Lessons for Policymakers to Boost Renewable Energy
Source: RE targets as published in Discussion Paper 22, Fig. 7
June 7, 2011
No one-size fits all; tailor-made approaches essential • Sequencing is critical • Incentives must be adjusted continuously to effective and efficient
Legal and regulatory frameworks for grid connection and integration have to be in place before RE policy is introduced. ||Gabriela Elizondo Azuela, Senior Energy Specialist, The World Bank
About 300 gigawatts of new electricity capacity were added worldwide in the two-year period ending in December 2009. Almost half of that—140 GW—came from renewable energy. The developing countries are big players in this promising trend, now accounting for 53 percent of global renewable energy capacity.
This growth gives grounds for optimism. Indeed, the recent report of the Intergovernmental Panel on Climate Change cited a best-case scenario in which almost 80 percent of global primary energy supply could be drawn from renewable sources by 2050. The IPCC’s best-case prediction is based on a big caveat, however. It is that government policies “play a crucial role in accelerating the deployment of RE technologies.”
Fair enough, but which policies work best? Given the complexity of energy technologies, and markets, modes of power generation, transmission, distribution, consumption, metering and billing, and the multiplicity of policies—feed-in tariffs, subsidies, renewable portfolio standards, and so on— policy makers are often scrambling for some guidance.
KEY REPORT FINDING: Sound governance is an essential condition for the success of policy incentives that aim to accelerate the integration of renewable energy. AUTHORS » Gabriela Elizondo Azuela, Senior Energy Specialist, The World Bank, and Luiz Augusto Barroso, Technical Director, PSR
One useful source is a recent Discussion Paper No. 22 produced by the World Bank’s Gabriela Elizondo Azuela and Luiz Augusto Barroso, Design and Performance of Policy Instruments to Promote the Development of Renewable Energy: Emerging Experience in Selected Developing Countries.
Elizondo and Barroso, both with the Bank’s Sustainable Energy Department, studied grid-connected RE policy options used in six countries—Brazil, India, Indonesia, Nicaragua, Sir Lanka and Turkey.
Their report finds that sound governance is an essential condition for the success of policy incentives that aim to accelerate the integration of renewable energy. “For example,” Elizondo says, “legal and regulatory frameworks for grid connection and integration have to be in place before RE policy is introduced.”
Not surprisingly, middle-income countries are leaders and early adopters among the 31 developing countries that have introduced some type of price- or quantity-setting instrument to promote renewable energy development.
The most common price-setting instrument is a feed-in tariff, which reduces the cost of developing RE by establishing favorable pricing regimes for RE relative to non-renewable sources of energy. Of the 31 early adopters, 26 are using feed-in tariffs.
With quantity-setting mechanisms—the most common of which is the renewable portfolio standard (RPS), and energy suppliers’ auctions—the government sets a target, and lets the market determine the price. An RPS is a quota-based policy in which the government requires electricity suppliers to draw a given proportion of their electricity from renewable sources.
These RPS are usually phased-in and, over time, they create market demand for RE, to which suppliers respond, developing new, competitive sources of renewable energy. These are far less widespread among developing, emerging and transition countries, with only five of the 31 cited above using them, namely Brazil, Chile, China, Poland and Romania.
Brazil, China and India accounted for 37 percent of global clean energy investment in 2009. These three countries all have or had feed-in tariffs, auctions and RPS policies, among others, and have had them for several years. They have also been good at delivering predictable governance, with national energy strategies and plans, and a regulatory framework, and the capacity to implement them.
The challenge is to transfer the lessons of this policy experience to low-income countries. These lessons include the following:
Tailor-made approaches are essential: There is no one size-fits-all. The choice of policies or regulatory regime should be tailored to the conditions of a country’s energy system, market, supply/demand volume, risks, and administrative capacity. In many cases, capacity-building of staff in energy utilities and energy ministries is needed to ensure sound policy design and rigorous implementation.
Policy sequencing is key: Policy sequencing and the existence of key legal/regulatory instruments as well as institutional and administrative efficiency are crucial to the effectiveness of RE policy. For example, you need to have legal and regulatory frameworks on resource and land use, and allocation of permits/rights in place before RE incentives such as feed-in tariffs or Renewable Portfolio Standards are introduced.
Policy interaction and compatibility: Making sure that policies and incentives are consistent and aligned is important; this is a complex area, and contradictions can arise among the policies. Policymakers need to be alert to this.
Regulatory design is a dynamic process: Feed-in tariff policies have had to be adjusted continuously. The challenge has been to offer just enough incentive to attract the private investment, but not so much that you attract rent-seekers.
RE policy performance, including both effectiveness and efficiency, depends on several factors: These include incremental cost recovery mechanisms, the existence of transmission infrastructure that accommodates RE, and clear rules for transmission access and connection.