The Importance of 'Right' Renewable Energy Support Policies at the 'Right' Stage
The US Solar Energy Industries Association (SEIA) has recently released a report – prepared by the Brattle Group – on how Germany’s policies to support solar PV have made the country a world leader in deploying solar PV over the last decade. Most recent data from the Fraunhofer Institute for Solar Energy Systems (ISE) show that solar PV is still a fast growing market with PV installations having grown at a stunning compound annual growth rate (CAGR) of 44 per cent between the years 2000 and 2013.
Source: Fraunhofer ISE
The chart illustrates that at the end of 2013, Germany accounted for 27 per cent of the 134 gigawatt peak (GWp) globally installed cumulative PV capacity, which translates to about 36.2 GWp installed German solar PV capacity. This makes Germany by far the country with the largest installed solar PV capacity. The Fraunhofer Institute adds to these overall impressive numbers even though newly installed capacity registered a hit due to ‘policy adjustments’: “In 2013 newly installed capacity in Germany amounted to 3.3 GWp, which corresponds to half of that installed in 2012. In total, 1.4 million PV systems are installed in Germany. [Moreover], PV supplied about 5.3 % of Germany’s electricity demand in 2013 [with] 29.7 TWh electrical energy generated by PV.”
A SEIA report titled ‘Solar Energy Support in Germany: A Closer Look’ offers the answer – at least one answer – to how Germany ended up in the solar PV pole position – in short, ‘right’ renewable policies pursued by a government committed to transition to a low-carbon economy, thereby charting one successful pathway to “deep decarbonization”, an integral part of sustainable development pursuant to the definition outlined by the Deep Decarbonization Pathways Project (DDPP) – go to Breaking Energy coverage here – a global initiative for the United Nations.
The SEIA report lists several important and interesting lessons (see all here) that can be learned from the German experience. Perhaps the one lesson that needs to be highlighted is “that Germany’s solar PV support program has been instrumental in bringing down the cost of solar PV. Since 2007, average installation costs have fallen from close to €5 per Watt to between €1-2 per Watt. In that sense, earlier investments are paying off in terms of much lower installation costs today,” the report argues. Accordingly, this has led to a rapid surge in overall renewable energy production and – as the report elaborates further “the success of those programs [has also] led to penetration levels of renewable energy sources high enough to require modifications to both the renewable program itself and to overall electricity market design.” This statement is not incorrect per se. It only chooses to perceive the evolution positively, thereby omitting the following line of reasoning which happens to explain the same phenomenon:
“Feed-in tariff levels were administratively driven and slow to adapt to the evolution of the solar market, the incentive became excessively generous, which initiated an uncontrolled development of renewables, which, in turn, created unsustainable growth with a myriad of unintended consequences and lessons learned.”
This argument has been penned by the authors of another report on lessons from Germany’s subsidies experience titled “Development and Integration of Renewable Energy: Lessons Learned from Germany.” Check out Breaking Energy coverage here with an article by two of its authors, Felix ab Egg and Hans Poser. Nevertheless, while both arguments are certainly valid, any subsequent policy redesigns of the government support programs are actually of great benefit to every country trying to broadly replicate Germany’s success within their respective sui generis energy market structures. In this respect, the SEIA report highlights several important policy reforms that have been initiated over the years in order to respond to “unexpected growth in installations above expectations”:
“Previous reforms included a cap on aggregate solar PV capacity of 52 GW, after which support in excess of market revenues is supposed to end. (…) With annual installations exceeding 7 GW in several of the past few years [prior to 2013], the current reforms also introduce a narrower corridor of annually targeted solar PV additions between 2,500 MW and 3,500 MW and automatic and frequent adjustments to the [feed-in tariff] FIT downward, more strongly so if those target corridor levels are exceeded. Currently installed solar PV (…) has begun to have significant impacts on grid operations during periods of low demand and high generation from solar PV (…). The current reforms therefore also include a number of measures gradually moving solar PV and other renewables towards being more tightly integrated with electricity markets. Finally, the increasing levels of renewable power generation have put downward pressure on wholesale prices received by existing fossil generators, which highlight both shortcomings of existing market rules – in terms of adequately incentivizing those plants needed to ensure reliability of supply – and the need to further adjust market mechanisms to a system with a significant portion of intermittent power generation.”
The proper lesson to be learned here is that while a FIT system can be highly effective in accelerating the growth of all non-hydro renewables during a market introduction phase, FITs for new installations – the report stresses – “should be adjusted regularly and perhaps automatically in response to observed relative to targeted deployment levels so as to avoid undue increases of electricity rates for retail customers.” The report’s recommendation is straightforward in that ”[when] entering the market penetration phase of its renewables deployment, [to shift] from a primary goal of supporting the early technological development with an emphasis on affecting cost reductions through scaling and learning to a phase of developing complementary technologies and market mechanisms that make a future electricity system powered essentially by renewable technologies alone feasible.”
Interestingly, German legislators and regulators by doing so to a certain degree and reforming the existing EEG system helped “to avoid a complete crash of PV installations along what happened in Spain and Italy,” according to the report.
This final point brings us back to the headline of this article. Policymakers, regulators, and businesses in the energy realm across the world – in some countries more than in others – try to work together in order to create a new and better electricity distribution grid, which is both stable and secure while cleaner than today in terms of atmospheric pollution. And as a prerequisite to all that, the system must be able to incorporate increasing shares of variable renewable energy sources.
The REN21 chart below is a great compilation of what is going on around the world in terms of renewable energy support policies – distinguishing between regulatory policies and available fiscal incentives along with public financing. Given urgency and size of the climate challenge, the full range of policies and financial instruments to spur targeted investments will be required to increase renewables in the energy mix, reduce carbon emissions, and reach respective climate targets globally. Diverse country approaches will give the ones in charge ample opportunities to learn from what works and what does not, thereby improving the effectiveness of any replication effort.
Renewable Energy Support Policies
Source: Renewable Energy Policy Network for the 21st Century (REN21); also check out charts for upper-middle, lower-middle, and low income countries.
Finally, what needs to be clearly understood regarding the modification or correction of support policies due to a changing energy market environment is that such legislative and/or regulatory moves only increase uncertainty and augment the financial risk for stakeholders and potential investors – especially by adding in retroactive clauses.
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Roman Kilisek is a Global Energy & Natural Resources Analyst and a contributor at Breaking Energy. His writing and research focuses on global energy policy, energy infrastructure and trade, commodities, mining, global political risk and macroeconomics. He likes to draw on scenario development and analysis. He has a Master of Arts degree in international relations and diplomacy from Seton Hall ...
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