Policies for Renewable Energy Trading

Twelve of the most notable types of policies that have promoted renewable energy worldwide are given below:

1. U.S. Public Utility Regulatory Policies Act (PURPA) of 1978

PURPA required utilities to purchase power from small renewable generators and co generators – otherwise known as independent power producers (IPPs) – through long-term (10-year) contracts, at prices approximating the avoided costs to the utilities. These avoided costs represented the marginal costs to the utilities of building new generation facilities, which could be avoided by purchasing power from the IPPs instead.

2. Electricity Feed-in Laws

The electricity feed-in laws in Germany and similar policies in other European countries in the 1990s, set a fixed price for utility purchases of renewable energy. For example, in Germany starting 1991, renewable energy producers could sell their power to utilities at 90% of the retail market price. The utilities were obligated to purchase the power. The law changed in 2000, when pricing became based on fixed norms unique to each technology, which in turn were based upon estimates of power production costs and expectations of declines in those costs over time. Other countries in Europe with renewable electricity feed-in laws include Denmark, France, Greece, Italy, Portugal, Spain, and Sweden.

3. Competitively bid Renewable Resource Obligations

The United Kingdom tried competitive bidding for renewable energy resource obligations during the 1990s under its Non-Fossil-Fuel Obligation (NFFO) policy. Under the NFFO, power producers bid on providing a fixed quantity of renewable power, with the lowest- price bidder winning the contact. With each successive bidding round (there were four total), bidders reduced prices relative to the last round. The UK abandoned the NFFO approach after the fourth round of bidding in 1997. Other countries with similar competitively-bid renewable resource mechanisms have included Ireland, France, and Australia.

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4. Renewable Energy Portfolio Standards (RPS)

An RPS requires that a minimum percentage of generation sold or capacity installed be provided by renewable energy. Obligated utilities must ensure that the target is met, either from their own generation, power purchases from other producers, or direct sales from third-parties to the utility‘s customers. Typically, RPS obligations are placed on the final retailers of power. At least twelve U.S. states have enacted an RPS, ranging from 1% to 30% of electricity generation. In Europe, the Netherlands has been a leader among RPS initiatives. Dutch utilities have adopted an RPS voluntarily, based on targets of 5% of electricity generation by 2010, increasing to 17% by 2020. Other countries with RPS-type regulatory requirements include Australia, Brazil, Belgium, Denmark, France, Japan, Spain, Sweden, and the United Kingdom.

5. Renewable Energy (Green) Certificates

Renewable energy (green) certificates are emerging as a way for utilities and customers to trade renewable energy production and/or consumption credits in order to meet obligations under RPS and similar policies. Standardized certificates provide evidence of renewable energy production, and are coupled with institutions and rules for trading that separate out renewable energy attributes from the associated physical energy. This enables a paper market for renewable energy to be created independent of actual electricity sales and flows. Green certificate trading is gaining ground in the UK, Belgium, Denmark, Australia, and the United States. Europe embarked upon a test phase of an EU-wide renewable energy certificate trading system during 2001 and 2002.

6. Cost Reduction Policies

A number of policies are designed to provide incentives for voluntary investments in renewable energy by reducing the costs of such investments. These policies can be characterized into five broad categories. Policies can:
i) Reduce capital costs up front (via subsidies and rebates)
ii) Reduce capital costs after purchase (via tax relief)
iii) Offset costs through a stream of payments based on power production (via production tax credits)
iv) Provide concessionary loans and other financial assistance
v) Reduce capital and installation costs through economies of bulk procurement.

Many examples of these policies exist in individual U.S. states, several countries in Europe, India, and Thailand.

7. Public Benefit Funds

In the United States, public funds for renewable energy development are raised through a system benefits charge, which is a per-kWh levy on electric power consumption. Similar levies exist in some European countries for fossil-fuel-based generation. The funds collected in this manner serve a variety of purposes, such as subsidizing the cost difference between renewable and traditional generating facilities, reducing the cost of loans for renewable facilities, providing energy efficiency services, funding public energy education, providing low-income energy assistance, and supporting research and development.

8. Market Infrastructure Policies

A variety of market-facilitation policies are used to build and maintain renewable energy market infrastructure – the capabilities, institutions and rules which underlie a market – including design standards, sitting and permitting requirements, equipment standards, and contractor education and licensing. Policies may also require that market participants have local on-the ground presence (or joint-venture type requirements).

9. Net Metering

Net metering allows a two-way flow of electricity between the distribution grid and customers with self-generation. When consumption exceeds self-generation, the meter runs forward, and when self-generation exceeds consumption, the meter runs backward. The customer pays only for the net amount of electricity used in each billing period, and is sometimes allowed to carryover net electricity generated from month to month. Net metering in effect allows customers to receive retail prices for their self-generation. At least 38 U.S. states now have net metering laws. Net metering is also common in parts of Germany, Switzerland and the Netherlands, and allowed by at least one utility in the UK. Thailand is one of the few developing countries to have enacted net metering laws.

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10. Transport Biofuels Policies

Biofuels mandates and tax policies in Brazil, the United States, and Europe have accelerating development of biofuels. Biofuels mandates require a certain percentage of all liquid transport fuels be derived from renewable resources. Tax policies may provide tax credits or exemptions for production or purchase of biofuels. Brazil has long mandated blending of ethanol with all vehicle fuels sold in the country, as well as the availability of pure ethanol fuels at service stations. India has recently mandated blending in some states. The United States has several policies, such as a federal ethanol tax credit and an Iowa mandate that government vehicles use ethanol-blended fuel. Many European countries utilize small amounts of biodiesel blended with conventional diesel, and some, like France and Italy, also provide tax incentives. Germany provides tax exemptions for pure biodiesel.

11. Emissions Trading Policies

Policies to reduce power plant emissions, including NOx, SOx, and CO2, have the potential to affect renewable energy development. Many emissions-reduction policies create allowances for certain emissions (representing the right to emit a certain amount of that pollutant). Credits made available to renewable energy generators can offset these allowed emissions and can be sold by renewable energy producers at market value to other electricity generators who must comply with emissions limits.

12. Renewable Energy Targets

Several countries have adopted or are proposing national renewable energy targets. The European Union collectively has adopted a target of 22% of total electricity generation from renewables by 2010, with individual member states having individual targets above or below that amount. Japan has adopted a target of 3% of total primary energy by 2010. Recent legislative proposals in the United States would require 10% of electricity generation from renewables by 2020. China and India are the first developing countries to propose renewable energy targets. India has proposed that by 2012, 10% of annual additions to power generation would be from renewable energy; China has a similar goal of 5% by 2010. Other countries with existing or proposed targets are Australia, Brazil, Malaysia, and Thailand. In addition, a group of countries from around the world placed increased attention on renewable energy targets at the U.N. World Summit for Sustainable Development in 2002.