How do quota obligations perform in practise? Review of international experiences

André Wakker, Martine Uyterlinde, Nico van der Linden

EWEC, Athens 28.02.2006

Overview

How does a quota obligation work?

Does it work? (Experience from UK, Sweden, USA)

Would it work for Europe?

in cooperation with:

UK: IT Power

Sweden: Lund University

USA: Lawrence Berkeley National Laboratory

FIT is the preferred support mechanism in EU-25

Majority of Europe: Feed-in-tariffs (varying between 30 and 90 EU/kWh) accompanied by a variety of investment and tax incentives

(yellow)

Quota Obligations

UK

Belgium

Italy

Sweden

Poland

US (and also Australia, Japan) embraces quota

WI: 2.2% by 2011

NV: 15% by 2013

TX: 2880 MW by 2009

PA: 8% by 2020

NJ: 6.5% by 2008

CT: 10% by 2010

MA: 4% new by 2009

ME: 30% by 2000

NM: 10% by 2011

CA: 20% by 2010

MN: 825 MW wind by 2007 + 10% by 2015 (applied to state’s largest utility)

IA: 105 aMW

MD: 7.5% by 2019

RI: 16% by 2019

HI: 20% by 2020

AZ: 1.1% by 2007

NY: 24% by 2013

CO: 10% by 2015DC: 11% by 2022

WI: 2.2% by 2011

NV: 15% by 2013

TX: 2880 MW by 2009

PA: 8% by 2020

NJ: 6.5% by 2008

CT: 10% by 2010

MA: 4% new by 2009

ME: 30% by 2000

NM: 10% by 2011

CA: 20% by 2010

MN: 825 MW wind by 2007 + 10% by 2015 (applied to state’s largest utility)

IA: 105 aMW

MD: 7.5% by 2019

RI: 16% by 2019

HI: 20% by 2020

AZ: 1.1% by 2007

NY: 24% by 2013

CO: 10% by 2015DC: 11% by 2022

Feed-in tariffs

• fixed subsidy per kWh domestic production• differentiated per technology type• often combined with priority grid access

Pros and cons:• asymmetric information problem: market is always

smarter regarding cost assessment (-)• creates vested interests in high tariffs (-)• may lead to market imperfections (-)• certainty to investors (+)• has been very effective in stimulating new investment (+)

Theory: Simple system to boost new markets

FIT costs, risk of over stimulation

Quota obligations

• obligation on producers, suppliers or consumers to fulfil a certain % of supply or demand from renewable energy sources• can be facilitated by a TRECs• penalty for not fulfilling the % obligation• international TREC trade optional

Pros and cons:• induces cost minimisation (+)• potentially very effective (+)• uncertainty to investors (-)• little practical experience (-)

Theory: Effective system for more developed markets,more complicated to implement than FIT

COM(2005) 627: The support of electricity from renewable energy sources

• Competition amongst schemes is healthy and can lead to a variety of solutions and benefits

• Too early to compare advantages and disadvantages of well established support mechanisms with systems with a rather short history

• Encourage cooperation between countries on support schemes and optimisation of the impact of national schemes.

To be evaluated not later than December 2007

Do quota work? Evaluation criteria

• Effectiveness• Market efficiency• Certainty for producers• Cost effectiveness• Stakeholder support• Equity

ECN-C-05-025: Review of International experience with renewable energy obligation support mechanisms, N.H. van der Linden, M.A.Uyterlinde et al.

(covers Japan, Australia, Italy , Belgium, and in depth for UK, Sweden, USA)

Do quota work? Observations by country

UK: Renewables Obligation since 2002 “Recycle payment” creates uncertainty about TREC prices, causing high

risk-premia and reducing certainty to investors. Complicated design encourages buy-out and non fulfilment of quota Absence of long term targets halted investments on new capacity

Sweden: Experience since 2003, most “standard” case Mainly expansion of existing capacity (biomass, small hydr.o) Buy-out despite surplus of TRECs. More TRECs redeemed in recent years with increasing penalties, fulfilling

99% of the obligation.

US: Quota in 18 states (40% of consumption), less than 5 years experience Examples of successful systems based on long-term contracting Other examples of poor system definition and insufficient enforcement.

Do quota work? Lessons learnt

• European experience is still very limited• US experience shows that quota obligations can work effectively and efficiently provided that:

Targets are in line with potentials and penalties are high enough The system allows for long term contracts (role of TREC trade seems

limited) Possibly separate subsidies for more expensive technologies

• System is vulnerable to design errors and correction si difficult.

• Keep monitoring!

ECN-C-05-025 Review of International experience with renewable energy obligation support mechanisms, N.H. van der Linden, M.A.Uyterlinde et al.

Would quota work for Europe?

Both FIT and quota can be optimised: Quota:

– Differentiated by technology bands. – Long term contracts offer long term

certainty FIT:

– Decrease of tariff over time– Set budget ceilings

A matter of belief in the market: Culture!

A hybrid system, allowing for regional differences, may combine the advantages of both systems

Thank you!

Aanbevelingen m.b.t. het ontwerp

Markt liquiditeit voldoende marktpartijen

Lange termijn doelstellingen15 jaar of meer

Realistische doelstellingen groter dan huidige aanbod

Differentiatie per technologielagere marginale kosten

Verplichting bij distributiebedrijven

Flexibiliteit beperkte banking en borrowing

Opbrengsten penalty niet terugsluizen maar RE fonds

Toegestane bronnen harmonisatie met Directive om internationale handel te bevorderen

Hoe werkt een certificaten systeem?

RES producers Obliged actors

Issuing Body

IssuingOffice

Central Monitoring

OfficeTRECs

TRECs

Meteringdata

Powermarket

Wholesaleprice

electricity

TRECmarket

€

TRECs

TRECs

TRECs

€

€