Elements of a Successful REP Policy

published: 2011-08-22 11:56 | editor: | category: Knowledge

In 1973, the worldwide oil crisis in 1973 persuaded many governments of the need to develop policies to move society towards investment in solar and other renewable energy sources. In 1978, the U. S. introduced the Public Utility Regulatory Policies Act (PURPA) of 1978, which contained a provision that required utilities to purchase electricity from other sources. This clause typically kicked in when oil prices escalated. Portugal introduced Europe's first “Renewable Energy Payments” (REP), which paid a premium to producers, in 1988.

REP, also called feed-in-tariff (FIT) refers to incentives designed to support the generation and use of solar, or other renewable energy. Utility firms must buy the energy and pay the producer a   specified price over the period of the agreement. The duration usually lasts from 15 to 20 years. REP

slowly evolved and received attention mostly during hikes in oil prices.

Over the past ten years, REP policies have been instrumentally in the growth of the PV market, as well as other renewable energy sources. By the end of 2010, the worldwide photovoltaic market had grown to an installed capacity of 40 gigawatts (GW). The European Union (EU), led by Germany has been responsible for much of this expansion with 30 GW. One major key to this prolific expansion has been REP policies.

Germany’s REP Model

At the beginning of the century, Germany had 76 MW of installed capacity for solar generated electricity. A year later, the country enacted theRenewable Energy Sources Act (EEG), widely regarded as the most successful renewable energy payment policy in the world. By the end of 2010, Germany increased its installed capacity to 17 GW - 50 percent of global installed capacity.

On July 8, 2011, Germany revised its REP policy. Contrary to many news reports, the country expanded its commitment to solar and other renewable energy sources by developing objectives that are more aggressive. Germany's feed-in-tariff policy continues to lead the way in minimizing investors' risk while ratcheting up solar energy generation. Deutsche Bank estimates the country’s solar installations will average 3.5 GW per year going forward.

According to a May 2011 report released by Deutsche Bank, Germany's REP policy has been successful in creating over 340,000 jobs in the renewable energy sector; over 65 percent of the positions -- 221,000 have been attributed to EEG.

Following are a few of the elements Germany policymakers, and others around the globe, have incorporated into REP policies to stimulate participation and growth of the PV market as well as other renewable energy industries.

REP Pricing Strategies

REP policymakers must identify an incentive level that attracts players - both producers and buyers - to help achieve the policy objectives. Policies that have incentives set too low find it difficult to attract interest on the part of solar energy producers. In contrast, polices with rates set too high have fewer producers and they earn “windfall” profits. This situation occurred with China's Golden Sun program in 2009. Extra generous subsidies -- 50 percent rebates -- were too high and quickly depleted the funding. This results in a disproportionately higher utility cost to rate payers.

Typically, policy makers employ on of three methods to compute the payment rate: renewable energy generation costs, fixed monetary reward or a premium and avoided or external costs. Many European FIT policies adopted the renewable energy generation cost, which base rates on the cost of energy generation for the project, and a reasonable ROI over a certain duration.

Fixed monetary rewards offer a premium besides the market price paid per kilowatt-hour (kWh) of electricity produced. Avoid fixed cost set rates based on utilities' “negative externalities,” such as health issues from pollution or the affect of climate change on the environment.

Program Duration

A weakness of many REP policies concerns the absence of a specified program period. Investors look for certainties in terms of payment security over time. The most successful programs guarantee payments for a period of between 15 to 20 years. Germany program has a 20-year duration. The intent is for the guarantees to last until the market can eventually support solar energy generation without reliance on enticements and subsidies. Policymakers must identify a period that provides investors with guarantees, which eliminate the concern of the investment risk.

REP Differentiation

Policies that make distinctions in type and size of projects allow participants for rooftop photovoltaic and utility-scale developments. Typically, the policies not only includes solar, but other renewable energy sources, such as wind, and geothermal. This enables policy makers to distinguish between productivity and production capacity. In this case, having fixed rates that apply to all systems is neither economical nor fair. Another approach focuses on a resource type that exemplifies highest use and takes advantage of natural resources, such as solar developments in the Southwestern region of the U.S., which has over 300 days a year of sunshine.

Payment Degression

Many policies have a predetermined schedule, which requires periodic revisions of the payment rates -- for new contracts -- based on advances in technology, program participation, and solar energy generation costs. Many programs have a provision that mandates schedule decreases in the payment rate. Payment rate reduction depends on factors like depreciation of equipment and the expenses associated with future production.

Currently, Germany determines its solar PV degression twice a year. The objective is to maintain a solar growth rate of 3,500 megawatts a year, which results in a minus nine percent degression. The   higher initial rates attract participants in the early stages of the program. It also decreases the tariff rate as generation cost drops and market condition changes. 

Monitor & Review

It is critical to the program's success to have a solid system for monitoring and assessing the REP policy. The process must include modifications and enhancements to the program over the long-term by using a flexible management style. Conduct ongoing evaluations to determine participation attract more producers. In addition, assess the tariff rate and rate of degression for future contracts. Adjust strategies depending on inflation, program cost, and other expenses.

Purchase Agreement

Utility companies have a responsibility to purchase the generated power from the producers they contract with and transmit it to the grid regardless of their shot-term energy requirements. In addition, many REPs have rules that obligate utilities to buy the electricity ahead of other sources, which adds more market certainty for solar energy investors.

Other Considerations

Policymakers must take a variety of other considerations into account consider, such as the state of existing infrastructure, transmission or distribution capacity. In some cases, it may be necessary to improve these items in conjunction with the enactment of an REP policy. Consider placing caps on generation capacity to prevent steep rise in solar generation, which places a financial burden on the ratepayers; it also provides an installation target for the program. Often, programs meet their target before it projected date, which results in modification of the target or temporary closure of the program.

Conclusion

Many industry insiders believe REPs distort the capital market because the subsidies eliminate risk. Conversely, others argue that when developing solar energy, and other renewable energy sources, becomes the high priority of a nation, solar energy developers must have sources of reasonable capital to make projects financially feasible for developers. Historically, the capital market has been slow to invest in these developments. REPs solve this dilemma by guaranteeing a secure return on investment and providing long-term fixed-rates to investors in solar energy and other developments.

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