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Policies to Accelerate the Application of Renewable Energy Resources in Developing Countries
that the extra cost to German electricity consumers attributable to the pricing law was only 0.11 €cent/kWh in 2000, and is predicted to be only 0.19 €cent/kWh in a decade if the renewables share doubles (Lackmann, 2003). This amounts to € 8 annually per household (EoG, 2003). A third study (Uh, 2003 & 2004) estimates the additional costs at 0.25 € cent/kWh in 2001. These are figures that disappear in the noise. Environment Daily (2003) analysts find that feed-in renewables are cheaper than those produced by quota or green-certificate systems. Nitsch et al (2001/02) present evidence that national initiatives like the feed-in law reduce prices more rapidly through the national learning curves. This encourages local manufacturing, competition and secondary business. It also avoids the need for a plethora of subsidies, e.g. in agriculture. By spreading the costs over all national electricity consumers, the light burden is carried equitably. The rapid reductions of bid prices ascribed to the quota system (from US$ 0.189/kWh to US$ 0.043/kWh [Wiser et al, 2000]) must, in part, be ascribed to the feed-in policies in other countries were costs were driven down by R&D (Moore & Ihle, 1999) and in part, because the NFFO conditions were improved, including longer project periods (Kleiburg, 2003). Also, using the NFFO bids as a gauge may be misleading because many bids never materialised, either because of local resistance, or bidders found projects less attractive as more detail emerged. Quota systems tend to reduce participation to a limited number of players, which can lead to cartels and abuse of market power (Epey, 2000). Quota-based systems are not inherently cheaper, nor are 34
pricing systems inherently more costly (Sawin, 2004:13). A more recent comparison by Cambridge University (Butler and Neuhoff, 2004) in the wind energy sector between the UK quota system with the German pricing system (RE feed-in law) - allowing for the better wind regime in the UK conclusively found the German prices to be lower. 1.3.6 Financial security Under the pricing system, the long-term certainty resulting from guaranteed prices (typically 20 years) causes companies to invest in technology R&D, to train staff, and maintain resources and services with a longer-term perspective. This in turn makes it more attractive to financiers. For example, in Germany banks lobbied the Bundestag for a continuation of the pricing laws in 2000. By contrast, quota systems harbour political and procedural uncertainties. The stop-go renewable energy politics of many countries are disruptive to industry and unnerve potential investors. Preparing tenders adds an element of risk and cost that many potential developers cannot afford (Menanteau et al, 2003). This is of great concern in developing countries where the local industries are underdeveloped and often cannot compete with established global players in a capital-intensive environment. The fact that government officials in developing countries are often challenged by tender procedures, exposes local bidders and developers to additional uncertainty. Certificates can fluctuate significantly with the volatility of the marketplace, the stock market or the vicissitudes of weather conditions. Adding floor and ceiling prices to certificates may help to stabilize prices (Meyer, 2003). But then,
this means moving towards the pricing system. It also increases the complexity and cost of the system. In summary, it appears that pricing systems provide greater security than quota systems, particularly in developing countries, because there is greater doubt about future markets in renewable energy certificates (Frost, 2003). Targets set under the quota system are too dependent on political stability, adding to the perceived and real investor hazard in developing countries. With pricing systems the future price and terms are known. 1.3.7 Ease of implementation Pricing laws are easy to administer and enforce, and they are highly transparent. For obvious reasons, this is absolutely crucial to developing nations. In Germany, independent research institutes facilitated the setting of tariffs for each renewable energy technology and their future decrements over time. Government only has to oversee the process. Under the quota system, the requirements are much more demanding. First, realistic target have to be established. This requires detailed market surveys, renewable energy resource assessments, future energy demand and price analyses and scenario planning. Developing nations typically do not have the data, expertise, resources and time for these exercises. The risk of setting the quota target too low is that local economies of scale will not be attained, meaning that national industries never reach critical mass. Jobs are lost and the costs to the national economy are consequential. If the target is too high, prices will be pushed up dramatically while long-term investors will not neces-