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Trading Carbon : November 2011
39 NORTH AMERICA There are 14 financial institutions that provide renewable energy tax equity in the US, and their supply is only about half of what is needed to fund renewables investment at 2009 levels. This means that new renewable projects will have greatly diminished capacity to realise the financial benefits of the tax credits unless new players enter the market that have significant tax appetite. Permanently making the tax credits refundable would avoid the need to involve institutions that would not otherwise be part of project development, such as investment banks. This would simplify the process and maximise the financial incentive provided for renewable development. Feed-in tariffs generally offer stable, long-term contracts -- usually from 15 to 20 years -- to renewable energy facility owners and require the utility to interconnect the plant to the grid. Because feed-in tariffs can be set at any level of price support, they are useful for technologies in the commercialisation and early deployment stages. At these stages technologies are proven technically and, thus, do not have significant performance risk. They do, however, have higher costs and/or development risks than alternatives and can be deployed faster with a well-structured feed-in tariff that covers their incremental cost. Renewable electricity standards (RES) are most effective for more mature technologies that are in early deployment. A RES creates demand for renewable electricity and allows the market to determine how to most efficiently supply it; thus the market sets the premium paid. RES mandates can allow for open competition among all technologies, or can be tailored with a carve-out to promote specific technologies. The carve-out option can be a good fit for technologies that are still in the commercialisation phase. The Renewable Auction Mechanism (RAM) is an energy procurement system being spearheaded by the state of California that has elements of a RES and a feed-in tariff. Similar to a RES, the RAM requires electricity suppliers to obtain a minimum percentage of their power from eligible renewable energy sources by a certain date. Under the RAM, periodic auctions are held during which potential projects may submit bids to supply renewable power, and selected projects receive compensation ($/MWh) equal to the actual bid price annually for the length of the contracts. This differential pricing aims to help prevent windfall profits. RESs and RAMs are most effective once a technology has progressed to a stage where its risks are better understood, or when it has reached the commercialisation stage or later. When the technology reaches late-stage deployment and is cost competitive without any incentives. The cost of the policy will fall to nearly zero. This feature makes them appealing for rapidly advancing technologies, as there is no financial risk incurred by leaving it in place too long. A favourable regulatory environment is also important. This is because it will ensure that renewable technologies do not face disadvantages due to unfavourable interconnection and net metering policies, complex utility tariff structures, disproportionate backup penalties and legal restrictions on some new business models designed to promote renewables. The financial and market-creation incentives described above will be less effective if there is an unfavourable regulatory environment governing the target market for a technology. Rapid deployment of renewable energy to meet our security, environmental and economic needs will require a portfolio of technologies and policy support. Designing policy support mechanisms to help push renewable energy technologies forward in the commercialisation cycle can yield faster uptake and more affordable technology. l *More details are in "Is the Fit Right? Considering Technological Maturity in Designing Renewable Energy Policy" which can be found at www.wri.org/publication/is-the-fit-right Jenna Goodward is an associate and Alex Perera is co-director of the business engagement in climate and technology team at the World Resources Institute in Washington, DC Email: JGoodward@wri.org November 2011 Demonstration Demonstrations produce data that define viable technical applications and potential markets. Size moves from partial- to full-scale engineering and designs move from subsystem components to the whole system. Commercialisation Projects are installed at commercial scale and for a customer in their intended market. First-of-a-kind deployments in a commercial setting, although costs are often high. The technology risk factors are understood, but not always able to be mitigated or guaranteed. Deployment Capacity addition is no longer constrained by technology uncertainty, since data from in situ commercial demonstrations define technical performance. Early: first movers in niche markets adopt technology; cost still not widely competitive. Widespread: Technology penetrates all major markets and is cost competitive without incentives. Research & development Basic: Research on fundamental science that relates to energy technologies and processes. Applied: Applying new scientific findings to technological applications to establish engineering feasibility. May include proof- of-concept, prototype and pilot-scale testing at small scales and/or of sub-system components. The learning curve and the technology innovation chain Cumulative production (Megawatts) Cost ($/MW)
December - January 2011