In general, there are six main instruments which are used to support investments in renewable energy technologies. Among those six are: quota obligation, feed-in tariffs, fiscal incentives, tax exemptions and premium. Table 1 below shows the various instruments used to enhance investment in renewable energy technologies in the EU.
Table 1: Main Renewable Energy Sources (RES) support instruments in the EU
A feed-in tariff is usually fixed payment made for the power fed into the grid by electricity generating companies. In feed in premium arrangement, extra amount is paid on top of the actual income earned by the generating company after selling the electricity generated from renewable sources. In quota obligations, the government creates a market for the electricity generated from renewable sources. This usually involves putting in place certain rules that require consumers to use a certain percentage of electricity generated from renewable sources. Most countries in the EU have different instruments for different RES.
Feed in tariffs are more effective than feed-in premiums and quota obligations because feed-in tariffs guarantees the investors of a long term and fixed support. This substantially minimizes the risks involved. The capital costs for investment in RES in countries that have effective feed-in tariffs are usually lower than in those countries with other support instruments. Since the feed-in tariffs provide a fixed price and an assured demand, they significantly reduce the market price and risk as well as creating certainty for the investor with regard to the profitability of the project.
The tariff’s cost effectiveness to the society reduces when the government planners exaggerate the cost of generating electricity from renewable sources. This is due to the fact that the allocated tariffs depend on the expected future electricity generation cost. If the cost of producing electricity from these sources ends up being lower than expected, the investors gain massive profits. Therefore, regular reviews must be carried out to ensure that the projected cost is in line with the latest figures. This can also encourage technology learning. In addition, the tariffs are provided for a limited period of time normally 15 to 20 years. In order to ensure that the investors do not make extremely huge profits as the cost of production reduces.
When feed-in tariffs are used, the renewable energy electricity generators sell the generated electricity to a one particular buyer fee-in. This strategy ensures that the power generating companies are not lured into adjusting their production to correspond to the price signals that are controlled by market demand.
Since the economic viability of a PV system is affected by both of the capital cost and the payback rate, a comparison of PV feed-in tariffs to the cost of electricity from the conventional sources taken from the grid is necessary. The ratio (r) of these two costs is different across different countries. Germany and Spain have the highest rates in the EU . Some of the most common tariff schemes for PVs are:
Very low tariff schemes:under these schemes, the rates are quite low and the set conditions generally apply to all the renewable energy technologies. Also, the ratio r is very low i.e. r << 1.
Low schemes:it is similar to the above scheme but with special incentive premiums that range from +10% to +100%. The total energy payment is low with the ratio r less than 1 i.e. r < 1.
Parity schemes:The feed-in tariffs are equal to the price charged by the utility i.e. the ratio r=1
High schemes:These schemes have appealing prices and r is greater than 1 but less than 2 i.e. 2 < r< 1. However, there are regulations that are put in place to control the payment period.
Very high schemes:These schemes have the highest tariffs where the ratio r is much greater than 1. It usually lies between 5 and 6.
Other schemes:In these schemes, consumers without a PV system can easily buy electricity from renewable sources.
Feed-in premiums have recently gained position as PV support instruments in countries like Netherlands and Denmark. In some countries, both premiums and feed-in tariffs exist. Such countries give an opportunity to select feed-in tariffs premiums. The selection criteria for these systems vary from one country to another. Although premiums provide safe extra earnings for the generating companies, they expose them to risks that arise from fluctuations in market prices. Unlike tariffs, premiums give less confidence to the investor which means that the capital requirements are high. Premiums systems can be designed in various forms. The rate of premiums is usually determined by the future expectations of the prices of electricity as well as the energy market revenues. Like feed-in tariffs, premium systems can introduce extra costs to the society if the planners overestimate the production cost and give large profits to the generating companies if the cost is underestimated. Therefore, project duration and the generation costs must be reviewed regularly to ensure that the set premiums are credible. One of the advantages of the premium systems is that the generators are involved in the electricity wholesale market. This motivates the producers to adjust their production in response to the market demand which is useful for the proper running of a power system.
Another support instrument for renewable energy is the quota obligation. This system is common in countries like Romania, Sweden and Belgium. In those countries where quota obligations are applied, the relevant authorities enforce the minimum shares of electricity generated from renewable sources of which a certain producer should supply. This may even extend to consumers. These minimum shares increase gradually over time. The consumers and the suppliers must meet the obligations of risk facing penalties. These obligations are accompanied with a renewable obligations certificate which proves that the company complies with the obligations. A renewable obligations certificate shows the worthiness of green electricity and assists in carrying out transactions involving renewable electricity. These certificates can be traded and reduction in the cost of renewable electricity automatically reduces the cost of these certificates. However, this might be disadvantageous to companies that did not get good returns from the technological learning. Quota obligations are known to be better than feed-in tariffs and premiums because the support is immediately removed when the specific renewable energy technology becomes competitive to the conventional electricity generation technologies.
Certificate prices are influenced by market forces. In addition, certificate prices are surrounded by uncertainty that might scare potential investors. The combined uncertainty of certificate and electricity prices increases the financial risk that producers are faced with. This uncertainty increases the capital cost. These extra costs are transferred to the consumers, which increases the societal costs of electricity to levels higher than those experienced in feed-in tariffs or premiums. Quota obligations encourage the development of low cost technologies and allow other technologies to be discarded in a cost effective way. This is common for quota obligation systems that are neutral and do not target specific renewable technology. To encourage development of expensive renewable energy technologies, quota obligations are combined with other instruments like feed-in tariffs and premiums. This is common in technologies like PV.
Investment grantsare common in many countries within the EU and are meant to encourage investment in less mature technologies like PV. On the other hand, Tax exemptions are put in place to complement other support instruments. They are very effective and flexible support tools which can be used to encourage the development of a certain renewable technology, especially when combined with other support instruments. These exemptions are of different kind but are all geared towards minimizing the operation cost of the power plants hence encouraging investors.
Fiscal incentivesare examples of supporting instruments that have recently gained popularity. They mostly include low interest loans. The interest rates charged are usually less than the market rates. The borrowers may also get additional benefits like interest holidays and extended repayment periods. These incentives are currently applied in EU countries like Germany, Estonia, and Poland among others.
In the case of large scale projects, tenders have proved to be very attractive. They have been used in countries like United Kingdom (UK) and Spain. The tendering process brings attention to investments in the renewable energy sector and the available opportunities in this sector.
Whatever the incentive used the aim is the same, increase the penetration of the Photovoltaics and the Renewable Energy Sources, RES, in general.