Towards a green economy
power markets. Such risks may be reduced with second generation, relative to first generation biofuels. Various government initiatives,
including policies, fiscal incentives and public financing
mechanisms, can reduce many of these risks and thus increase expected returns (Ecofys 2008). Such measures include offering long-term policy commitment to increased deployment of renewable energy investment, helping to mitigate political and regulatory risks. Shorter-term political commitment is similarly important. Owing to the long-lead times for project development, clarity over the development of regulation in support of renewable energy over a five-year horizon is desirable. Political and regulatory risks, as well as some country- specific risks, can also be reduced through government- sponsored initiatives to share risks, including through loan guarantees (discussed again under section 5.3) or public participation in the project or related infrastructure investments. Technical and project-specific risks can be addressed through action to improve permitting procedures, as well as grid connection procedures in the case of power generation projects. Well-designed measures to reduce the above risks have been estimated to decrease the production costs by as much as 30 per cent, in a European context (Ecofys 2008).
A range of further public support mechanisms can also enhance returns to investments in renewable energy, by either helping to lower costs or to enhance income. Measures to reduce costs include subsidies and fiscal measures, such as investment tax deduction, production tax deduction, and preferential depreciation schemes. Public finance mechanisms, such as loans, also lower risks to investors and this particular type of support is discussed in more detail in the next section.
Direct subsidies for renewable energy have been used to provide assistance in the early stages of market diffusion. In July 2009, for example, China initiated the Golden Sun Policy, which provides subsidies for 500 MW of PV projects until 2012 to temporarily support the domestic solar industry in response to reduced demand for PV panels in Germany and Spain. The policy supports large- scale PV, which complements the existing Solar Roofs Program that began in March 2009 (REN21 2010). Such subsidies can be in the form of investment support and grants to reduce capital costs, or in the form of operating support. Currently, they are estimated at US$ 27 billion in 2007 for renewables (excluding hydroelectricity) and US$ 20 billion for biofuels at the global level, clearly dwarfed by subsidies to fossil fuels.
Subsidies, however, need to be judiciously designed. Subsidies will most likely need to be adjusted over time in order to be efficient, and such changes are likely to be opposed by businesses or consumers who benefit
228 regulatory
from them. Such support also needs to take into account requirements of international agreements, in particular the rules and regulations of the WTO. Box 3 gives the example of Brazil, which used taxes on petrol to cross- subsidise ethanol from sugarcane.
Taxes can be an alternative fiscal measure to subsidies (or used in combination) in order to shape the structure of incentives facing producers and consumers in energy markets. A tax is one of the most efficient measures for addressing the externalities of carbon emissions in energy production and use. Given the pervasiveness of energy use and, thus, the broad tax base, it may be desirable on both efficiency and equity grounds to embed such tax measures in a broader fiscal reform package with a view to offsetting a carbon tax with reductions in other taxes, especially those which distort markets; this would produce a win-win for society as a whole.
Renewable energy producers, for example, may be granted exemptions from general energy taxes. Such measures are potentially most effective where overall energy taxes are high, such as in Nordic countries (IEA 2008e). The United States and Sweden, for example, provide a 30 per cent tax credit for solar PV, France offers a 50 per cent income tax credit, and Australia provides rebates up to AUS$ 8/watt (REN21 2010).
In addition to measures to reduce costs for renewable energy investments, governments employ a range of production support measures to enhance the income earned on such investments. These include obligation schemes, such as renewable portfolio standards for energy utilities mandated by government (discussed below under section 5.4) or feed-in tariffs.
Support mechanisms can elicit private investment in
renewable implemented in
energy, and while most support high-income countries,
is incentives
are becoming common place in developing countries. Currently 79 countries have at least some form of regulatory policy, such as a renewable quota, and 80 countries have at least one form of fiscal incentive in place (REN21 2011). Public finance and investment are being utilised, but at a slower rate than other mechanisms. In most support schemes the government must be actively involved to assure investment certainty.
Feed-in tariffs, much like preferential pricing, guarantee payment of a fixed amount per unit of electricity produced or a premium on top of market electricity prices. Feed-in schemes can be flexible and tailored; for example, tariffs can be based on technology- specific costs, possibly decreasing over time to follow actual cost reductions. This instrument is popular with project developers for the long-term certainty it can provide and,
thereby, a considerable reduction of
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