WREC 1996

RENEWABLE ENERGY PROMOTION IN IEA COUNTRIES

Jane ELLIS and Stephen PEAKE’

Energy and Environment Division, International Energy Agency, 2 rue Andre Pascal, 75775 Paris Cedex 16, France

ABSTRACT

Although promotion of renewable energy in countries of the International Energy Agency2 is not new, many countries have intensified their efforts in this area over the 1990s. The most widespread measures used are financial incentives, but voluntary agreements, ‘green pricing’ and targets are becoming more common. As a result, the use of some renewables has increased since 1990, especially for electricity generation. However, geothermal, solar and wind energy account for only 0.7% of total IEA energy supply and their contribution will remain small as long as their cost remains above that of competing fuel supplies.

KEYWORDS

Renewable energy policy; financial incentives; buy-back rates; green pricing; voluntary programmes

RENEWABLE ENERGY PROMOTION IN IEA COUNTRIES

Energy security and the heavy dependence on oil - which acted as key drivers for renewable energy development in the 1970s - still have relevance today, although the energy picture has radically changed. lEA countries have moved from an era of high energy prices and concern over energy (and particularly oil) supplies to one of relatively low energy prices and reduced concern about energy import dependency. Moreover, one of the key areas for renewables, electricity generation, is undergoing a period of rapid change as electricity markets are liberalised. This new environment clearly represents a challenge to the further development of renewable energies and government policies in this respect. Environmental concerns that emerged in the 1980s (acid rain) and 1990s (climate change) are now also drivers, as are economic concerns such as regional and agricultural

’ The views expressed in this paper are those of the authors and do not reflect any official positlon of the IEA, the Organisation of Economic Co-operation and Development, or their member governments.

’ IEA countries are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, Turkey, Umted Kingdom, United States.

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development and the export potential of renewable energy technology in emerging markets. Nevertheless, governments have limited resources, and policies used to promote renewables should be a worthwhile investment within the context of the wider call on government funds. This papet focuses on a comparison of the policies used to promote renewables (biomass and wastes, small hydro, geothermal, wind, solar, tidal and ambient heat), highlighting some of the more recent trends in government policy.

Non-hydro renewables contributed approximately 16.5 Mtoe or 3.8% to the IEA’s total primary energy supply (TPES) in 1994, and generated 142 TWh or 1.9% of electricity in the same year (IEA, 1996 a). Almost half of this is the direct use of biomass, with geothermal, wind, solar and tidal energy contributing only 0.7% of TPES. Although the use of these renewables is growing faster than other fuels, the lEA’s World Energy Outlook (IRA, 1996 c) projects their contribution in 20 IO to remain small: around I .5% of TPES.

The mix of policy measures employed and renewable energies targeted in each country varies, although some policies are more widespread than others (IEA 1996 b). The biggest barrier to increased renewable energy use is its cost, and much of the current efforts undertaken by governments is aimed at making renewable energy investment more favourable, for example the German Electricity Feed Law; the regime of financial incentives in Japan, Denmark and Sweden; the District Heating Promotion Act in Austria, and competitive bidding procedures for renewable electricity in the UK. These policies have shown that potential investors will invest in renewable energies if it is in their economic interests to do so.

In general, measures taken to promote renewables fall into eight categories, the last three of which are the newest: ?? financial incentives through subsidies, grants or tax breaks (or, conversely, financial

disincentives such as a carbon tax for competing fuels). a guaranteed markets and/or favourable prices for renewable electricity; 0 government-funded R&D on renewable energy technologies; ?? information and education campaigns to increase awareness of renewable energy

technology performance, availability and incentives; a regulations and standards on energy use, environmental performance or the siting of

energy systems; ?? national renewable energy plans: e.g. specific plans for renewable energy development

and/or targets for renewable energy use; 0 voluntary programmes (VAs), generally between governments and industries/utilities; and ?? green pricing, whereby customers choose to pay more for ‘green’ energy.

Although government-funded R&D is the most widespread measure among IEA countries, financial incentives are in place in almost all countries and have helped increase the use of renewable energy over recent years. These incentives are often directed towards the construction of renewable electricity generating capacity, although solar water heaters are subsidised in a number of IEA countries, and tax exemptions form a common incentive for biofuels for transport. Capital subsidies are generally highest for small systems, such as rooftop PV (where Germany’s ‘1000 Roofs’ programme reimbursed up to 50-60% of the cost), lower for wind (e.g. 35% in Sweden for turbines >60 kW) and lowest for small hydro projects (e.g. 20% in Japan for plants up to 5 MW). However, some countries are phasing out or reducing capital subsidies for electricity or heat production, either

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due to budgetary pressures (e.g. the Netherlands) or in favour of output subsidies (e.g. Denmark).

Renewable electricity production is also encouraged in 17 IEA countries via guaranteed markets for renewable electricity and/or premium purchase prices and buy-back rates. Premium rates, especially when guaranteed over a number of years, have, unsurprisingly, proven successful in increasing renewable-generated electricity. Perhaps the best example is Germany, where wind generation climbed from 3 GWh in 1990 to 1420 GWh in 1994. Avoided cost rates guaranteed for IO-years t’o~ renewable electricity from qualifying facilities under PURPA has also been credited with increasing the US’ renewable electricity generation, although the decline in avoided costs makes this a much lower incentive now than for contracts concluded over the previous decade. Guaranteed markets alone have had less effect as success is largely dependent on rates that independent power producers. who are significant players in renewable generation, can obtain for their output.

Information campaigns are also used to promote renewable energies in 17 IEA countries. This tool is generally of lesser importance than other promotional measures in place, although Australia relies on information campaigns to try and increase the penetration of renewable energy technologies in remote areas and Switzerland dedicates almost half its federal funding for renewables to ‘marketing’ activities, including dissemination networks for different renewable energy technologies.

Regulatory measures, via planning guidelines or procedures, are used to promote renewables by overcoming resistance against land-use for renewable projects or to try and streamline planning consent. The use of municipal waste for energy purposes is also encouraged in some countries, e.g. France, via regulations on waste disposal.

Two of the newest policy measures that have been introduced to promote renewables have a voluntary aspect. The first is ‘green pricing’, whereby customers voluntarily elect to pay more fat green electricity. This is being introduced in four IEA countries, and, if it is successful, will create a stream of private finance for renewable energy projects. However, it is too early to determine either the financial resources that could be generated or the potential of such schemes to be applied to a wider public. VAs between governments and either utilities or industries are also becoming more widespread, with some countries relying heavily on them to achieve renewable energy goals. Examples include the agreement between utilities and the government in Denmark to use a certain amount of straw in electricity generation, and a scheme in Austria whereby some municipalities have agreed to pay premium prices for wind-generated electricity. Both VAs and green pricing arc attractive from a public funding perspective as they may require little or no public funds. Setting up a renewable energy target is also not a costly measure, and around half IEA countries have quantified plans for future renewable energy use. However, many countries with targets rely heavily on economic and fiscal incentives to achieve the aims set, although agreements or arrangements with local authorities on the siting and/or use of different renewable energies are also used.

While the costs associated with increased renewable energy use, e.g. via expenditure on subsidies or on R&D are often borne by public energy budgets, the benefits of such a policy may be hidden, qualitative or unquantified. Evaluation of renewable energy policies is also complicated by the fact that several policy objectives may be mixed. For example, increasing farmers’ income via subsidies for biofuels may help to maintain a country’s food production capability, increase regional development, maintain rural employment levels and reduce emissions of CO, as well as increasing renewable energy use. Other renewable energy programmes may develop technology export

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capabilities. All of these may be perceived as desirable objectives for political or other non-energy and/or non-cost reasons. The increased energy security and flexibility that arises from greater renewable energy use may also have a strategic value for governments. Governments may therefore be willing to pay a premium over a certain time period in order to maintain options in this area.

However, for as long as renewables remain uncompetitive on cost terms alone with other energy sources, their applications will remain limited to niche markets unless there is either explicit recognition of their non-energy benefits (via externalities), continued public subsidies or consumers who are prepared to pay a premium for ‘green’ energy. This will be exacerbated, despite the drop in renewable energy prices seen over the 1980s and 1990s. if the liberalisation of energy and electricity markets means that renewables have to compete in a more short-termist environment. Few lEA governments have explicitly evaluated the success of policies and prograrnmes introduced to promote renewable energy. This may be because the policies introduced were aimed as much at increasing energy security, regional development, or for agricultural concerns than at improving the cost-effectiveness of renewable energy. However, evaluation of previous policies is important when determining future policy actions (and would lx facilitated if governments explicitly stated the goals, measures and timescales of individual policies at the time of their introduction).

CONCLUSIONS

Although renewables have increased their importance in IEA countries, their contribution to energy supply is likely to remain small for the foreseeable future (largely due to their higher cost), despite the fact that all IEA countries are promoting their use. The policy mix used to achieve this aim varies widely between countries, as do the targeted end uses (e.g. electricity) and the type of renewables (e.g. some countries explicitly encourage some renewables and not others). However, emphasis is particularly marked on increasing renewable electricity production.

The challenge that policy makers face is where to train their limited resources. They also need to evaluate the likely return in terms of wider and longer-term objectives. We can already see that government-financed R&D (aimed at longer term technological development) is declining, while funds pour into output subsidy schemes, many of which have not been evaluated on energy, economic or environmental terms.

It is clear that IEA governments recognise the potential of renewable energy to help attain several short and longer-term policy objectives. This is reflected by the policies initiated to try and harness that potential, with some new policy actions, such as ‘green pricing’ and voluntary agreements being initiated over the last few years. While the more traditional policies in place, such as financial incentives, attempt to increase the short-term use of renewables, introduction of new policy types perhaps reflects government recognition of both the changing energy market conditions and the longer-term cost outlook for competing fuels,

REFERENCES

IEA, (1996a, forthcoming) Energy Balances of OECD Countries, Paris IEA, (1996b, forthcoming) Policy Aspects of Renewable Energy in IEA Countries, Paris IEA, (1996c, forthcoming) World Energy Outlook, Paris

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