Factors Influencing the Likelihood of Regulatory Change in Renewable Electricity Markets

1. Factors Influencing the Likelihood of Regulatory Change in Renewable Electricity Markets Paolo Agnolucci Policy Studies Institute 5th BIIE Academic Conference St John’s College, Oxford 23rd September

2. Background • Survey and analysis of renewable electricity policies in four European countries • Denmark (Renewable and Sustainable Energy Reviews, in press) • England and Wales • Germany (EnergyPolicy, in press) • Netherlands • Two wrapping-up papers • Regulatory Risk • Market Risk in Tradable Quota Systems and Feed-in Laws

3. Outline of the presentation • Risk and Renewable Electricity • Factors Influencing the Likelihood of Regulatory Change in Renewable Electricity Markets • Empirical Evidence in NL (just mentioning D and DK) • Conclusions

4. 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

5. Risks in long-term power purchase contracts • Fuelprice risk: variability of the fuel price used to generate electricity • Fuelsupply 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 • Environmentalcompliance risk, i.e. existing environmental regulations and uncertainty over possible future regulations • Regulatory risk: risk that future laws, regulations, regulatory review or renegotiation of a contract will alter the benefits or burdens of a contract to either party Wiser et al. 2004, Renewable and Sustainable Energy Review, p338

6. 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

7. Regulatory Risk: Preliminary Empirical Evidence PTC expires 6/99 - extended in 12/99 PTC expires 12/03 - extended in 10/04 PTC expires 12/01 - extended in 2/02 (*) (*) U.S. Wind Power Capacity Additions (1999-2005) in Megawatts (MW) (*) indicates industry estimates

8. Economics and Lobbying • Financial sustainability and Economic Effectiveness • (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 • Supporting coalition • Level of commitment of the government • Difficult to assess • Who/what is the “government”? • Size of coalition • Increasing or decreasing the effectiveness of lobbying? Free-riding or feedback effect? • Variety of coalition : • Different interests taken into accounts (only environment or is it a business/employment issue?) • Different channels to the decision-makers

9. Coherence of the Policy & Brussels Effect • Coherence of the Policy • Fairness of treatment • Policy does need to discriminate among electricity sources • No need to discriminate between different generators (e.g. utilities and the rest) • Relation between the RES policy and other policies • Electricity market • Planning system • Environmental regulation • Brussels Effect • Popularity of feed-in/tradable obligation in some countries = f(Popularity of feed-in/tradable obligation in Brussels) • Which direction?

10. Additional generating capacity in NL Difference filled by Waste Inc. and Biomass

11. Regulatory changes (1) • until 1995: feed-in law • 1995: REB and Production Subsidy • Implied worse economic terms for wind • Planning problems were overcome • 1998: voluntary target for 2000. Lack of coherence: • Uncertain role of imports: target was on consumption not production • Utilities could charge a levy to fund plants • Verified by green labels - used also for REB, different definition of RES, etc.

12. Regulatory changes (2) • 2001: early opening of the green electricity market; introduction of green certificates • 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?

13. Regulatory changes (3) • 2002: introduction of a feed-in law • European Commission agreed that feed-in laws did not constitute a State aid (May 2002) • Excluding imports • Demand-side and tradable quota approach progressively loosing importance • 2004 Abolition of REB and related certificates • In the meantime, • One of the most promising industries (alongside DK) across Europe (early 90s) • Lagging much behind (now) • Weak coalition not able to avoid this stop-and-go behaviour

14. Additional generating capacity in Germany MW

15. Additional generating capacity in Denmark for wind

16. Conclusions • National industry cannot accommodate a stop-and-go behaviour • National industry and/or technological progress are needed if you advocate differentiated “CO2 taxation” • Different stakeholders need to support RES development • Utilities • Local communities • Uncertainty is expensive • Finance guys will ask higher interests rate on loans • Higher incentives (p/kWh) need to be paid to persuade generators to build plants