market risk (IEA 2008e). To achieve the required returns, incentive mechanisms such as feed-in tariffs need to be guaranteed for 15-20 years, though the level of support can be expected to decrease.
By early 2011, feed-in tariffs had been implemented in more than 61 countries and 26 states/provinces, more than half of which have been enacted since 2005 (REN21 2011). Developing countries are increasingly employing feed-in tariffs, including 13 lower middle-income countries and three lower-income countries, as of early 2011. Ecuador, for example, adopted a new system of feed-in tariffs in early 2011, building on an earlier policy dating from 2005 (REN21 2011). Kenya introduced a feed-in tariff on electricity from wind, biomass and small- hydro power in 2008 and extended the policy in 2010 to include geothermal, biogas and solar-generated electricity (AFREPREN/FWD 2009).
As with any kind of positive support, the design of feed-in tariffs is crucial for their success. Important issues include tariff levels, graduated tariff decreases over time, time periods for support, the formula for cost-sharing among different groups of consumers, minimum or maximum capacity limits, payment for net versus gross generation, limitations based on type of ownership and differential treatment of technology sub-classes. For example, rates for solar PV feed-in tariffs have recently been (or are in the process of being) revised in various countries in reaction to price reductions of PV panels, and thus the declining cost of installations (REN21 2010, 2011).
Apart from feed-in tariffs, which are basically financed by cross subsidies among electricity users, the feebate has
Box 3: Brazilian ethanol
The Brazilian Alcohol Program (Proalcool) was established in 1975 for the purpose of reducing oil imports by producing ethanol from sugarcane. Incentives aimed at both production and consumption of ethanol, including vehicle technology advancement through flexible fuel engine development, made petroleum substitutes competitive on the Brazilian energy market (United Nations 2011). The ethanol costs declined along a “learning curve” as production increased at an average rate of 6 per cent per year, from 0.9 billion gallons in 1980 to 3 billion gallons in 1990 and to over 15 billion gallons by 2005 (IEA 2006). The unlevelised cost of ethanol in 1980 was approximately three times the cost of petrol, but cross-subsidies paid for the price difference at the pump. The subsidies came mostly from taxes on petrol and were thus paid by vehicle drivers. The democratization of Brazil
provided an increasingly deregulated ethanol market, culminating in the termination of Proalcool and the removal of all remaining ethanol subsidies in 1999. Cumulative subsidies to ethanol are estimated to have amounted to about US$ 50 billion over the 20- year period ending in 1995, but were more than offset by a cumulative reduction of petroleum imports amounting to US$ 100 billion by the end of 2006 (IEA 2006). As of 2006, Brazil accounted for over 50 per cent of the world’s ethanol exports (IEA 2006). Other measures, such as the requirement that vehicle manufacturers provide so-called flex fuel vehicles that could operate on either ethanol or petrol, also supported the market for biofuels. These were introduced in 2003 to accommodate higher and fluctuating prices for sugar which had reduced the incentive to produce ethanol.
also been proposed as alternative regulatory measure to enhance incentives to invest in renewable power generation. Feebates have been applied in the transport sector on vehicle emissions (Small 2010). In the power sector, feebates would impose a per kWh charge on generators in proportion to any difference between their average emissions per kWh and the industry as a whole, and a rebate to generators with below average emissions per kWh. Feebates could thus have little overall effect on energy prices, enhancing their overall feasibility and acceptability, and be revenue-neutral.
Initiatives to price carbon emissions would likely also have an important impact on the returns to renewable energy investments (see Box 1 in Section 3). At the international level, the most important policy initiative that would alter the relative profitability of renewables would be a framework agreement on carbon emissions that established a robust pricing mechanism for full cost accounting of health and climate externalities. With estimates reviewed by the IPCC (2007) ranging up to US$ 95 per tonne of CO2
, these additional costs of fossil
fuels would make a variety of renewables attractive and spur wider investment and adoption over time. Accompanying measures would also be required though to minimise negative impacts on energy poverty.
Some possibilities for selecting and adapting these various support measures to the level of technological maturity and market development is illustrated in Figure 10. Support to earlier stages of innovation and R&D is discussed further in section 5.5. Policies, incentives and mechanisms influencing risks and returns as discussed above generally contribute as deployment is initiated (in niche markets)