Comparison of various Policy Tools for Promoting Renewable Energies

Background

We can distinguish two ways through which regulations could be viewed (Minogue 2013). The legalistic approach to regulations considers them to consist of laws, rules and decrees by all levels of government, and by non-governmental bodies which are vested with regulatory power (Minogue 2013). The major objectives of regulation, then, ideally, target achieving efficiency in energy provision, fair pricing, equality of access and environmental sustainability. On the other hand, the economics-based definition advances that the role of regulation is to create conditions for efficient functioning of markets (Minogue 2013).

Efficient markets, however, may not necessarily satisfy social equity considerations or take into account environmental concerns as many ecosystem services do not have market prices, hence, are not incorporated into markets. Both approaches have their strengths and weaknesses.

There are often risks associated with government failures while trying to solve complex resource allocation problems in renewable energy, which calls for the use of markets and setting clear incentives and standards (Purkus et al. 2012, video). At the same time, government action is needed to overcome market failures. Accordingly, implementing the innovative renewable energy policies requires a proactive government action, societal support and involvement of local governments and communities (Beltramello et al. 2013).

As a result, the renewable energy sector involves a host of policy tools and regulations (Peters and Thielmann 2008, Wesseler et al. 2010, White et al. 2013, Sims et al. 2015), such as:

Renewable Energy Mandates

Renewable Energy Mandates are legal requirements to produce a certain share of energy from renewable sources. For example, presently, several countries impose renewable energy mandates on electricity generation on utilities. Similarly, another example, Mexico City mandated all new and renovated swimming pools, as well as large commercial buildings to cover 30% of their energy needs for water heating from solar energy (Cabre et al. 2015). Renewable energy mandates are being applied by an increasing number of countries. According to REN21 (2015), 98 countries and sub-national units had renewable energy mandates by the end of 2014, which represents a nine-fold increase compared to 2004 (REN21, 2015).

Renewable Energy Targets

Reneable Energy Targets are policy commitments to generate a determined share of total energy using renewable sources. For example, Germany targets to generate 35% of its electricity from renewable energy sources by 2020, reaching 80% by 2050 (Droste-Franke 2012). Successful implementation of these targets requires the establishment of effective systems of monitoring and reinforcement (GIZ 2012).

Feed-in-tariffs

Feed-in-tariffs are policy tools designed to promote renewable energy generation by guaranteeing the purchase of the generated renewable energy with a long-term contract and at cost-based purchase prices. Under this scheme, electricity generated using solar panels or other types of RE based electricity can receive higher prices than, for example, from the fossil fuel-based electricity generator. Feed-in-tariffs often have digressive element, when guaranteed prices gradually decline over time in order to stimulate cost-reducing innovations in renewable energies sector. Feed-in-tariffs can also be applied to photovoltaic irrigation schemes, whereby farmers could sell the excess of the electricity generated to the central grid. Feed-in-tariffs are one of the most widely applied tools for promoting renewable energies. In 2014, they were applied by 108 countries and sub-national jurisdictions (REN21, 2015).

Net Metering and Flexible Grid Access

Net Metering and Flexible Grid Access is a mechanism that enables small-scale renewable energy producers, for example, households with rooftop solar energy generation, to sell the amount of electricity beyond their own needs to the central grid.

Transfers and Subsidies

Transfers and Subsidies are direct or indirect monetary support to producers or other actors involved in renewable energy production. For example, China provides subsidies for solar energy technologies benefitting poor communities.

Fiscal Incentives

Fiscal Incentives are the reduction of taxes by various mechanisms, such as tax credits, deductions and exemptions, in order to stimulate renewable energy. For instance, under Brazil’s Social Fuel Seal initiative, biodiesel producers are given tax credits (BEFSCI 2012).

Grants

Grants are non-repayable monetary allocations for specific projects. They are often used to promote renewable energy production, foster research and development and encourage deployment of renewable technologies, for example, the US program of Sustainable Agriculture Research and Education (SARE) program. Powering agriculture: an energy grand challenge for development seeks to identify and support promising clean energy innovations specifically targeted to the agricultural sector.

Soft Loans

Soft loans are credits with below market interests charges. This instrument is used by several governments and international donor organizations to promote renewable energies. For example, the International Renewable Energy Agency (IRENA) and the Abu Dhabi Fund for Development (ADFD) have recently announced USD 46 million worth of soft loans for renewable energy projects in several developing countries.

Comparison of the Policy Tools

Policy Tools	Strengths	Weaknesses
Renewable Energy Mandates and Targets	Market-friendly Promotes especially more mature technologies	Requires high administrative and monitoring capacity Less efficient in case of weak enforcement and low penalties
Feed-in-tariffs	To promote different renewable energy technologies, including those which are less competitive due to early stage in their development Provides legal security when well applied Predictable revenue streams	Can be very costly Appropriate design may require continued adjustments through complex administrative procedures
Net Metering and Flexible Grid Access	Generally less costly Technically easy	Not applicable for large scales
Transfers and Subsidies	Allows for targeted development of renewable energy technologies	Once entrenched, could be very difficult to remove even when there is no longer need for them
Fiscal Incentives	Provides incentives especially for new renewable energy projects, by reducing investment costs	Can be a burden to public budget Lower certainty due to changing political context
Grants	Allows for targeted investments to specific renewable energy applications, especially when they are not sufficiently attractive to private markets Particularly applicable for research and development into renewable energy innovations Facilitates renewable energy deployment especially in riskier environments	Long-term sustainability after grant is over may often be problematic Payback and rate of return may be uncertain
Soft Loans	Many agri-/food chains and their sites for processing agro-products or food/ beverages	Often cover capital investment costs only

When it comes to the choice of any particular tool in a specific country, there are no fit-all approaches. The choice whether or not to use any of these tools depends on the context of each country (Azuela and Barroso 2012). Moreover, each stage of the development of renewable energies in each country may require different tools, so customized sequencing of these policy tools may be required (ibid.). Each of these policy tools has its strengths and weaknesses (see the table), which can shape their choice in a specific country context.

References

• Azuela, G. E., and Barroso, L. A. (2012). Design and performance of policy instruments to promote the development of renewable energy: emerging experience in selected developing countries. World Bank Publications, Washington, USA.
  
• BEFSCI (2012). Policy Practices to promote good practices in Bioenergy feedstock production. Available at http://www.fao.org/docrep/015/i2617e/i2617e00.pdf, retrieved on 5th March 2014
  
• Cabré M, Lopez-Peña A, Kieffer G, Khalid A and R. (2015). Renewable Energy Policy Brief: MEXICO. IRENA, Abu Dhabi, United Arab Emirates.
  
• Droste-Franke, B., Paal, B., Rehtanz, C., Sauer, D. U., Schneider, J. P., Schreurs, M., & Ziesemer, T. (2012). Balancing Renewable Electricity: Energy Storage, Demand Side Management, and Network Extension from an Interdisciplinary Perspective (Vol. 40). Springer Science & Business Media.
  
• GIZ (2012). Legal Frameworks for Renewable Energy. Policy Analysis for 15 Developing and Emerging Countries. Bonn/Eschborn, Germany.
  
• REN21. 2015. Renewables 2015 Global Status Report (Paris: REN21 Secretariat). ISBN 978-3-9815934-6-4
  
• Sims, R., Flammini, M., Puri, M., Bracco, S., 2015. Opportunities for Agri-Food Chains to Become Energy-smart. FAO and PAEGC, Rome, Italy.
  
• Peters, J., & Thielmann, S. (2008). Promoting biofuels: Implications for developing countries. Energy Policy, 36(4), 1538-1544.
  
• Wesseler, J., Spielman, D., Demont, M. (2010). The Future of Governance in the Global Bioeconomy: Policy, Regulation, and Investment Challenges for the Biotechnology and Bioenergy Sectors. AgBioForum, 13(4): 288-290.
  
• White, W., Lunnan, A., Nybakk, E., & Kulisic, B. (2013). The role of governments in renewable energy: The importance of policy consistency. Biomass and Bioenergy, 57, 97-105.