by Virginie Schwarz for the United Nations Development Program, Bureau for Development Policy, Energy and Environment Group Under the Supervision of Marcel Alers.
Although wind energy is a rapidly growing technology its use remains geographically concentrated, with more than 75 percent of global installed capacity found in just five countries. These countries and others wishing to develop wind energy have implemented various supportive policies covering areas as diverse as tariffs, technical R&D, administrative procedures, or education and communication, and range from direct project subsidies to general awareness raising.
Experience shows that good wind resources are not on their own sufficient to ensure strong wind energy development and reductions of the cost of wind energy. Even fair pricing is not necessarily enough. Only countries that have set up an adequate enabling environment and long-term stable comprehensive public policies, with strong political commitment, have succeeded in developing wind power. Their policies have been focused, not only on reducing costs and improving revenues to increase profitability, but also on reducing risks.
Policies giving market access to wind energy are the most critical. Feed-In laws – the main instrument used in Europe to promote wind energy – have the advantage of giving developers long-term stability and predictability and have helped create three of the world’s largest wind energy producers. In the European context, they have been more cost-effective than Quotas. However, apart from Canada, large industrial countries in the rest of the world (USA, Japan, and Australia) have chosen Quota-based instruments, combined with subsidies or tax credits. Some of these Quota-based systems have been effective in giving rise to new wind capacities but only when carefully designed, and in countries using them, it has not been proven that Quotas effectively provide the lower costs that theory credits them for. China and India have, like Canada, in theory chosen to mix Feed-In tariffs and Quotas, even if, in practice, the Chinese
Feed-In pricing system will actually be based on tendering results. Tender-driven policies have major drawbacks and until now, there has been no successful experience of tendering as the sole instrument of a nationwide ambitious wind dissemination policy. The same conclusion can be reached for voluntary policies, such as green pricing.
Whatever policies are chosen, in most countries the development of wind energy will require specific financing, generally through public subsidies and/or an increase in electricity prices, however small. In almost all countries, policies such as Feed-In laws and Quotas are combined with tax credits, subsidies or soft loans. The necessary public or private money is not always available, especially in developing countries. Available funding should be first allocated to creating an adequate general environment for wind projects, removing barriers, and activities of this kind. The Clean Development Mechanism (CDM) can potentially bring additional revenues to specific wind energy projects.
Wind energy projects will generally be able to comply with the CDM eligibility rules.
CDM and Joint Implementation (JI) can be useful by financing projects in a country for the first few years and help them reach a volume where national competence can develop. As more and more projects are developed, local skills in designing, planning, maintaining and operating wind farms will increase, paving the way for private investor-based projects. In small countries, the financing of these projects can rely mainly on CDM. However, because of the administrative burden linked with the international assessment of individual projects, it is doubtful that CDM or JI could by themselves be the basis for long-term wind energy development in large countries.
CDM often needs to be combined with other policies designed to bring additional revenues and remove non-economic barriers. Feed-In laws are the easiest of the market access policies to combine with CDM revenues. Such a combination would be most adequate for medium to large-sized projects in countries with medium wind energy potential.
Policies on permitting and licensing and grid issues are also critical. To meet wind energy penetration targets in a cost-effective way, it is necessary to create a process that will facilitate increased generation in a timely and simple manner. If obtaining all the necessary permits and licenses is a complex, costly and uncertain process, investors can be deterred and project profitability jeopardized. Grid access is of course critical to wind energy development, but even when regulations giving grid access to wind farms are in place, many critical issues related to grids can remain – including connection delays and charges, transmission charges and grid stability and ancillary services. Electric grids in most countries were designed to bring electricity from large production centers to urban areas. They were not made for distributed generation.
Both issues – permitting/licensing and grid issues – have been among the focuses of European policy in the past few years and are beginning to be considered in China and India.
Many countries have also implemented policies on national industry promotion, wind resource assessments, technology development, standards and testing, education and awareness-raising because they reduce risks and bring solidity and confidence to a business plan. This is even more important in countries that are seen in themselves as risky for investors, whatever the type of investment.
Setting up an effective and comprehensive wind energy policy requires dealing with a large number of various, often complex, issues. However, much experience has been gained in developed countries, and more recently in some developing countries such as China or India. This should help make things easier, and also faster, for countries wishing to promote wind energy.
To help governments transform the markets for wind energy by implementing enabling policies, the GEF has financed, or is considering financing, 14 projects through UNDP, of which only one has been completed. These projects are generally located in countries with good wind resources and some experience with liberalization/ privatization. Electricity prices are very diverse in the different countries.
In order to remove barriers to the development of wind energy, the design of the projects integrates some of the lessons learned from existing successful wind policies. These include the necessity of reviewing the regulatory environment to offer developers clear and expeditious procedures, the importance of giving developers access to data on wind resources and the need to increase awareness of public authorities, companies and the public through education and training programmes.
Demonstration sites are included in all projects but efforts towards enhancing the replicability of these demonstrations need to be continued. The most recent projects increasingly emphasize the need to have defined, stable, business models and financing schemes with guaranteed market access at the end of the project rather than concentrating essentially on financing the demonstration plant. This should be generalized. Education or wind assessment policies, however important, will not lead to effective wind farms if there is no profitable economic model for developers. The importance of grid-related issues seems generally underestimated.
For future projects, some guidelines can be offered.
Concentrating projects in countries where they stand the best chances of success because of the country’s wind energy policies can help maximize the effectiveness of the money available. Wind energy generally has better chances of being successfully developed in countries with the following characteristics:
- A real commitment by policy-makers to develop wind energy;
- A legitimate public authority to set rules and obligations and enforce them in a way that will appear credible to investors;
- Some privatization/liberalization of the electricity market and some experience with Independent Power Production;
- A grid that has enough capacity and technical stability to accept large amounts of wind energy without jeopardizing its security;
- High electricity prices compared to which wind energy will be more easily competitive; and
- A large enough commercial wind energy potential. One strategy for UNDP could be to start working systematically on countries that have successfully participated in the Solar and Wind Energy Assessment Programme (SWERA).
In order to be successful in each country, wind energy policies should :
- Be long term and consistent;
- Include legally binding targets or obligations;
- Offer wind energy producers standardized long-term contracts with secure payment mechanisms and an acceptable rate of return;
- Provide fair and open grid access and development;
- Provide good governance and appropriate streamlined procedures; and
- Create strong public acceptance and support.
The Conference on Grid-Connected Renewable, hosted by the World Bank in Mexico in February 2006, highlighted the fact that many developing countries are still searching for the most appropriate mix of regulation, market incentives and tendering process to attract private wind energy developers without requiring unacceptable subsidies from ratepayers or the public treasury. The different types of policies can be more or less adequate depending on local circumstances.
All policies should be designed in a way that makes them easy to understand and to use for wind energy developers. They should be kept as simple and stable as possible. Geographic distribution of projects is also an issue that needs to be given consideration, whatever the type of policy.
For each type of policy some key issues require special attention.
Feed-In Laws
The key elements of a successful Feed-In law are:
- A stable policy applicable over a long period of time;
- A long-term contract allowing for guaranteed prices until developers have recouped their costs;
- A reasonable rate of return;
- Enough flexibility to capture effective cost reductions; and
- A cost-recovery mechanism for monopoly utilities and a cost-sharing system for utilities in competitive markets.
The key elements of a successful Quota system are:
- A long-term obligation (at least 10 years or even 15 years) with strong enforcement;
- Realistic target levels (that can be reached at reasonable cost but significantly exceed existing capacities);
- A level of penalty at, or above, compliance costs;
- A regulator to monitor the system;
- Long-term power purchase contracts; and
- Clear rules and limitations regarding eligibility (existing/new plants) and compliance flexibility (banking/borrowing).
The key elements of a successful tendering policy are:
- Long-term objectives and planning of tenders made public with regular rounds;
- Sufficiently large tenders to achieve economies of scale;
- High penalties for plants not built and:
- Choice of projects, based not only on price, but also technical and financial capacity to avoid committing resources to projects that will not materialize.
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