To start with they need to agree on further binding emission reduction commitments in the second phase of the Kyoto Protocol. Only by setting stringent greenhouse gas emission reduction targets will the cost of carbon become sufficiently high to properly reflect its impact on society. This will in turn stimulate investments in renewable energy. Through massive funding for mitigation and technology cooperation, industrialised countries will also stimulate the development of renewable energy and energy efficiency in developing countries.
Alongside these measures specific support for the introduction of feed-in tariffs in the developing world - the extra costs of which could be funded by industrialised countries - could create similar incentives to those in countries like Germany and Spain, where the growth of renewable energy has boomed. Energy efficiency measures should be more strongly supported through the Kyoto process and its financial mechanisms.
Carbon markets can also play a distinctive role in making the Energy [R]evolution happen, although the functioning of the carbon market needs a thorough revision in order to ensure that the price of carbon is sufficiently high to reflect its real cost. Only then can we create a level playing field for renewable energy and be able to calculate the economic benefits of energy efficiency.
Industrialised countries should ensure that all financial flows to energy projects in developing countries are targeted towards renewable energy and energy efficiency. All financial assistance, whether through grants, loans or trade guarantees, directed towards supporting fossil fuel and nuclear power production, should be phased out in the next two to five years. International financial institutions, export credit agencies and development agencies should provide the required finance and infrastructure to create systems and networks to deliver the seed capital, institutional support and capacity to facilitate the implementation of the Energy [R]evolution in developing countries.
While any energy policy needs to be adapted to the local situation, we are proposing the following policies to encourage the Energy [R]evolution that all countries should adopt.
1. Climate policy
Policies to limit the effects of climate change and move towards a renewable energy future must be based on penalising energy sources that contribute to global pollution.
Action: Phase out subsidies for fossil fuel and nuclear power production and inefficient energy use
The United Nations Environment Programme (UNEP) estimates (August 2008) the annual bill for worldwide energy subsidies at about $300 billion, or 0.7% of global GDP.59 Approximately 80% of this is spent on funding fossil fuels and more than 10% to support nuclear energy. The lion’s share is used to artificially lower the real price of fossil fuels. Subsidies (including loan guarantees) make energy efficiency less attractive, keep renewable energy out of the market place and prop up non-competitive and inefficient technologies.
Eliminating direct and indirect subsidies to fossil fuels and nuclear power would help move us towards a level playing field across the energy sector. Scrapping these payments would, according to UNEP, reduce greenhouse gas emissions by as much as 6% a year, while contributing 0.1% to global GDP. Many of these seemingly well intentioned subsidies rarely make economic sense anyway, and hardly ever address poverty, thereby challenging the widely held view that such subsidies assist the poor.
Instead, governments should use subsidies to stimulate investment in energy-saving measures and the deployment of renewable energy by reducing their investment costs. Such support could include grants, favourable loans and fiscal incentives, such as reduced taxes on energy efficient equipment, accelerated depreciation, tax credits and tax deductions.
The G-20 countries, meeting in Philadelphia in September 2009, called for world leaders to eliminate fossil fuel subsidies, but hardly any progress has been made since then towards implementing the resolution.
Action: Introduce the “polluter pays” principle
A substantial indirect form of subsidy comes from the fact that the energy market does not incorporate the external, societal costs of the use of fossil fuels and nuclear power. Pricing structures in the energy markets should reflect the full costs to society of producing energy. This requires that governments apply a ‘polluter pays’ system that charges the emitters accordingly, or applies suitable compensation to non-emitters. Adoption of polluter pays taxation to electricity sources, or equivalent compensation to renewable energy sources, and exclusion of renewables from environment-related energy taxation, is essential to achieve fairer competition in the world’s electricity markets.
The real cost of conventional energy production includes expenses absorbed by society, such as health impacts and local and regional environmental degradation - from mercury pollution to acid rain – as well as the global negative impacts of climate change. Hidden costs include the waiving of nuclear accident insurance that is too expensive to be covered by the nuclear power plant operators. The Price Anderson Act, for instance, limits the liability of US nuclear power plants in the case of an accident to an amount of up to $98 million per plant, and only $15 million per year per plant, with the rest being drawn from an industry fund of up to $10 billion. After that the taxpayer becomes responsible.
Although environmental damage should, in theory, be rectified by forcing polluters to pay, the environmental impacts of electricity generation can be difficult to quantify. How do you put a price on lost homes on Pacific Islands as a result of melting icecaps or on deteriorating health and human lives?
An ambitious project, funded by the European Commission - ExternE – has tried to quantify the full environmental costs of electricity generation. It estimates that the cost of producing electricity from coal or oil would double and that from gas would increase by 30% if external costs, in the form of damage to the environment and health, were taken into account. If those environmental costs were levied on electricity generation according to its impact, many renewable energy sources would not need any support. If, at the same time, direct and indirect subsidies to fossil fuels and nuclear power were removed, the need to support renewable electricity generation would seriously diminish or cease to exist.
One way to achieve this is by a carbon tax that ensures a fixed price is paid for each unit of carbon that is released into the atmosphere. Such taxes have, or are being, implemented in countries such as Sweden and the state of British Columbia. Another approach is through cap and trade, as operating in the European Union and planned in New Zealand and several US states. This concept gives pollution reduction a value in the marketplace. In theory, cap and trade prompts technological and process innovations that reduce pollution down to the required levels. A stringent cap and trade can harness market forces to achieve costeffective greenhouse gas emission reductions. But this will only happen if governments implement true ‘polluter pays’ cap and trade schemes that charge emitters accordingly.
Government programmes that allocate a maximum amount of emissions to industrial plants have proved to be effective in promoting energy efficiency in certain industrial sectors. To be successful, however, these allowances need to be strictly limited and their allocation auctioned.
2. Energy policy and market regulation
Essential reforms are necessary in the electricity sector if new renewable energy technologies are to be implemented more widely. Action: Reform the electricity market to allow better integration of renewable energy technologies Complex licensing procedures and bureaucratic hurdles constitute one of the most difficult obstacles faced by renewable energy in many countries. A clear timetable for approving renewable energy projects should be set for all administrations at all levels, and they should receive priority treatment. Governments should propose more detailed procedural guidelines to strengthen the existing legislation and at the same time streamline the licensing procedures.
Other barriers include the lack of long term and integrated resource planning at national, regional and local level; the lack of predictability and stability in the markets; the grid ownership by vertically integrated companies and the absence of (access to) grids for large scale renewable energy sources, such as offshore wind power or concentrating solar power plants. The International Energy Agency has identified Denmark, Spain and Germany as example of best practice in a reformed electricity market that supports the integration of renewable energy.
In order to remove these market barriers, governments should:
- Streamline planning procedures and permit systems and integrate least cost network planning;
- Ensure access to the grid at fair and transparent prices;
- Ensure priority access and transmission security for electricity generated from renewable energy resources, including fina;
- Unbundle all utilities into separate generation, distribution and selling companies;
- Ensure that the costs of grid infrastructure development and reinforcement are borne by the grid management authority rather than individual renewable energy projects;
- Ensure the disclosure of fuel mix and environmental impact to end users;
- Establish progressive electricity and final energy tariffs so that the price of a kWh costs more for those who consume more;
- Set up demand-side management programmes designed to limit energy demand, reduce peak loads and maximise the capacity factor of the generation system. Demand-side management should also be adapted to facilitate the maximum possible share of renewable energies in the power mix;
- Introduce pricing structures in the energy markets to reflect the full costs to society of producing energy.
3. Targets and incentives for renewables
At a time when governments around the world are in the process of liberalising their electricity markets, the increasing competitiveness of renewable energy should lead to higher demand. Without political support, however, renewable energy remains at a disadvantage, marginalised by distortions in the world’s electricity markets created by decades of massive financial, political and structural support to conventional technologies. Developing renewables will therefore require strong political and economic efforts, especially through laws which guarantee stable tariffs over a period of up to 20 years.
At present new renewable energy generators have to compete with old nuclear and fossil fuelled power stations which produce electricity at marginal costs because consumers and taxpayers have already paid the interest and depreciation on the original investments. Political action is needed to overcome these distortions and create a level playing field.
Support mechanisms for different sectors and technologies can vary according to regional characteristics, priorities or starting points, but some general principles should apply. These are:
• Long term stability: Policy makers need to make sure that investors can rely on the long-term stability of any support scheme. It is absolutely crucial to avoid stop-and-go markets by changing the system or the level of support frequently.
• Encouraging local and regional benefits and public acceptance: A support scheme should encourage local/regional development, employment and income generation. It should also encourage public acceptance of renewables, including increased stakeholder involvement.
Incentives can be provided for renewable energy through both targets and price support mechanisms.
Action: Establish legally binding targets for renewable energy and combined heat and power generation
An increasing number of countries have established targets for renewable energy, either as a general target or broken down by sector for power, transport and heating. These are either expressed in terms of installed capacity or as a percentage of energy consumption. China and the European Union have a target for 20% renewable energy by 2020, for example, and New Zealand has a 90% by 2025 target.
Although these targets are not always legally binding, they have served as an important catalyst for increasing the share of renewable energy throughout the world. The electricity sector clearly needs a long term horizon, as investments are often only paid back after 20 to 40 years. Renewable energy targets therefore need to have short, medium and long term stages and must be legally binding in order to be effective. In order for the proportion of renewable energy to increase significantly, targets must also be set in accordance with the potential for each technology (wind, solar, biomass etc) and taking into account existing and planned infrastructure. Every government should carry out a detailed analysis of the potential and feasibility of renewable energies in its own country, and define, based on that analysis, the deadline for reaching, either individually or in cooperation with other countries, a 100% renewable energy supply.
Action: Provide a stable return for investors through price support mechanisms
Price support mechanisms for renewable energy are a practical means of correcting market failures in the electricity sector. Their aim is to support market penetration of those renewable energy technologies, such as wind and solar thermal, that currently suffer from unfair competition due to direct and indirect support to fossil fuel use and nuclear energy, and to provide incentives for technology improvements and cost reductions so that technologies such as PV, wave and tidal can compete with conventional sources in the future.
Overall, there are two types of incentive to promote the deployment of renewable energy. These are Fixed Price Systems where the government dictates the electricity price (or premium) paid to the producer and lets the market determine the quantity, and Renewable Quota Systems (in the USA referred to as Renewable Portfolio Standards) where the government dictates the quantity of renewable electricity and leaves it to the market to determine the price. Both systems create a protected market against a background of subsidised, depreciated conventional generators whose external environmental costs are not accounted for. Their aim is to provide incentives for technology improvements and cost reductions, leading to cheaper renewables that can compete with conventional sources in the future.
The main difference between quota based and price based systems is that the former aims to introduce competition between electricity producers. However, competition between technology manufacturers, which is the most crucial factor in bringing down electricity production costs, is present regardless of whether government dictates prices or quantities. Prices paid to wind power producers are currently higher in many European quota based systems (UK, Belgium, Italy) than in fixed price or premium systems (Germany, Spain, Denmark).
The European Commission has concluded that fixed price systems are to be preferred above quota systems. If implemented well, fixed price systems are a reliable, bankable support scheme for renewable energy projects, providing long term stability and leading to lower costs. In order for such systems to achieve the best possible results, however, priority access to the grid must be ensured.