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Trading Carbon : November 2011
38 NORTH AMERICA renewables industries can consider how these policy levers would apply to technologies in their area. Grants can be used to fund technologies in the earliest stages -- R&D and early-stage demonstration. The R&D stage involves uncertainty as to whether the concept will ever lead to a viable technology application. To overcome this uncertainty, grants provide an important cost share for investment to research and develop the technology further. Grants can also be helpful in the demonstration stage, by giving commercial investors the ability to pilot and evaluate a new technology with appropriate due diligence. Grants can be provided to universities, national laboratories or private entities to help drive high-risk investments that would not otherwise happen. Analysis in the Energy Policy journal in 2007 by Daniel Kammen and Gregory Nemet shows that in the US, the decline in R&D funding since 1980 has been accompanied by a decrease in the number of energy patents granted. They recommend that annual federal research and development spending should be increased five- to 10-fold above 2005 levels. Loan guarantee programmes are well suited for technologies in the commercialisation and early deployment stages. In these stages, renewable energy technologies are often perceived as risky by investors and lenders because of technology performance risk. Start-up companies do not have strong balance sheets against which they can offer guarantees, which typically results in a premium on loans for a given renewable project. Government agencies with good credit can help reduce this risk premium by offering a loan guarantee. This reduces the repayment risk borne by the bank, thus allowing the bank to provide financing to allow the project to move forward. Loan guarantees will be most effective if the application process is straightforward, timely and transparent. The programme should also incorporate regular outreach to potential applicants, as new companies are regularly entering the market and may not be aware of these opportunities. Tax credits can help advance technologies in the later stages of innovation, namely commercialisation and early deployment. Tax credits reduce the price a project must charge customers in order to remunerate investors by providing an additional revenue stream. To take advantage of tax credits, energy developers usually partner other investors that have sufficient tax liability to use the credits. These "tax equity" investors have typically been large investment banks. November 2011 www.pointcarbon.com IsThe FitRight? JENNA GOODWARD AND ALEX PERERA EXAMINE THE BEST POLICY REQUIREMENTS FOR PROMOTION OF RENEWABLE ENERGY IN THE US Renewable energy deployment has driven reductions in US greenhouse gas (GHG) emissions. This impact will grow thanks to policies at the state and federal level, even in the absence of climate action by Congress. While renewables alone will not overcome Congress' lack of action, properly crafted renewable energy policies can help speed technologies through their learning curve and drive their costs down. The effectiveness of policy deployment determines the pace of improvement more than the amount of money spent. Policies are most effective when they are properly targeted to the stage of technological development. Technologies face different types of barriers as they mature, starting from basic to applied research and development (R&D), then on to demonstration, and further through commercialisation and deployment (see figure). The framework presented here considers policies based on technology maturity -- smart policy can help a technology overcome those barriers and progress along its "learning curve". Costs fall, thanks to technical innovation, improved business practices and larger-scale production. In the R&D stages, new scientific research eventually leads to a physical proof of concept or prototype, at a fraction of the eventual intended scale of the technology. This is high risk research. At this point, the eventual market applications are unclear, so the main barrier is a lack of capital willing to invest at this pre-venture capital stage. Demonstration projects can range from partial- to full- scale engineered prototypes that help identify potential markets. Here, again, financing is the main non-technical barrier, although less so than in R&D. Technologies are first sold to customers in the commercialisation phase, but its cost is still relatively high and guarantees of standard performance are typically not available. Financing can be sourced, but its costs reflect this higher risk of the uncertain performance. The toolbox of policies is broad and deep, but we selected seven to study and recommend when they can be most useful to spur technology progress. Those looking to support local The effectiveness of policy determines the pace of improvement not money spent
December - January 2011