Summary of Renewable Energy Financial Incentive Best Practices

Capital Subsidies, Grants, and Rebates

Capital subsidies, grants, and rebates reduce the installed cost of a renewable energy project. Capital subsidies and grants are often paid in lump sum payments, while rebates are frequently determined on a $/kW basis.

Capital Subsidies and Rebates

  • For renewable energy rebates to be effective, other supporting policies, such as net metering and interconnection for example, need to be in place. (Kubert & Sinclair 2011)
  • Consistency and duration improve the use of the incentive by avoiding confusion in the market and building awareness of the rebate. (Kubert & Sinclair 2011)
  • Rebates ideally should reflect existing market trends, cost of alternative technologies, and program goals (e.g., intended size of market). (Ellingson et al. 2010)
  • Rebates set at the appropriate level incentivize market up-take while avoiding windfall profits to system owners. (Kubert & Sinclair 2011).
  • Incentive levels should be differentiated for residential, commercial, and public sectors. (Ellingson et al. 2010).
  • Declining incentive blocks contain program costs by reducing incentive amounts as target capacity levels are reached, reflecting increased economies of scale as markets mature. (Kubert & Sinclair 2011)
  • Rebates are most effective when used for market-ready technologies with capacity for cost reductions. (Ellingson et al. 2010)
  • Complementary programs include tax incentives and feed-in tariffs. (Lantz et al. 2009)

Grants

  • Grants based on project needs ensure that sufficient funds are provided without over subsidizing the project; other incentives received by applicants should be considered when determining funding needs for a given project. (Kubert & Sinclair 2011)
  • Ongoing project technical and financial assistance increases the likelihood of the project being completed on time and successfully. (Kubert & Sinclair 2011)
  • Focused Requests for Proposals (RFPs) for grant applications enable programs to select projects that fit program goals. (Kubert & Sinclair 2011)
  • Clear and sufficient applications enable potential program participants to fill out applications correctly and to provide sufficient information, thereby allowing project evaluators to consistently and effectively review applications. (Kubert & Sinclair 2011)
  • Milestone-based payments encourage timely progress for the project by releasing funds once certain project implementation steps are met. Programs can also require milestone deposits that are released as the project reaches certain implementation steps. (Kubert & Sinclair 2011)

Credit Enhancements

Credit enhancements improve a borrower’s ability to take on debt, often at the project level. Governments provide credit enhancements by taking on some of the risk of borrower non-repayment. Loan guarantees are a form of credit enhancement and provide government-ensured repayment of a portion (or possibly all) of the debt in the event of borrower default. And although not directly a credit enhancement, governments have also provided interest rate buy-downs to improve a borrower’s ability to take out a loan. An interest rate buy-down is often in basis points (e.g., 200 basis points or 2%).

Loan Guarantees

  • Design of guarantees require careful attention (Mostert 2010)
  • Guarantees should be based on market studies to determine market needs and the cost-effectiveness of the program (Mostert 2010)
  • The level of the risk associated with the guarantee should be reflected in the credit subsidy fee charged by the government (Mostert 2010)

Interest rate buy-downs

  • Creating a broad network of lenders can expand awareness and use of an interest rate buy-down program. (Kubert & Sinclair 2011)
  • To encourage program uptake, the interest rate buy-down needs to make the net interest rate competitive with local market rates. (Kubert & Sinclair 2011)
  • Lump-sum payments to participating lenders rather than interest payments reduces the administrative burden for the program. (Kubert & Sinclair 2011)

Levelized Electricity Pricing

Levelized electricity pricing reduces subsidies for fuels high in emissions and other forms of waste, such as oil and natural gas, thereby improving the comparative economic position of renewable energy technologies.

Performance-Based Incentives

Performance-based incentives can be used to encourage efficiently sited projects as developers/investors will seek to locate projects in areas with the highest resources to maximize the overall incentive received. Feed-in tariffs or FITs are a form of production-based incentive.

  • Performance based incentives may be most appropriate for large-scale installations as projects of that size may not need up-front capital as much as smaller projects because large-scale projects often can obtain financing more readily. (Kubert & Sinclair 2011)
  • Incentive levels determined based on customer class best reflect differences in costs and access to incentives (Kubert & Sinclair 2011)
  • Long-term payments encourage long-term system performance (but also increase the administrative burden). (Kubert & Sinclair 2011)

Feed-in Tariffs

  • Long-term security of payments is more important than the economic level of the incentive (Olz et al. 2008).
  • Feed-in tariffs without cost reduction mechanisms can jump-start initial project deployment but are not economically sustainable over the long term (Olz et al. 2008).

Public Investment and Financing

Renewable energy companies often have difficulty gaining access to financing, and to address this barrier, governments have provided loans to renewable energy project developers and manufacturers. Often, these loans are "soft” loans consisting of any combination of below-market interest rates, longer loan tenors than those available from private banks, and interest payment holidays. In the U.S., several states and local governments have used revolving loan funds, which are intended to be self-sustaining with loan repayments recapitalizing the available funding. Governments have also made investments in research and development and facilities such as technology incubators in efforts to catalyze renewable energy deployment.

Investment

  • Technology research investment typically requires a long-term support commitment (e.g., 10 years). (U.S. EPA)

Financing

  • Programs that target borrowers unable to access financing at reasonable rates optimally leverage funds while avoiding competition with private loan markets. (Kubert & Sinclair 2011)
  • Longer amortization schedules enable payments to match cash flows from energy sold. (Kubert & Sinclair 2011)
  • Low interest rates attract participation to the program (Kubert & Sinclair 2011)
  • Low application burden reduces time and money spent on paperwork and fees. (Kubert & Sinclair 2011)
  • Partnering with lending organizations reduces administrative burdens. (Kubert & Sinclair 2011)

Public/System Benefit Funds

Public/system benefit funds are collected through a variety of means, including $/kWh charges on electric and gas utility bills, flat charges on bills, and environmental and other fees from energy companies. Funds can be redistributed to support clean energy programs and incentives.

  • Solicit stakeholders’ input throughout the planning process (Ellingson et al. 2010)
  • Determine goals for the fund before establishing programs and incentives to ensure that objectives are met. (Ellingson et al. 2010)
  • Set measureable targets such as MW installed and monitor progress. (Ellingson et al 2010).
  • Keep funding sources consistent, allow annual excess funds to carry over, and maintain funds for the programs. Appropriate legislative language and public acknowledgement of the benefits of the fund may help to prevent reallocation or a reduction in funds. (Ellingson et al. 2010)
  • Fund allocations, uses, and eligible technologies should be transparent to state officials, policymakers, and the public (REN21 2009).
  • Renewable portfolio standards, energy efficiency standards, tax credits, and loan programs are complementary to public/system benefit funds (Kubert & Sinclair 2011).

Tax Incentives and Credits

Governments can provide tax incentives to renewable energy projects by one of two ways. First, governments can reduce the liability of a particular tax via a deduction that allows a portion of the expense of a particular investment to be subtracted from a taxpayers’ adjusted gross income. Second, governments can provide tax credits, refundable tax credits, and cash grants that either allow the taxpayer to subtract a certain portion of the cost from the amount of taxes owed on a dollar-for-dollar basis or provide a refund if the credit exceeds the amount of gross tax owed. Main types of tax incentives used include: corporate tax incentives, personal tax incentives, property tax incentives, and sales or value-added incentives.

  • Design tax incentives to target certain markets, ownership types, etc., reflective of program goals. (Lantz & Doris 2009)
  • Establish an incentive with terms that reflect program goals. For example, if long-term market development is sought, create a policy that will be in place for 5 to 10 years. (Lantz & Doris 2009)
  • Determine what level of tax incentive is needed to meet program goals (i.e., what level of incentive would result in how much market uptake, potentially?). (Lantz & Doris 2009)
  • Creating options such as tax pass-throughs and refundable credits for entities without a tax liability (e.g., local governments) expands the pool of possible participants. (Lantz & Doris 2009)
  • Tax incentives can be paired with a variety of other policies and incentives, including renewable energy mandates/tradable certificates and rebates.
  • Consider interactions between tax incentives and other incentives/policies. (Lantz & Doris 2009)

Tradable Certificates

Tradable certificates have been used as a compliance mechanism for a variety of policies including Renewable Portfolio Standards (RPS) (also known as renewable energy mandates), renewable energy targets, and greenhouse emissions mitigation schemes such as cap and trade and carbon tax policies. Tradable certificates are also used in voluntary markets and are purchased by companies and organizations to reduce carbon footprints and support renewable energy markets.

  • Tradable certificates alone may not be an effective policy if high non-economic barriers exist. (Olz et al. 2008)
  • Investors may perceive higher risk with tradable certificate programs compared to other types of incentives where the support level is known (e.g., feed-in tariffs) and because of the typically shorter support periods. (Olz et al. 2008)
  • Under an RPS, declining price caps for the certificates can be included as a means to reduce long-term incentive levels. (Olz et al. 2008)
  • Tradable certificates reflect the attributes of the generating facility at the time the power is generated. The location, time of generation, type of technology and fuel are a few characteristics that should be catalogued with the certificates. (Hamrin and Wingate 2003)
  • Tradable renewable certificates may sold and bought unbundled from the electricity as well as bundled with the electricity (Hamrin & Wingate 2003).
  • Only one entity can claim ownership of the tradable renewable certificates at a given time (Hamrin & Wingate 2003).
  • Tradable renewable energy certificates belong to the owner of the generating system unless the certificates are transferred to another party via a contract, sale, loan, or the certificates can be retired permanently. (Hamrin & Wingate 2003)
  • Tradable renewable energy certificates are created as power is generated whether a certificate is officially issued or not. (Hamrin & Wingate 2003)

References

  • Ellingson, Maria; Hunter, Lesley; Lung, Robert Bruce; Carey, Kym; Plunkett, Eric; (April 2010). Compendium of U.S. Policy Best Practices. .
  • Environmental Protection Agency. EPA Clean Energy-Environment Guide to Action
  • Hamrin, Jan; Wingate, Meredith. (June 2003). Regulator’s Handbook on Tradable Renewable Certificates. Center for Resource Solutions. (PDF)
  • Kubert, Charlie; Sinclair, Mark (expected 2011). State Support for Clean Energy Deployment: Lessons Learned for Potential Future Policy. National Renewable Energy Laboratory Subcontract report. Will be available at: NREL publications database
  • Lantz, Eric; Doris, Elizabeth (2009). State Clean Energy Policies Analysis (SCEPA): State Tax Incentives. National Renewable Energy Laboratory. (PDF
  • Olz, Samantha; Fankl, Paolo; Sims, Ralph; Chandles, Hugo; Schomer, Steffen (2008). Deploying Renewables: Principles for Effective Policies. International Energy Agency. (PDF)
  • U.S. Environmental Protection Agency. Clean Energy-Environment Guide to Action