Last month, I blogged about the Special Report on Renewable Energy Sources and Climate Change Mitigation of the Intergovernmental Panel on Climate Change (IPCC), for which I was a coordinating lead author. In that report we found that by 2050, roughly 80 percent of global energy demand could be met by tapping renewable sources. The IPCC’s best-case prediction is contingent on a big caveat, however. It is that government policies must “play a crucial role in accelerating the deployment of Renewable Energy (RE) technologies.”
Fair enough, but which policies work best? Which can be replicated widely? Which sectors need more radical new approaches? Given the complexity of energy technologies, and markets, modes of power generation, transmission, distribution, consumption, metering and billing, and the multiplicity of policies—feed-in tariffs, subsidies, ‘feebates’, renewable portfolio standards, and so on— policy makers are often scrambling for guidance.
As author for the Policy and Deployment chapter of the IPCC report, as well as a member of the Summary for Policymakers’ team, I am pleased to suggest a useful source: a recent Discussion Paper No. 22 produced by my World Bank colleague Gabriela Elizondo Azuela, along with Luiz Augusto Barroso, Design and Performance of Policy Instruments to Promote the Development of Renewable Energy: Emerging Experience in Selected Developing Countries.
Elizondo and Barroso studied grid-connected RE policy options used in six countries—Brazil, India, Indonesia, Nicaragua, Sir Lanka and Turkey. They find that sound governance is an essential condition for the success of policy incentives that aim to accelerate the integration of renewable energy. “For example,” Elizondo says, “legal and regulatory frameworks for grid connection and integration have to be in place before RE policy is introduced.” In the IPCC report we called this the ‘enabling environment’.
Not surprisingly, middle-income countries are leaders and early adopters among the 31 developing countries that have introduced some type of price- or quantity-setting instrument to promote renewable energy development. The most common price-setting instrument is a feed-in tariff, which reduces the cost of developing RE by establishing favorable pricing regimes for RE relative to non-renewable sources of energy. Of the 31 early adopters, 26 are using feed-in tariffs.
With quantity-setting mechanisms—the most common of which is the renewable portfolio standard (RPS), and energy suppliers’ auctions—the government sets a target, and lets the market determine the price. An RPS is a quota-based policy in which the government requires electricity suppliers to draw a given proportion of their electricity from renewable sources. These RPS goals are usually phased-in and, over time, they create market demand for RE, to which suppliers respond, developing new, competitive sources of renewable energy. These are far less widespread among developing, emerging and transition countries, with only five of the 31 cited above using them, namely Brazil, Chile, China, Poland and Romania.
Brazil, China and India accounted for 37 percent of global clean energy investment in 2009. These three countries all have or had a combination of feed-in tariffs, auctions and RPS policies, among others, and have had them for several years. They have also been good at delivering predictable governance, with national energy strategies and plans, and a regulatory framework, and the capacity to implement them. The challenge is to transfer the lessons of this policy experience to low-income countries. These lessons, according to Elizondo and Barroso, highlight the following:
- Tailor-made approaches are essential: There is no one size-fits-all. The choice of policies and regulations should be tailored to the conditions of a country’s energy system, the type of market, supply/demand volume, nature of risks, and its institutional and administrative capacity.
- Policy sequencing is key: For example, legal and regulatory frameworks on resource and land use, and allocation of permits/rights should be in place beforeRE incentives such as feed-in tariffs or RPS are introduced.
- Policy interaction and compatibility: Making sure that policies and incentives are consistent and aligned is important.
- Regulatory design is a dynamic process: Feed-in tariff policies have had to be adjusted continuously. The challenge has been to offer just enough incentive to attract the private investment, but not so much that rent-seekers are attracted.
A critical final lesson is that synergies between renewable energy and energy efficiency are vital. The cheapest (financially and environmentally) energy is that which is not needed, so maximizing the co-planning, co-financing, and co-assessment of benefits of efficiency and clean energy programs and policies are critical to this process.