on Electricity"

(with respect to setting a special

tariff for electricity - "green tariff")

Tariffs are set in accordance with the Temporary

methodology for setting costs and tariffs related to

electricity of windmills, and Methodological

recommendations related to the

design of tariffs for electricity

from hydro and pumped storages

hydro power – 0.63US cents/kW

windmills – 3.63US cents/kWh

Purchase and sale of wind power is done

in the wholesale market of electricity

of Ukraine according to the

Law on Electricity

CROATIA


geothermal energy, biomass



At the stage of development there are no tariffs Mandatory purchase

of generated power

MONTENEGRO wind power, hydro power

Up to the end of 2006, the

government prepares the strategy for construction of small hydro. Also main issues related

to green energy would be discussed.

There is no calculation

methodology there are no tariffs Mandatory purchase

of generated power.

The Ministry of Economy is a competent body authorized to set prices for green energy. The

price is not set yet.


© ERRA 2006 68

ESTONIA


geothermal energy, wave power, tidal energy,

gas from biodegradation of

waste, sewage treatment

plant gas, biogas and biomass



The price is calculated

according to EU obligations to

reach by 2010 5% of consumption of

electricity generated using

renewable energy sources.

Uniform prices for all renewable energy

sources - 6.23 US cent/kWh

Documents

GREEN ENERGY PRICING