Factors Influencing the Likelihood of Regulatory Change in Renewable Electricity Markets

Paolo Agnolucci Policy Studies Institute 5 th BIIE Academic Conference St John’s College, Oxford 23 rd September

Background

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Survey and analysis of renewable electricity policies in four European countries

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Denmark (Renewable and Sustainable Energy Reviews, in press) England and Wales Germany (Energy Policy, in press) Netherlands

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Two wrapping-up papers

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Regulatory Risk Market Risk in Tradable Quota Systems and Feed-in Laws

Outline of the presentation

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Risk and Renewable Electricity

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Factors Influencing the Likelihood of Regulatory Change in Renewable Electricity Markets

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Empirical Evidence in NL (just mentioning D and DK)

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Conclusions

Risk in Renewable Markets (1)

• Technology risk: risk of development to large scale of any relatively new technology • Market risk: risk for a technology brought forward by a market-based instrument • Regulatory risk: risk due to the fact that markets are created by policy mechanisms subject to changes in policy priorities and governments • System risk: risk faced by disruptive technologies such as biomass, hydrogen and CHP Source: ICCEPT and E4Tech 2003: p116

Risks in long-term power purchase contracts

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Fuel price

risk: variability of the fuel price used to generate electricity •

Fuel supply

risk: supply of fuel to a power plant can be unreliable •

Demand

risk: electricity contracted might not be needed •

Performance

risk: generators not willing or able to deliver electricity according to contractually prescribed requirements •

Environmental compliance

risk, i.e. existing environmental regulations and uncertainty over possible future regulations •

Regulatory

renegotiation of a contract will alter the benefits or burdens of a contract to either party risk: risk that future laws, regulations, regulatory review or Wiser et al. 2004, Renewable and Sustainable Energy Review, p338

Risk in Renewable Markets (2)

• Price risk: uncertain price of the certificates but also of feed-in laws in some cases • Volume risk: uncertain quantity of certificates each generator can sell • Balancing risk: relates to demand = supply and market setting (NETA) Mitchell et al (in press), Energy Policy

Regulatory Risk: Preliminary Empirical Evidence

3000 2500 2500 2000 PTC expires 6/99 extended in 12/99 PTC expires 12/01 - extended in 2/02 1714 PTC expires 12/03 extended in 10/04 1689 1500 (*) 1000 575 500 0 1999 43 2000 2001 410 2002 2003 480 (*) 2004 2005

U.S. Wind Power Capacity Additions (1999-2005) in Megawatts (MW) (*) indicates industry estimates

Economics and Lobbying

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Financial sustainability and Economic Effectiveness

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(1) important when incentives are from central budget If (1) and (2) does not hold, policy is vulnerable, i.e. can be changed for all sorts of reasons

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Supporting coalition

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Level of commitment of the government

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Difficult to assess Who/what is the “government”?

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Size of coalition

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Increasing or decreasing the effectiveness of lobbying? Free riding or feedback effect?

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Variety of coalition :

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Different interests taken into accounts (only environment or is it a business/employment issue?) Different channels to the decision-makers

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Coherence of the Policy & Brussels Effect

Coherence of the Policy

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Fairness of treatment

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Policy does need to discriminate among electricity sources No need to discriminate between different generators (e.g. utilities and the rest)

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Relation between the RES policy and other policies

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Electricity market

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Planning system Environmental regulation Brussels Effect

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Popularity of feed-in/tradable obligation in some countries = f(Popularity of feed-in/tradable obligation in Brussels)

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Which direction?

Additional generating capacity in NL

300 250 200 150 100 50 0 Total Wind Difference filled by Waste Inc. and Biomass

Regulatory changes (1)

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until 1995: feed-in law 1995: REB and Production Subsidy

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Implied worse economic terms for wind

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Planning problems were overcome

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1998: voluntary target for 2000. Lack of coherence:

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Uncertain role of imports: target was on consumption not production

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Utilities could charge a levy to fund plants Verified by green labels - used also for REB, different definition of RES, etc.

Regulatory changes (2)

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2001: early opening of the green electricity market; introduction of green certificates

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Lack of coherence 1: due to increased REB exemption (fiscal reasons) green electricity boomed … Imported Brussels effect 1: preference for tradable quotas (international trading) Economic Effectiveness : 1.8 € ¢ per kWh paid to the German Dutch interconnector Brussels effect 2: changing opinion / additionality? National targets for RES?

Regulatory changes (3)

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2002: introduction of a feed-in law

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European Commission agreed that feed-in laws did not constitute a State aid (May 2002)

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Excluding imports Demand-side and tradable quota approach progressively loosing importance

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2004 Abolition of REB and related certificates

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In the meantime,

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One of the most promising industries (alongside DK) across Europe (early 90s)

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Lagging much behind (now) Weak coalition not able to avoid this stop-and-go behaviour

Additional generating capacity in Germany

MW

Additional generating capacity in Denmark for wind

700 600 500 400 300 200 100 7 22 33 32 82 67 80 70 45 33 41 87 0 223 287 314 328 646 140 329 229

Conclusions

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National industry cannot accommodate a stop-and-go behaviour

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National industry and/or technological progress are needed if you advocate differentiated “CO 2 taxation”

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Different stakeholders need to support RES development

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Utilities Local communities

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Uncertainty is expensive

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Finance guys will ask higher interests rate on loans Higher incentives (p/kWh) need to be paid to persuade generators to build plants

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