Topic 4: Re deployment Policy

Question 1

Relevant Market Failures and Barriers

Answer 1

Advantages of incumbents

• Existing institutions (regulations, market), infrastructure, skills etc. reduces risk
• Scale
• Existing subsidies and influence
• Often debt free in EI

Lack of information and high uncertainty

Higher cost of being first (not full value capture) and lack of scale

Institutional barriers

• Regulation of network infrastructure
• Market structure
• Policy uncertainty
• Lack of tech standards for RE
• Capital market barriers
• RE technical integration into system challenges

Question 2

Fiscal Incentives

Answer 2

Economic incentives that reduce the cost of RE investment via a redistribution of funds from the public budget (tax adjustment of direct payment from public treasury)

Rebates/subsidies

• Investor receives money upfront (subsidy) or after purchase (rebate)
• Financed through gov budget (eg Aus) or charges to other consumers (eg Cali)
• Pros:
  - Provide investor certainty
  - Low transaction costs (good from small scale)
• Cons:
  - Subject to budgetary change
  - Less incentive for price reductions
  - Don’t reward generation
• Investment tax credits/reductions
  - Reduces upfront investment based on system cost
  
  • Credit can be tied to compliance with equipment/performance to minimise quality risk
• Production tax credits
  - Provides revenue during life of asset but upfront cost still high
  - Rewards generation so encourages efficiency
• Other tax incentives:
  
  • Sales tax exemptions, import tax exemptions, accelerated depreciation

Question 3

RE Mandates (Quantity)

Answer 3

Requires liable parties to meet a minimum target for renewable energy

Basics

• % or GWh of elec or % fuel from renewables
• Mandate can be on producers, distributors/retailers, customers
• Names: renewable portfolio standard (RPS), renewable obligation, green certificates

Question 4

Utility scale RE financing

Answer 4

Merchant

• Developer operates plant and sells energy through
• High risk, hard to find capital and more expensive

PPA

• Developer has contract for purchase of energy from plant at an agreed price for an agreed time
• Lower risk therefore lower finance cost

Question 5

RPS

Answer 5

Price fluctuations common in RPS due to fixed demand and limited short term supply flexibility

Question 6

RET early learnings/experiences:

Answer 6

• Tech banding (different multipliers for different technologies)
• Unlimited banking of RECs (previously)
• REC multipliers created phantom RECs
• Eligibility issues (hydro made windfall profits and some non-elec RE generation)

Question 7

RET recent experiences

Answer 7

• 2015 LRET frozen at 33,000GWh per year from 2020
• RPP no longer increasing after 2020 which will kill the LGC price (increasing supply, constant demand)
• SRES phase out by ramping down deeming period
• Currently stalled investment due to policy uncertainty

Question 8

Aus RET design impacts

Answer 8

• Liability - small number of buyer (market power)
• Concessions for EITEI (energy intensive trade exposed) is a cross subsidy from other consumers
• Interaction with other schemes
• Green Power - ensures additionality
• FiTs - massive increase in small scale solar
• Carbon price - reduced REC to make projects bankable

Question 9

RPS:

• Pros
• Cons

Answer 9

Pros:

• Seen as market-based
• More compatible with restructured EI
• Capacity and market growth more predictable

Cons

• High risk for developers
• Price instability due fixed demand and (short-run) supply + policy (target?) uncertainty
• Market power due to few buyers (ie retailers) of RECs
• Setting quota/target at the right level
• Only supports least costs (without banding)
• High admin/transactional costs (issue certs, monitor compliance, collect penalties)

Question 10

RPS good design

Answer 10

• Price floors and ceilings to cap price volatility
• Band (separate portfolios for) different tech
• Limit banking to avoid boom-bust cycle
• Mandate long term target certainty

Question 11

RE Auctions

Answer 11

Developers bid for PPAs via auctions (price is sole criteria) or tenders (multiple criteria)

Question 12

Reverse Auctions

Answer 12

• Multiple sellers of elec, one buyer (lowest developer’s bid wins)
• Normally a % target of RE capacity (can band technologies as well)
• Contractual mechanism (CFD) required as elec must still be sold on the spot market
• CFD: long-term contract between a generator and buyer (retailer or large end-user) of elec where the price of electricity is fixed at an agreed strike price as the two parties pay the other one the residual between the strike and spot price (so that the price is certain for the agreed quantity and duration of elec)

Question 13

ACT Reverse Auction FiT

Answer 13

• 100% renewables by 2020, prices locked in for 20 years

- ACT gov pays the difference between the spot price and the FiT (CFD)

Question 14

Reverse Auctions:

• Pros
• Cons

Answer 14

Pros

• Price competition (determines ‘real’/lowest cost of RE)
• Volume and budget control
• Can support multiple techs

Cons

• Poorer quality possible due to least cost req (ie bad tech and bankruptcy issues for developers)
• Doesn’t reflect true (temporal and locational) value of NEM
• Bidding rounds create a stop-go cycle
• High risk and transaction costs favours large projects over small

Question 15

Reverse Auction/Tender Good Design

Answer 15

• Penalties for bidders (developers) who don’t complete bids
• Limit market power (lots of homogenous bidders)
• Assess best value not just least cost
• Differential quotas for different tech
• Provide lots of info to bidders to reduce risk

Question 16

CfDs

Answer 16

CFD trading enables you to speculate on the rising or falling prices of fast-moving global financial markets (or instruments) such as shares, indices, commodities, currencies and treasuries.