Journal of Cleaner Production 15 (2007) 280e287www.elsevier.com/locate/jclepro

Renewable financial support systems and cost-effectiveness

David Toke*

Department of Sociology, University of Birmingham, 32 Prichatts Road, Edgbaston, Birmingham B15 2TT, UK

Accepted 3 February 2006

Available online 5 May 2006

Abstract

This paper analyses the performance of ‘market-based’ and ‘feed-in tariff’ systems of renewable energy procurement, and comments on theimpact of different procurement systems on investment in renewable energy. The ‘market-based’ British Renewables Obligation (RO) is notmore cost-effective compared to the German feed in tariff. Although the nominal rates of payment per kWh of renewable energy are higherin Germany, this is more than offset by lower wind speeds in Germany producing a lower return on investment compared to the UK. A harmon-ised, EU-wide market-based system, would not improve cost-effectiveness, and may serve to reduce, rather than increase, local investment inrenewable energy. On the other hand, nationally based green electricity certificate systems like the RO are not intrinsically biased against locallyowned or co-operative ventures. Systems are needed which encourage a diversity of investment in renewable energy from local as well asinstitutional sources.� 2006 Elsevier Ltd. All rights reserved.

Keywords: Green electricity certificates; Feed-in tariffs; Investment

1. Introduction

The objective of this paper is to assess the effectiveness ofthe UK’s ‘Renewable Obligation’ (RO) in achieving two keyobjectives; first the cost effective deployment of renewableenergy, and second, an effective partnership with business atboth the trans-national level and at the local level. This taskwas accomplished in the context of a discussion of the effec-tiveness of other renewable electricity procurement mecha-nisms that are used in other countries.

This is an important topic since renewable energy is a keypart of the strategy to combat climate change. Yet, at the sametime, there is great pressure to minimise the costs involved inreducing carbon dioxide emissions. There are arguments aboutwhether the procurement systems should be ‘fixed price’ ormarket-based, and also whether we should move to a pan-European market in renewable energy offering the sameincentives in all countries. Which type can achieve greatest

* Tel.: þ44 121 415 8616; fax: þ44 121 414 6061.

E-mail address: d.toke@bham.ac.uk

0959-6526/$ - see front matter � 2006 Elsevier Ltd. All rights reserved.

doi:10.1016/j.jclepro.2006.02.005

deployment at least cost? Given that the Renewables Obliga-tion is the largest functioning green electricity market systemfor renewable energy, it is important to assess its effectivenessaccording to different criteria. Also, the fact that wind poweris set to contribute the large bulk of new renewable energyin the UK and other EU states; I focused my analysis onwind power. I first discuss some theoretical debates surround-ing so-called ‘market-based’ so-called ‘fixed price’ procure-ment mechanisms, and then engage in a practical discussionof the operation of the Renewables Obligation (RO). I presentcomparisons with systems being used in various other coun-tries and finish the analysis by discussing the impact of thenotion of creating a pan-European market in green electricitycertificates. The issue of the impact of such an idea on localinvestment in renewable energy will be analysed.

2. The theory of renewable electricity support systems

There has been a continuing debate about what sort of pro-curement mechanism can produce the greatest volume of

281D. Toke / Journal of Cleaner Production 15 (2007) 280e287

renewable energy generating capacity at the least cost. Inreality, programmes tend to rely on a combination of specialincentives and tax regimes to encourage deployment of renew-able energy. However, the debate has mainly focused over therelative efficacy of two schemes. First, the so-called Renew-able Energy Feed-In Tariffs (REFIT) have been associatedwith a large growth in wind power in Spain, Germany andDenmark. These countries now boast the supply of 9% 5%and 20% of the electricity in these countries, respectively.These systems involve fixed payments that are guaranteed inthe long term; 20 years in the cases of Spain and Germany.

In political terms, those on the centre-right of the debatehave tended to argue that REFIT regimes waste money sincethey give developers greater profits than they need. Market-based systems are preferred by interest groups such asEurelectric which represents the European electricity industry.Indeed, Eurelectric has gone farther and called for a pan-European market system in green electricity certificates [1].Arguments about the shape of financial procurement systemsare central to the implementation rates of wind power. AsMeyer points out [2], the biggest influence on wind powerdeployment is the nature of the policy instrumentation ratherthan even the resource base for wind power.

‘Market-based’ schemes create limited protected marketsfor renewable energy. The supply of renewable energy isachieved by obliging suppliers to deliver to consumers aportion of their electricity from renewable energy sources. Inorder to do this they collect green electricity certificates. Hencea market is created in green electricity certificates which,according to the theory, generates downward pressure on theprices paid to renewable energy developers. This is based onthe theory of perfect competition where there is a multiplicityof buyers and sellers in a market where no single buyer orseller has a big enough market share to have a significant in-fluence on prices. Although, in practice, markets are veryrarely perfectly competitive, the assumption is still that a rela-tively competitive market will produce a more efficient use ofresources compared to a system where prices are set by Gov-ernment fiat.

A pan-European market, where incentives for renewableenergy are harmonised between member states, is favouredby Eurelectric and others. A pan-European market would, itis argued, increase the cost-effective delivery of renewable en-ergy since investment in renewable energy would go towardsschemes where the cost of starting schemes was the lowest.As an example, investors might choose Scotland or Denmarkrather than Germany since Scotland is much windier thanthe other two countries. Therefore, the investment would bemore cost-effectively deployed in the windier zones.

As Lauber says [3] this view is associated with a neo-liberalperspective. Neo-liberal attitudes tend to argue that the effectsof globalisation make investment much more mobile, and thuspan-European markets in renewable energy will complementthis shift in the mobility of capital. Although, the wind industryin the UK is broadly behind the UK’s competitive RenewablesObligation arrangement, the European Wind Energy Associa-tion (EWEA) wants the choice of procurement mechanism to

be left up to the individual EU member states. This precludesa pan-European trading system in green electricity certificates.

While neo-liberals favour the trans-national harmonisationof renewable energy incentives, critics of neo-liberals favourlocally owned and co-operative ownership of wind power[3]. Activists such as Paul Gipe [4] have argued that greenelectricity certificate schemes disadvantage local ownership.However, it is not certain that nationally based ‘green certifi-cate’ systems actually can be blamed for reducing opportunitiesfor farmer and co-operative ownership. After all, in Spain,where local ownership is unheard of, the subsidies are organ-ised through a feed in tariff.

The idea of competition producing cost reductions is a sim-ple one, but translating this into the practice of deployingrenewable energy has been much more difficult. In Britainin the 1990s contracts for supplying renewable energy capac-ity were auctioned off in several rounds of bidding. Thisappeared to produce low prices, but very few schemes.Planning problems were frequently identified as the culprit,but detailed analysis suggests that the biggest problem, besidesthe lack of contracted capacity that was awarded was thata large proportion of the successful bids were uneconomic[5]. The renewable NFFO was abandoned in favour of theRenewables Obligation (RO) [6].

3. The Renewables Obligation

The ‘Renewables Obligation’ (RO) penalises electricitysuppliers which do not meet their quota for supplying renew-able electricity. The quotas are the same at any given time forall the suppliers, and they increase steadily to 10.4% by 2010and 15% by 2015. Also the Government ‘aspires’ to a 20%target by 2020. Electricity suppliers need to acquire ‘renew-able obligation certificates’ or ROCs, ultimately from the gen-erators who earn the certificates. Electricity suppliers have topay an (inflation-index-linked) penalty of 3 p/kWh or £30per MWh (2002 prices). This penalty is recycled as an extrareward in respect of each ROC. This recycled element meansthat the price of ROCs will fall if there is an increase in theoverall proportion of the RO target that is met. The price ofROCs will increase if there is a decline in the proportion ofthe RO target that is met [6]. Hence, the fact that the targetwas being underachieved by large margins in the early yearsof the RO meant that the market price of ROCs was quitehigh, at £45e50 per MWh.

However, this competitive market is one that involves theprice of certificates, not electricity prices paid to renewableenergy generators who have to raise money from banks.Developers will usually need long term contracts with at leastminimum guaranteed prices to satisfy bankers, and they needto have contracts with one of the biggest (five or six) ‘credit-worthy’ electricity suppliers. Indeed, by 2005, these companies(E.ON, RWE, EDF, Scottish Power, Centrica, South of ScotlandElectricity) accounted for close to 100% of the public electricitysupply market.

Only the very biggest of companies (or, paradoxically, rel-atively small co-operatives) can afford to fund schemes mostly

282 D. Toke / Journal of Cleaner Production 15 (2007) 280e287

out of equity capital or off the ‘balance sheet’. The electricitysuppliers tend to take a large ‘cut’ of the ROCs values in returnfor what are, in effect, long term, relatively (or actually) fixedprice contracts. Hence a key point to remember is that market-based schemes like the RO do not leave prices to a competitivemarket for green electricity certificates. Rather, they makeelectricity suppliers responsible for deciding the terms of con-tracts under which the renewable generators need to sell theirelectricity.

We can point to two crucial factors that may prevent effec-tive competition to provide renewable electricity. The first isthe theoretical point that competitive prices are most likely toemerge if there are low targets set for the RO. If there areambitious targets set (part of the point of the renewables pro-gramme), then there will be much less competition, and pri-ces are likely to be higher. The UK’s RO targets are generallyregarded as being ambitious in the time scale that isestablished.

The second factor is that in practice the electricity supplymarket is an oligopoly in which the major suppliers havea vested interest to ensure that the price of ROCs on the marketdoes not ‘crash’. The UK electricity market is dominated byfive or six major, multinationally based, electricity supplierswho supply most of the market. Their own investment deci-sions will have a significant impact on the market price ofROCs. This in itself violates criteria for perfect competition.If the price of ROCs does greatly decline then this could un-dermine the profitability of their own investments in renewableenergy or the profitability of the contracts they have issued toindependent generators. The Renewable Power Associationhas estimated that because of these factors no more than 7%of renewable electricity will be on line by 2010, regardlessof the extent to which problems with planning consent affectthe market [7]. A similar conclusion was made by a Houseof Lords study [8]. In theory, biomass renewable electricitycould be supplied through co-firing at existing coal-firedpower stations (thus avoiding the need for secure contractsneeded to raise bank loans). However, in practice, the marketfor this is likely to remain modest owing to financial, opera-tional and other restrictions (Interview with Richard Hotch-kiss, 25/02/2005). In short, biomass co-firing is unlikely tothreaten the stability of the ROCs market.

Developers are being offered contracts in three basic forms.First, a flat-rate contract for a full fifteen years, for 5 p/kWh.The second type of contract involves a basement flat rateplus a formula which gives a proportion of the value of theROCs (and their recycled value) in future years. Third, thereare annual contracts (which will be renewed in practice atthe end of every year). In general, the shorter the contractthat the developers were able to accept, or the more flexiblethe terms, the higher would be the amounts of money theywould receive. The flexible or shorter term contracts (whichwould be renewable) are, in practice, delivering out-turnincome of well over 5 p/kWh (interviews with various devel-opers and consultants -see end list).

Indeed, by the middle of 2005 some developers whoaccepted the 5 p/kWh rates for long term secure contracts

were regretting doing this. This is because of the increase inbaseload (spot market) power prices on the British electricitymarkets that was a consequence of dramatic increases in Britishnatural gas prices.

We can understand this by looking at the elements of theincome stream. Besides the money from the ROCs there is in-come from selling the baseload value of the electricity andalso renewable energy’s exemption from the climate changelevy on fossil fuels for industry. At the auctions (organisedby the Non-Fossil Purchasing Agency) of ROCs, in July2004, prices were 5.2 p/kWh per ROCs. In the latter half of2004 the baseload price was quite high, with developers likelyto receive 2.4 p/kWh even after discounts for intermittencyand electricity suppliers taking their cut. On top of this thelevy from the levy on electricity consumption (the climatechange levy) is 0.43 p/kWh. In 2005 the baseload power pricesrose even higher.

So there was, at this time (end 2004 and 2005), over 7 p/kWh potentially available for renewable energy. These levelshave been criticised as inefficient by Milborrow [9]. Although,in the case of the more secure contracts offered by electricitysuppliers to developers, much of this is kept by the electricitysuppliers, this is not the case if a developer can afford to runon contracts of one year at a time. Indeed, at the end of2004 annual contracts were on offer that would yield around7 p/kWh (£70/MWh) (Contract offer made by unattributableelectricity supplier to the author, personal communication9th December 2004). Use of this type of contracts suggeststhat the project is being financed largely or completely from‘equity’ funds rather than bank loans. Banks will ask for secu-rity offered by long term contracts.

It is difficult to argue, on the basis of these figures, that theRO is any more cost-effective than a feed-in tariff, of, say, 5£p/kWh for onshore wind power. This price should cover eventhose windfarms being set up in the relatively less windyarea of East Anglia, given a 12e15 year contract. Yet windpower developers are being paid in the 5.0e5.5 p/kWh rangeeven for relatively secure contracts, and even higher effectiverates for less secure deals. In addition, this market-based sys-tem does not prevent so-called ‘windfall profits’ from beingearned since a developer in East Anglia will be offered thesame contractual terms as a developer on a much more windyScottish hillside. As one developer put it:

‘‘With a multiplicity of players, in theory, competitionshould reduce prices. However, (in the short term) theRenewables Obligation does not actually produce greatdownward pressure on prices. Prices for wind power arenegotiated with suppliers rather than set by Government,but there is no allowance for different wind speeds’’ (Inter-view with Colin Palmer, Development Director, Wind Pros-pect, May 13th 2004)

The fact that onshore wind power developments are quiteprofitable is an advantage if the aim is to secure development.On the other hand, offshore windfarms are not nearly so profit-able under these RO arrangements. Although the amountof wind energy at an offshore site will be, in average years,

283D. Toke / Journal of Cleaner Production 15 (2007) 280e287

15e40% more compared to an onshore site, (capacity factor ofaround 0.35 compared to 0.25e3 for onshore), the capital costsof offshore schemes will be, on average, about 70% higher (say£1200 per kW compared to £750 per kW for onshore).

This means that while onshore wind is coming in at a costbetween about 3 p/kWh and 5.5 p/kWh, offshore costs begin at5 p/kWh and go up to over 6 p/kWh for some of the dozenschemes that have been given planning consent, so far. Infact the offshore schemes are receiving capital grants fromthe DTI of between 5e10% in value of capital costs, whichhelps, but the offshore windfarms have struggled to obtain fi-nance. The lack of a secure income stream has contributed tothe unwillingness of banks to lend offshore windfarms moneywhich means that the offshore schemes that are being built aremostly being funded directly from ‘balance sheets’, that is eq-uity capital of the electricity suppliers. Hence the RO actuallyappears to be inflexible in the sense that it will subsidise thelower-cost options, but make investments in more expensivetechnologies, including offshore wind more marginal. Hence‘bolt-on’ support mechanisms are being added to the RO.These include cash grants for the first round of offshorewind projects and subsidisation of grid connection costs inthe case of the second round of offshore wind schemes. Theelectricity consumer will pay for these latter subsidies.

4. Other procurement regimes

It is useful to make some comparisons with other renewableenergy procurement regimes. Let us begin with other ‘market-based’ schemes. These are popular in the US and one of themost cited (in terms of success) exists in Texas where the targetof 3% of electricity from renewable sources by 2005 has beenover-subscribed already. This indicates that what are knownas Renewable Portfolio Standards (RPS) obligations can workto produce targets cost-effectively, although the target is stillless than some national targets (and achievements) associatedwith feed-in tariffs in Europe. It must also be said that theachievement of the target has a lot to do with the existence ofa federal production tax incentive of 1.8 c/kWh. Indeed thefact that there was uncertainty over whether the productiontax incentive would be renewed seems to be at least partly re-sponsible for the rush to acquire wind contracts [10]. Texasalso has a very good resource of high-windspeed sites. Unlikethe British system the renewable energy certificates are ‘bank-able’ beyond one year. This gives more confidence to the elec-tricity suppliers that the market for the certificates will not‘crash’. Australia also has a market-based system in whichthe penalties on electricity suppliers for non-compliance arenot tax-deductible (unlike investment costs) and that the certif-icates are bankable. However both Australia and Texas havelow targets of 2% by 2010 and 3% by 2009, respectively.

Although several US states sport so-called RPS systems[11], some of them are means of validating and tracking andcomparing renewable energy units of production, rather thana market-based competitive scheme per se [12]. The largest re-newable energy target of them all, set by California, of 20% ofelectricity from renewables by 2017, does not involve

a market-based system, but rather involves a heavy regulatedcost ‘merit order’ of renewable capacity being put on line. Itremains to be seen how this translates into practice. Otherstates, such as Nevada, and Connecticut have ambitious targetsand are in the process of instituting green certificate regimes.Connecticut is interesting because it is in the New Englandelectricity pool where green electricity certificates can betransferred from state to state. It is hoped to develop thesame type of transferability in western US states. Nevadahas a separate obligation for solar electricity and another ef-fectively for wind power.

Compared to Britain or Texas, it may appear that Germanfeed-in tariffs are expensive, but then the wind speeds at typ-ical German sites are very much lower compared to typicalsites in Scotland, Wales or Texas. However, this comparisonlooks very different after we take into account differences inwindspeed and calculate the actual return, per unit of installedcapacity, which developers actually receive. I calculate thatwhen the differences in wind energy production are takeninto account financial returns, per MW of wind capacity, are30% less in Germany compared to the UK. We can see thatthe wind speeds are much lower from the data in Table 1. Inthe three years, 2001e2004 the average capacity factor in Ger-many was around 18%, compared to around 28% in the UK.I have just used offshore statistics here, since the subsidy sys-tems for offshore wind are different.

We can then use these figures for capacity factors to com-pare the return per kW of installed wind power capacity bymultiplying the capacity factor by the unit price that the devel-opers receive in each country.

In the year 2004 the initial rate payable for wind powerunder the feed-in tariff in Germany was 8.7 eurocents/kWh.In fact the rate payable declines over the 20 years of the fixedcontract to 5.5 c/kWh depending on the windspeed at the site.Arguably, therefore, the effective rate of payment is no morethan 8 eurocents/kWh. Indeed even the starting rate is beingreduced as well over time, down to 7.9 c/kWh in 2010. Hence

Table 1

Capacity factor calculations for Germany and UK wind power 2001e2004

Onshore wind capacity Production

in GWh

Capacity

factor

2001e2004

averageBeginning End Weighted

average

Germany

2001 6100 8754 6985 10509 0.172 0.176

2002 8754 12001 9836 15856 0.184

2003 12001 14609 12870 18859 0.167

2004 14609 16629 15282 24158 0.180

United Kingdom

2001 408 423 413 960 0.265 0.276

2002 423 531 459 1251 0.311

2003 531 678 580 1276 0.251

2004 678 809 722 1736 0.275

Data sources for capacity and electricity production (all accessed in July

2005): Digest of UK Energy Statistics, http://www.dti.gov.uk/energy/inform/

dukes/; British Wind Energy Association, http//:www.bwea.com; Verband

der Netzbetreiber, http://www.vdn-berlin.de; Deutsches Wind Energie Insitut,

http://www.dewi.de.

284 D. Toke / Journal of Cleaner Production 15 (2007) 280e287

I use the rate of 8 c/kWh for comparison purposes. I use thefigure of 5 p/kWh as the tariff for renewable electricity forlong term contracts under the British RO, even though, as dis-cussed earlier, this is likely to underestimate the average actualpayments to renewable generators in the UK.

The annual return for investments in a kW of wind power inthe UK is calculated as: 1 � 0.276 � 5.0 � 8760 ¼ £120.88.If we assume that, for the purposes of this analysis, however,that the German feed-in tariff is 8.0 eurocents/kWh or 5.5 p/kWh, 1.45 euros being taken as the long term equivalent ofthe £. Hence, for Germany the annual return per kW of in-stalled wind power is: 1 � 0.176 � 5.5 � 8760¼ £84.80.

According to these calculations, annual payments per kWof installed wind power are 30% lower in Germany comparedto the UK. Indeed, the real difference is likely to be ratherlarger than this. Hence the ‘headline’ rate of payment toGerman wind power developers (expressed in eurocents/kWh) is misleading if it leads to a conclusion that Germanwind developers earn a lot more profits than British devel-opers. That is because there are much greater average windspeed resources in the UK. There is no evidence to supportthe proposition that German developers are earning morewindfall profits compared to British developers. It does seemthat returns per MW of installed wind power are much higherunder the British RO compared to the German REFIT.

A lot of this difference in return per kW of installed capac-ity may be explained by difference in tax regimes. TheGermans have much more opportunity to offset capital invest-ments against tax (although even this advantage is now beingthreatened by changes in tax regulations). The higher incomegroups have marginal tax rates of over 50%. Interest rates inGermany tend to be lower than in the UK. It is perhaps signif-icant that while the German feed-in tariff for onshore windpower is around 6 p/kWh, so are the German and Danishfeed in tariffs for offshore wind power. Yet 6 p/kWh is essen-tially (when the effect of capital grants are taken into account)what is being given to British offshore wind power schemes.Indeed, the fact that the German REFIT system has an inbuiltmechanism whereby developers receive less subsidy per kWhon the windier sites means that the German system is, implic-itly, likely to deliver lower so-called ‘windfall’ profits todevelopers. This is on top of my earlier finding that Germanwind power developers earn lower returns on capital employedin wind power compared to British developers. The Frenchfeed-in tariff system also has a mechanism which reduces pay-ments per kWh to high windspeed sites.

5. A pan-European green electricity market?

As discussed earlier, it has been suggested that the creationof a pan European market in green electricity certificatesshould be created by harmonising incentives. Such a marketwould, it is argued, encourage capital investments to go whereit can most cost-effectively be deployed. This would cut outthe distorting mechanisms of subsidies set at a nation-statelevel. It is an argument which echoes notions that state-basedregulation is archaic because of the exigencies of ‘globalising’

inevitabilities [13]. Yet Ricardo, the author of the theory ofcomparative advantage in trade, himself spoke of how ‘feel-ings, which I would be sorry to see weakened, induce mostmen of property to be satisfied with a low rate of profits intheir own country, rather than seek a more advantageousemployment for their wealth in foreign nations’ [14]. Contem-porary critics of prevailing analysis of economic globalisationargue that however spectacular and important the advances inglobal communications maybe, the advance of economic glob-alisation is by no means as obvious as it would appear inneo-liberal analyses. It maybe that neo-liberals have merelyappropriated a popular bandwagon to suit their own socio-economic agenda [15].

The problem for sustainable energy policy is that strategiessupported because of their ideological resonance may notachieve practical objectives, which require carefully tailoredinstruments suitable to achieve precise technological objec-tives. The integration of wind power into electricity systemsis an example of how specifically the technological innova-tions need to be crafted [16].

Economists may craft designs that look elegant in theirimagination of markets, but real-world institutional complex-ity may often frustrate the ability of such designs to deliverthe desired objectives. Detailed criticisms of the social utilityof harmonised, pan-European, tradable green electricity certif-icate systems have been made by del Rio [17]. He points outthat individual member states may consider that the localsocial and environmental benefits of locating renewable en-ergy may outweigh any reduction in costs of renewable energyassociated with harmonised renewable support systems. Onemight add that in the case of Scotland, for example, which al-ready has some ambitious medium term targets for renewableenergy, the prospect of becoming the target area for a largequantity of other countries’ wind power capacity may explodean already heated political debate on Scottish wind powerplanning policy.

However, there may also be problem with one of the as-sumptions of the cost models generated by economists whofavour harmonised EU markets in tradable green certificates.The analysis set out by Voogt et al. [18], which was criticisedby del Rio [17] for its lack of attention to local factors, is notcentrally concerned with the volume of the targets. Rather themodel is concerned with the cost of reaching the targets.Hence insufficient attention is given to the effect of a harmon-ised regime on the amount of projects coming forward. Thedegree to which renewable energy targets can be met is acrucial objective, arguably rather more important than smalldifferences between programme costs. The amount of invest-ment in renewable energy may be potentially very high, butin practice it is dependent on the actual volume of projectscoming forward. If a harmonised renewable support regimeresults in a smaller number of projects then the total investmentwill be lower and consequently there may be a lot less renew-able energy deployed.

One big issue in this discussion is that of maintaining thehigh rates of investment by local actors in some countries. Ahigh proportion of wind power in Germany, Denmark and

285D. Toke / Journal of Cleaner Production 15 (2007) 280e287

The Netherlands is owned by local people. What proportion of,say, German investment in wind power would transfer to themore cost-effective, windier sites in, say, the UK? Some inves-tors may switch, but a large proportion of investors would prob-ably not change. Approaching half of all German wind power isowned by farmers or by people who invest in local co-operativeschemes. Much of the rest has been financed by high-income earners investing in tax offset schemes. The farmers,at least, may be most interested in investing in the technologybecause it is on their land rather than purely because it isa good investment. It does seem plausible to argue that the con-sequence of a harmonised renewable electricity support mech-anism (of whatever type) would be that we would see a lot lessrenewable energy deployed than if we have a series of ambi-tious national targets.

In fact, sheer nationalism poses a threat to transferablegreen electricity certificates. A Dutch (consumer demand-led) green electricity trading scheme was abandoned partly be-cause of opposition to the effective use of Dutch subsidies topay for renewable electricity sources from abroad, principallyNorwegian hydro-electricity.

If the coverage given by the leading wind industry publica-tion Wind Power Monthly is anything to go by, neo-liberal as-sumptions seem to have permeated deeply into the psyche ofdominant trends in the wind industry. In an article publishedin November 2004 the magazine reported that ‘‘Germanwind power is fast outgrowing the era when it was reliant onenthusiasts putting their savings into projects. While windfunds still have a role, the opening up of the financial marketsbrings brave new options for cheaper wind power’’ [19] (‘GermanFinancing Revolution’, by Sara Knight). Then, commenting onthe lack of new wind power in Denmark, in March 2005,Torgny Moller said (also in Wind Power Monthly) that ‘‘thetradition of community owned wind plant that dominated themarket ten years ago has all but disappeared’’ [20].

By apparently emphasising a decline in local and co-operative ownership of wind power Wind Power Monthly givesthe impression that corporate developers have lower costs andbetter cheaper means of investing in wind power. However,there are strong arguments to suggest that wind power deploy-ment rates are declining in Germany and practically stationeryin Denmark because of faltering levels of subsidies, not becauseof a surfeit of amateurism at a local level [21]. The political ben-efits for local ownership have been clearly established [22]. Wetherefore need to pay heed to the arguments for local ownership,for it is the local ownership that is likely to be marginalised ifwe see a move towards ‘globalised’ patterns of investment inwind power that may be encouraged by harmonised incentivesfor renewable electricity across the EU.

6. Benefits of local ownership

In the UK, The Netherlands, Germany and Denmark there isa much higher concern for landscape protection compared toSpain and Portugal. There are therefore strong arguments tosuggest that locally owned wind power, whether by farmers orby co-operatives, is much needed. This is partly because locally

inspired schemes mobilise local networks in support of theschemes at a planning stage. Locally inspired wind power,whether it is farmer-based or co-operative can often reduceplanning opposition by mobilising local pro-wind power net-works [23]. Locally owned wind power is also needed becauselocal investment means that much more capacity is deployedthan would otherwise be the case. Local people will tend to in-vest in wind power capacity that is deployed locally. Hence itmay seriously restrict the rate of deployment of wind power ifwe downgrade important, local, sources of investment in renew-able energy for these countries (and also, potentially, in the UK).

It is certainly the case that the co-operatives as such havebeen less important than the farmers in providing local invest-ment in Denmark, Germany and The Netherlands, but togetherthe locally owned wind power capacity comprises just overhalf of the installed wind power capacity in these three coun-tries. In Denmark, the proportion of wind power capacityowned by local people is around 85% of the onshore total[24,25]. In addition, it may be that farmer and co-operativeowned wind power may often be cheaper to develop comparedto corporate-led efforts. Developers have high overheads andbig needs for a ‘developer’s cut’ which will typically add10% onto the cost of a windfarm [26].

However, this logic does not mean that nationally basedgreen electricity certificate systems are intrinsically damagingfor the prospects for local ownership of wind power. As wassaid earlier, a feed in tariff does not necessarily promote localownership, as is illustrated in the case of Spain where windpower is a utility, not a local, affair. Yet even in the UK thereare a small number of instances of local and co-operative own-ership [24,25]. Electricity suppliers are likely to offer contractsto wind power schemes whatever the nature of their ownershipmay be. Indeed, given that equity based schemes are more ablethan bank loan-financed schemes to take advantage of theshorter term contracts with attractive financial terms, co-operative schemes are actually given an advantage over manyconventional operations. Ethical investors are not going to insiston the type of high-security contracts demanded by banks. Onthe other hand locally owned schemes also have the opportunityto obtain long term contracts from electricity suppliers withfixed rates of payment per kWh. The notion that the BritishRO is too ‘risky’ for local investors is a myth that survives,partly on a misunderstanding of how the RO works in practice,and partly on a lack of information on how the system has bed-ded down since its early gestations. Some analyses [27,28] fo-cus on the ROCs markets and point out that there is uncertaintyabout the future value of ROCs. The implication sometimesdrawn from this is that locally owned schemes will not beable to obtain secure long term contracts to supply renewableelectricity at good rates. However, this is incorrect.

Of course, if the system actually did merely rely on windpower operators having to sell ROCs on the volatile ROCs mar-ket then there would (often) be a big problem for all wind poweroperators. Indeed, the lack of firm contract offers was a majorissue right at the beginning of the British RO. However afterDecember 2003, when the UK Government announced thatthe RO target was to be extended from 10% of UK electricity

286 D. Toke / Journal of Cleaner Production 15 (2007) 280e287

by 2010 to 15% by 2015, offers of long term contracts withgood fixed prices emerged from major electricity suppliers.So, (as previously discussed), locally owned schemes can enjoylong-term (15-year) contracts with good rates (at least 5 p/kWh)for their electricity. Analyses proposing hypotheses that arguethat green electricity trading schemes cannot operate in thisway are incorrect on this point [29]. The empirical evidence fal-sifies such arguments. The relative lack of local investment inthe UK has to be ascribed to a lack of a tradition of local energyinvestment, a lack of knowledge and a lack of confidence at a lo-cal level. The fact that there are a couple of examples of localownership of wind power in the UK does demonstrate that localownership is possible.

By the middle of 2005, however, the price of ROCs was sohigh, and the baseload power prices for electricity generatedfrom any source was so high (because of high natural gas pri-ces), that many wind power developers did not even feel theneed to sign long term contracts for £50/MWh (5 p/kWh).Renewable developers/operators could derive over £70/MWhthrough agreeing a succession of one-year contracts with elec-tricity suppliers. One-year contracts allow the generators tokeep a very high proportion of the income streams (that isthe ROCs price, the busload electricity price etc). Facedwith the prospect of making large short-term profits, manyequity investors felt that the short-term profit rate availableto renewable electricity generators in 2005 offsets the absenceof long-term security on their investment (i.e. the lack ofa long term contract to supply electricity). Hence even thenominal prices for electricity being earned by many windpower schemes were now much higher than German feed-intariff. Of course, as discussed earlier, the usually much windierconditions in Britain will mean that a given rate of paymentper kWh will give a much higher return on capital comparedto the same rate in Germany.

In order to engage in perceptive analysis we must look be-yond the standard stereotypes and ideological postures. Thismeans we should analyse how systems work in practice, notcling to ideologically inspired pre-judgments that may not becompletely borne out in practice. We must rely on empiricalanalysis as well as theory. Careful analysis suggests that whilethe ‘globalised’ vision of renewable investment may reduce lo-cal investment, the same does not necessarily apply to nationallybased green electricity certificate systems. Of course, as arguedearlier, green electricity certificate systems may not necessarilybe as cost effective as the free market theorists would claim.

7. Conclusion

There are problems with the British RO, and it certainlydoes not deliver renewable energy any more cheaply thana feed-in tariff. Indeed the evidence produced in this articlesuggests that the German REFIT is more cost-effective thanthe British RO. Just because we set up a market, this doesnot mean this will be a perfectly competitive market whereAdam Smith’s ‘magic hand’ conjures the most resource-efficient outcome. On the other hand experience suggeststhat well-designed market-based obligation procurement

regimes can work effectively. However, progress in the USseems to be heavily reliant on the federal subsidy as muchas the competitive state-based obligations, and alleged cost-effectiveness gains in Texas seems to be reliant on a modesttarget and the existence of many high wind speed sites. So-called market-based and feed-in tariffs both involve subsidiesto renewable energy, albeit organised in different ways. Windpower becomes more cost-effective as a technology as windgenerator manufacturers compete against each other to supplythe markets created by the subsidies, and not by designing‘market-based’ procurement systems.

Nevertheless, market-based renewable obligation electricitysystems do fit in with the prevailing mood favouring systemsthat look competitive, even though they may not (at least inthis policy area) be any more cost-effective than ‘feed-intariffs’. Indeed both types of system involve subsidy. The sub-sidy is just organised differently. It would, in practice, be fartoo disruptive to the wind power industry (which has otherproblems) to try to re-engineer the British RO, which is, afterall, delivering considerable new quantities of capacity. Bolt-onmeasures can be used to subsidise more expensive technolo-gies, including offshore wind power, wave power and tidalstream technology. Yet it would be unwise to simply extenda single British-style RO to the whole of Europe.

Problems begin to creep in when people start making pro-posals for the same incentives to be given anywhere in Europe.In theory this would induce investment to go to the more cost-effective areas. In practice this may dramatically reduceinvestment in renewable energy. This is because a lot of invest-ment is place-specific. Farmers and local co-operatives are,more often than not, interested in renewable investment intheir area, not in another country or region. Visions of multi-nationally mobile capital certainly fit in to the prevailingmodel of neo-liberal globalisation. However, if renewable energysubsidy systems are tailored to fit in with this vision the resultwill undoubtedly be a big reduction in wind power deploymentrates in countries such as Germany and The Netherlands. Dif-ficulties in achieving planning consent may also be exacerbatedas locally inspired schemes are replaced by schemes owned byremote, institutional, investors.

8. Interviews (listed in alphabetical order by surname)

Steven Brooks of Breeze Renewables Consultancy (27/10/04)Gareth Ellis of the National Energy Foundation (22/11/04)Hans Detlef Feddersen (consultant to German Burgerwind-parks and farmers) (2/09/04)Richard Hotchkiss, Combustion Process Engineer RWEnPower (25/02/2005)Colin Palmer of Wind Prospect developers (13/05/04)Bill Richmond of Your Energy developers (14/05/04)Huw Smallwood of Tegni developers (11/11/04)Adam Twine, farmer-developer (12/08/04)

Also, a number of other interviews conducted during otherresearch programmes which contributed background material:

287D. Toke / Journal of Cleaner Production 15 (2007) 280e287

officials of various US state Public Utility Commissions, Britishelectricity industry officials, and a range of farmers, co-operative organisers, wind generator manufacturer agents andconsultants, and also officials of British, Danish, Dutch,German, Spanish energy agencies and electricity utilities1999e2005.

Acknowledgements

The research which led to this article being written wasconducted under the ESRC Sustainable Technologies Pro-gramme research award RES332250001, ‘Accounting for theOutcomes of Windfarm Planning Applications’. I would alsolike to thank Volkmar Lauber for his advice.

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