Energy Sector Strategies to

Support Green Growth

Module 02

Policy Instruments for Renewable Energy

Lesson 2

Price Instruments and Policy Frameworks

World Bank
Institute

Presentation Script

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

About this Presentation

In the previous lesson, we covered regulations and standards as well as
quantity instruments.

This lesson analyzes price instruments and focusing on fiscal incentives and
Feed in Tariffs. It then presents an introduction to government procurement
policies to support energy.

Once finished reviewing all the specific instruments we will conclude with
some more high level review of renewable energy policy design and some
suggestions for further reading.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Renewable Energy Policies

In the previous lesson, we reviewed two categories of policy instruments for
renewable energy: regulations and standards and quantity instruments.

This lesson reviews price instruments and procurement strategies, starting
with price instruments.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Renewable Energy Policies

Price instruments reduce cost and pricing-related barriers by establishing

favourable price regimes for renewable energy relative to other sources of
power generation. There are a variety of price instruments available for
Renewable Energy. This lesson will focus on fiscal incentives and feed-in
tariffs.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Fiscal Incentives for Renewable Energy

The primary objective of most fiscal incentives are to lower the costs of
constructing and operating renewable energy projects to make them more
competitive with traditional sources of energy. There are several types of
fiscal incentives and their use is widespread around the world. For example,
over 53 countries offer some type of direct capital investment subsidy, grant,
or rebate sometimes referred to as a capital buy-down. In general, fiscal
incentives can provide positive pricing for clean energy or negative incentives
for dirty generation.

Click on each of these examples of fiscal incentives to learn more. Select next
when you are ready to continue.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Feed-in Tariffs

Feed-in tariffs are a special form of financial incentives that can be used to
drive investment and scale up renewable energy.
The design of FITPs typically involves three key incentives:
a preferential tariff,
guaranteed purchase of the electricity produced for a specified
period, and
guaranteed access to the grid.

Click on each of these incentives to learn more.







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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Feed-in Tariffs

Determining the level of preferential tariff is one of the most difficult, and
important aspects of FiT policy design. There are several types of FiT tariffs
that vary over the following four characteristics:

First, FiT tariff levels may be technology neutral, that is, the same levels of
remuneration are paid to all renewable energy projects, regardless of
technology or the tariff level may be specific to different renewable energy
technologies.

Second, FiT tariffs can be flat and pay the same level of remuneration to all
plants of the same technology. On the other hand, stepped tariffs pay
different levels of remuneration to plants of the same technology to lower
windfall payments and the overall cost of FiT subsidies. These payments may
vary by location, plant size, or fuel use.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Third, FiT tariffs can be fixed and pay a certain level of remuneration per kWh
of electricity generated or a premium that is paid on top of the electricity
market prices.

Fourth, FiT tariffs can remain constant over time or include a degression
factor that decreases the level of remuneration over time to account for
technology improvement, innovation, and learning.

In general, FITs have evolved from simpler technology-neutral flat tariffs to
more complex technology-specific stepped tariffs that may include
degression factors. Tariffs that are differentiated by technology, size,
resource intensity, and degree of technological maturity improve the overall
economic efficiency of the policy.

Click the link to view an example FiT tariff design.
Feed-in Tariffs

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

As shown, the FiT tariff design varies by country. Some countries have
specific types of tariffs for certain technologies. For example, France,
Germany and India include a degression factor in the tariff incentive for wind
energy. As wind technologies improve and costs decrease over time, the
amount of incentive will also decrease.
Feed-in Tariffs

A key part of a FiT incentive are stable long-term purchase agreements or an

arrangement that ensures a stable revenue stream for a pre-specified period.

A purchase obligation ensures that energy suppliers are obliged to buy the
power generated by renewable energy projects. These purchase obligations
are usually for 10 to 15 years and help provide more long term certainty for
developers of renewable energy projects.

In many cases this contract stability has been critically important, often even
more important than the tariff itself in attracting project investors.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

For example, in multiple-buyer power markets, renewable energy suppliers
are paid a preferential tariff for a pre-specified number of years from the
market operator. Usually, the market operator imposes a surcharge on
consumer tariffs to cover the incremental cost.

Feed-in Tariffs

The third key provision is guaranteed access to the grid which also helps
reduce project development risks. There are several examples of grid access
problems that renewable energy projects face such as insufficient grid
capacity available, long lead-times for grid connection authorization, and the
grid connection procedure is not fully transparent.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

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Feed-in Tariffs

Several developing countries have experience using FiT policies to promote
renewable energy, including India and Brazil. The experience of these
countries illustrate the opportunities and challenges facing FiT
implementation, and can provide some general lessons on FiT
implementation.

Click on each topic to learn more. Select Next when you are ready to
continue.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

FiT Policy in India

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Feed-in Tariff Policy in Brazil

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

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Feed-in Tariffs

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Mobilizing Private Capital: Global Energy Transfer Feed-in Tariff (GET FiT)

Feed-in tariffs are a critical incentive for renewable-energy generation.
However, developers, investors, and financiers perceive risks in many low-
and middle-income countries which can work against the effectiveness of
FiTs. One possible solution for overcoming these perceived risks and
mobilizing private capital for renewable energy is a scheme proposed by
Deutsche Bank called a Global Energy Transfer FiT, or GET FiT. The idea
behind GET FiT is to leverage international public private partnerships to
support and de-risk national FiTs in order to provide transparency, longevity
and certainty to investors and financiers.

A GET FiT program would include three pillars: first, an international fund to
support renewable energy incentives; second, a combination of risk
mitigation strategies; and third, the provision of technical assistance. These
three elements will be described in the following slides.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

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Types of GET FiT Support

The centerpiece of a GET FiT scheme is an international fund, or partnership
of international sponsors, to share in the cost of providing renewable energy
incentives. Here are three examples of policies where national utilities would
commit to purchasing electricity at the market price and an internationally
supported GET FiT program would contribute public sector funds to share the
above-market costs of renewable energy generation.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Types of GET FiT Support

De-risking national FiTs is the second pillar of the proposed GET FiT scheme.
Risk mitigation strategies are important to providing developers, investors,
and financiers the transparency, longevity, and certainty required to mobilize
capital for renewable energy. A GET FiT scheme would include several layers
of guarantees and insurance to ensure that premiums for renewable energy
are not subjected to the risks listed on this slide.

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Energy Sector Strategies to Support Green Growth

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Types of GET FiT Support

Technical assistance is the final component to a GET FiT scheme. GET FiT
might provide funding for certain types of technical assistance, such as policy
design for advanced FiTs, but more importantly, a GET Fit program could
aggregate and coordinate existing technical assistance resources to help
private sector actors establish track records with renewable energy finance,
development and operations.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Government Procurement

We now move on to discuss how government procurement policies can

promote renewable energy developments.

Governments are often very large energy consumers.

As such, government purchasing and procurement decisions can exert
substantial influence over the market for renewable energy and renewable-
energy technology.

Through purchasing and procurement requirements, procedures, or power-
purchase agreements, governments have the option to wield their own
demand for energy as a policy tool to help spur and mature their countrys
renewable-energy markets and build renewable-generation capacity.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Government Procurement

There are broadly three renewable-energy procurement approaches which

governments can use to leverage their energy demand to support the market
for renewable energy.

One approach is to require that public facilities meet a certain percentage of
their demand with renewable energy. This approach involves stipulating the
supply of renewable energy in power purchase agreements with the energy
supplier or distributer.

Another approach is to allow public facilities to meet all or part of a
renewable energy requirement with on-site power generation.

A third approach is integrating national or sub-national governments into
renewable portfolio standard or renewable energy certificate schemes.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Renewable Energy Policy Design

In this lesson and the previous one, we have focused on specific renewable
energy policy instruments. More broadly, the question of how can policy
design increase the effectiveness of policies

The IEA and OECD found that high levels of policy effectiveness are linked to
three factors coexisting at the same time.

First, a countrys level of policy ambition such as level of targets. By
establishing an ambitious, yet feasible, renewable energy target,
governments can send a credible signal that it fully supports the
development of renewable energy deployment.

Second, the presence of a well designed incentive scheme. As noted
throughout this Module, the various policy instruments can provide different
types of incentives for renewable energy. Policies should provide a coherent

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

and clear set of incentives for development that reflects the unique
characteristics of the renewable energy technologies and the local energy
circumstances.

Third, the capacity of the system for overcoming noneconomic barriers that
may prevent the proper functioning of the market. Some of these issues
include administrative hurdles, lack of information, obstacles to grid access,
and opposition of local stakeholders.

The evidence to date suggest that countries where all three of these factors
are present have high policy effectiveness. Furthermore, if one of these three
key factors is missing, the policy is likely to fail. In particular, a high level of
economic incentive may not be enough to overcome significant noneconomic
barriers that pose risks to project viability.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Renewable Energy Policy Design

:Renewable energy technologies are rapidly maturing and different

technologies are at various stages of development. This has important
implications for renewable energy policy design.

The S-curve of technological development describes a changing policy mix as
technologies mature. The underlying principle is that the government should
apply policy mixes that are increasingly based on market principles as the
technology matures from the development stage, through the niche market
stage, and to the mass market stage when the technology is widely deployed.

The least mature technologies can be considered prototype & demonstration
stage technologies, such as second generation biofuels. These technologies
require continued R&D support and capital cost incentives.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Moving along the curve, technologies that face a high cost-gap with
traditional energy sources will require stable, significant and low-risk
incentives such as FiT policies or technology specific tenders.

Low cost-gap technologies will still require financial and regulatory support,
but at less of a scale than high cost-gap technologies and with more market
risk. For example, renewable energy credits, also known as tradable green
certificates, or TGCs, can be implemented.

Mature renewable energy technologies that can compete on a level playing
field with traditional energy sources require less government support and
carbon pricing mechanisms such as charges or trading systems or voluntary
programs can help stimulate market pull.
Renewable Energy Policy Design

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

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It is useful to compare renewable instruments along the key criteria of

investment risks, effectiveness/efficiency, and complexity.

Two of the most popular renewable energy policies are renewable energy
certificates and feed in tariffs. These policies are also two of the most
developed and thus provide rich comparisons.

Advance to the next screen to learn more about renewable energy
certificates.
Renewable Energy Policy Design

Review the key points regarding the design of Renewable Energy Credits.
When ready, advance to the next screen to compare this approach with Feed
in Tariffs.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

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Renewable Energy Policy Design

Review the key points regarding the design of Feed in Tarriffs. When ready,
advance to the next screen to continue.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

General Lessons for Renewable Energy Policy

Lastly, as a concluding element of this module, we will look at 6 key lessons of
renewable energy policy.

First, the choice of policy instruments, policy design, and complexity of the
policy package or regulatory regime should be tailored to the actual
conditions of the system in the type of market, supply or demand volume,
and nature and level of risks, as well as institutional and administrative
capacity.

Second, policy sequencing, the existence of basic legal and regulatory
preconditions, as well as institutional and administrative efficiency, are
crucial to the effectiveness of Renewable Energy policy. For example, legal
and regulatory frameworks for grid connection and integration, resource and
land use and/or the allocation of permits and rights must be in place before
Renewable Energy policy is introduced, and the process for granting permits
should not create bottlenecks.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Third, even if the policy mix succeeds in triggering investments that achieve
Renewable Energy capacity targets, its overall economic efficiency or cost per
unit of benefits may be poor.

Fourth, the coexistence of policy instruments has the potential to result in
complex interactions and unintended effects. Thus, policy makers need to
assess the compatibility among policy and regulatory mechanisms or
incentivesthat is, their combined impact may result in inefficient outcomes.
It is also vital that individual policies are coordinated with the wider set of
conditions that impact the energy market in a specific setting.

Fifth, countries have tested different types of instruments to support
Renewable Energy development and many are now using both price and
quantity setting instruments to support different segments of the Renewable
Energy market. Policy adjustments should be controlled through mechanisms
that allow stakeholders to manage the risks in order to maintain a certain
level of regulatory certainty.

Finally, even policies with a sound design do not result in effective and
efficient development of Renewable Energy if other critical aspects are not
considered in parallel, including the existence of a sustainable incremental
cost recovery mechanism and the existence of transmission infrastructure
capable for Renewable Energy integration, as well as clear rules on
transmission access and connection.

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Energy Sector Strategies to Support Green Growth

Module 2: Lesson 2 Price Instruments and Policy Frameworks

Presentation Script

Suggested Further Reading

Here are some links to more information on Policy Instruments for
Renewable energy.

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