The Effectiveness of Policy Instruments in Facilitating the Implementation of Renewable Energy Systems

By John Wright, Wright Energy Consulting
August 2012

This post was prompted by some recent evaluations in Australia of the efficacy of various policy instruments targeted at the promotion of low emission technology implementation. The lessons learned from these evaluations may be useful to other countries and governments exploring and developing the most cost effective ways to achieve emission and renewable energy implementation goals.

Policy Instruments

Many countries have legislated a price on greenhouse (GHG) emissions in the form of a tax or emissions trading scheme (ETS) and this platform is generally accepted as a basic starting point of an emissions strategy. Australia has introduced a carbon tax that commenced on the 1st July this year. This tax will morph into an ETS in 2015. This is only one component of Australia's emissions reduction strategy, as it is considered that a carbon price on its own, will not deliver intermediate and long term emissions reduction goals. A set of complementary measures will also be required. The measures can be technology neutral or, technology specific, such as grants to promote solar or geothermal energy. Other examples of complementary policy measures include feed-in tariffs (FiT) and targeted financial instruments. These are designed to handle market failure, reduce technical and institutional barriers and first-mover financial risks.

How Effective are the Measures?

photo of women in field, from cover of  report: Learning the Hard Way: Australian Policies to Reduce Carbon Emissions

A recent analysis (Learning the Hard Way: Australia's Policies to Reduce Emissions) by the Grattan Institute in Australia found that "Market mechanisms, such as a carbon trading scheme, have delivered the greatest emission reduction and have met targets ahead of time". This includes tradable green certificates (TGCs). In Australia's case these are represented by the federal government's renewable energy target (RET) requiring retailers to source specific proportions of total electricity sales from renewable energy generation according to a fixed time frame (rising to 20% by 2020). Some states also have TGC schemes although these will be reconsidered in light of the commencement of a carbon tax. As mentioned in the Grattan report, the combined TGC schemes have delivered more than 40% of Australia's emissions reductions since 1997.

Feed-in tariffs and rebates have been used extensively in Australia to promote the public installation of roof top solar PV. They have been remarkably successful, at least in terms of completed installations. In fact so successful that the tariffs have had to be progressively reduced as the take-up rate exceeded the rebate budget. This has especially been the case in the last couple of years with the substantial drop in PV module prices. The situation reflects the current German and Spanish FiT revisions. The rebate and FiT schemes have substantially increased PV implementation, and now are making a significant impact on electricity supply (and peak prices). As PV module prices continue to fall it is likely that in the not too distant future, roof top PV power can be economically used without any subsidies at all.

The Grattan report commented that other complementary measures did not come off as well. For example, Australia has applied a wide range of competitive grants to assist the development of low emissions technologies. These involve governments (both federal and state) funding industry consortia to set up low emissions demonstration and/or commercial scale plants. The process used to select eligible applicants, and the eventual winners, is rigorous with a number of technical, financial and operational hurdles that have to be cleared. A panel of experts (with technical, financial and project management skills) are employed to assess the proposals and recommend those that should be funded to government. The best selection is made at the time of the decision. The process then revolves around contract negotiations between the winning consortia and government. However, the length of time taken to convert the grant into operating hardware presents some challenges. Many projects fail to deliver because of changed circumstances (such as the recent dramatic drop in PV module prices – the subject of a future blog), "over-optimistic" bids in the first place, and failure to obtain appropriate power purchase contracts. In the past decade, over $7 billion has been allocated to granting schemes (see Policy: The Drug of Choice for Renewable Energy) and only a small fraction has been allocated to viable projects. The Grattan report comments that those that have gone ahead have generally not supported wide spread technology take-up, and overall GHG reductions are correspondingly low. The recent analyses of the effectiveness of competitive granting systems by the Grattan Institute and the Australian National Audit Office have focused attention on these aspects and the experience will lead to improvements in future competitive granting processes.

As a variation to the current granting process, a reverse auction for 40MW of solar generation is currently being trialled in the Australian Capital Territory (ACT). This process involves applicants basing their bids on offered electricity prices to the grid with the lowest bids receiving favourable attention. The ACT joins a growing number of countries turning to reverse auctions as a means of meeting their renewable energy development goals. It remains to be seen how this process will work in the Australian context.

In many countries, financial instruments have been set in place as general policy support. The Australian government has recently announced the formation of a Clean Energy Finance Corporation (CEFC). The objective of the $10 billion Corporation is to "apply capital through a commercial filter to facilitate increased flows of finance into the clean energy sector thus preparing and positioning the Australian economy and industry for a cleaner energy future" (see the CEFC Expert Review "Report To Government"). It will do this by identifying financial market failures and financial barriers to the greater deployment of clean energy. While Australia has had some experience of using loans, loan guarantees, tax credits and other financial instruments, nothing of the size and influence of the CEFC has been attempted and its effectiveness will be watched with interest.

Most measures have been effective, some more so than others. We will necessarily go through a continuing policy evolution process to identify the best paths to achieve short, medium and long term clean energy objectives. To date, policy application has been mostly narrowly directed, targeting specific technologies and systems. This is changing, as in the fast-moving energy development world, it is increasingly obvious that renewable energy implementation cannot be done in isolation of the total energy system. Integration of new technologies and systems into the future energy landscape is playing a more dominant role in policy design to minimise chance of failure and/or less than optimum outcomes.