Tag Archives: policy

EU winter package brings renewables in from the cold

December 1, 2016 |

 

Joint press conference by Maroš Šefčovič and Miguel Arias Cañete on the adoption of a Framework Strategy for a Resilient Energy Union with a Forward-Looking Climate Change Policy

Christmas came early yesterday in Brussels, with the release of some heavy reading for the EU’s parliamentarians to digest over the festive season. Or at least that was the more jovial take on the launch of the EU winter package from Maroš Šefčovič, the EU vice-president in charge of the Energy Union (pictured).

Targets to cut energy use 30% by 2030, the phasing out of coal subsidies and regional cooperation on energy trading are central to the proposals, which updates the regulations and directives that support targets set out in 2014 as part of the Energy Package 2030.

Whether this gift is not just for Christmas will be down to the EU parliamentarians who have two years to debate these proposals and implement them.

So where does it leave us with the growth of renewables, the underpinning for a decarbonised power sector? If the EU meets its 2030 target, 50% of electricity should be renewable compared with an EU average of 29% today. That target remains unchanged, so those engaged in producing clean energy for Europe’s electricity grid should be reassured – up to a point.

A great deal was made of scrapping priority dispatch for renewables after that proposed change was ‘leaked’. In the end, the Commission merely soften its language but the outcome remains the same on priority dispatch, implying that policymakers think that renewable generation should be more responsive to the market.

Yesterday, Šefčovič and the Commissioner for Climate Action and Energy Miguel Arias Cañete both acknowledged that renewables need to be more integrated into wholesale markets, and those markets need to be more coordinated with each-other. Specifically, the package encourages member states to:

  • ensure that renewables participate in wholesale and balancing markets on a “level playing field” with other technologies. In particular, the new package removes the requirement for renewables to be given priority dispatch over other generation types (which most, but not all, member states currently abide by). It instead requires dispatch which is “non-discriminatory and market based”, with a few exceptions such as small-scale renewables (<500kW). In addition, renewables should face balancing risk and participate in wholesale and balancing markets.
  • increase integration between national electricity markets across the EU. Requirements include opening national capacity auctions to cross-border participation and an interconnection target of 15% by 2030 (ie, connecting 15% of installed electricity production capacity with neighbouring regions and countries). Earlier this year, the Commission established an expert group to guide member states and regions through this process.

What does this all mean for investors? The obvious concern is that removal of priority dispatch and exposure to balancing markets will increase revenue risk for renewables generators.

So, why is the EU removing these rules on priority dispatch once the mainstay of the Commission’s wholesale market rules? The main argument is to help reduce the costs of balancing supply and demand, and managing network constraints. Generally, it is most economic to dispatch renewables first because their running costs are close to zero regardless of whether they have priority dispatch.

But, when there is surplus generation, the most economic option is sometimes to curtail renewables ahead of other plant. For example, turning down an inflexible gas plant only to restart and ramp it up a few hours later can be expensive and inefficient. By contrast, wind generators can be turned down relatively easily.

Therefore, giving renewables priority dispatch can sometimes increase the overall costs of managing the system. When renewables were a small part of the market, any inefficiencies caused by priority dispatch were small and easy to ignore, while it helped reduce risks around renewables investment. But now renewables are set to become the dominant part of electricity markets it is harder to ignore.

Nevertheless, risks around balancing for wind can cause real headaches for investors. In our report from earlier this year, Policy and investment in German renewable energy we found that economic curtailment could increase significantly, potentially adding 17% to onshore wind costs by 2020.

The amount a generator is curtailed depends on a wide range of uncertain factors which wind investors have little or no control over (eg, electricity demand, international energy planning, network developments and future curtailment rules).

What could happen next?

So to maintain investor confidence (and avoid costly lawsuits) existing renewables investments need to be financially protected as rules are changed. There are many ways to do this. For example, priority dispatch status could be grandfathered for existing generators (as the winter package suggests) or, as set out in our recent report of Germany, generators could be fully compensated for curtailment through “take-or-pay” arrangements.

More generally, very clear rules around plant dispatch and curtailment are needed to avoid deterring investment. Ideally, dispatch will be determined by competitive, well-functioning balancing markets, where renewables are paid to be turned down based on what they offer, rather than by a central system operator curtailing without compensation.

The move to integrate renewables into balancing markets means they will compete with other options to balance the system such as storage and demand-side measures. These flexibility options should benefit from the sharper price signals and greater interconnection implied by winter package. But there is no clear consensus yet on the right business and regulatory models to support investment in flexibility. However, CPI is currently working on a programme as part of the Energy Transitions Commission to explore the role of flexibility in a modern, decarbonised grid and will be publishing our findings soon.

Ultimately, there is an unavoidable trade-off in designing electricity markets: it is very difficult to provide incentives for generators, storage and the demand-side to dispatch efficiently through market mechanisms without also exposing them to some risk. Yesterday’s announcement in the winter package means more countries will have to face this dilemma.

Disclaimer: Unless otherwise stated, the information in this blog is not supported by CPI evidence-based content. Views expressed are those of the author.

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Changing land use patterns in Brazil

October 29, 2015 | and

 

As the demand for food and climate change risk both increase, a new study explores paths to more efficient land use in the country.

As Brazilian President Dilma Rousseff promised to reduce Brazil’s greenhouse gas emissions by 43 per cent by 2030. Brazil became the first major developing country to pledge an absolute reduction in emissions over the next fifteen years. Since the country is an agricultural leader with abundant natural resources, it clearly has many challenges ahead. One of the questions that arises is whether it is possible to simultaneously promote economic growth and improve ecosystem protection within Brazil’s rural landscape.

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How better price risk policy in Brazil could improve agricultural productivity

February 24, 2015 | and

 

Clarissa Costalonga e Gandour and Pedro Hemsley co-authored this post.

In Brazil’s agricultural sector, fluctuations in crop prices that are not mitigated by insurance or public policy can hinder farmers’ productivity and income, as well as the agriculture sector’s economic growth. For example, a farmer who makes planting decisions under the expectation of high harvest prices, which then fall short, can suffer severe losses. Understanding agricultural price volatility and mitigation is important to improving relevant public policy.

As part of CPI’s series of work on how to improve agricultural productivity while reducing deforestation in Brazil, we recently looked at agricultural price volatility, current policy to mitigate price risks, and what Brazil could do differently.

Our main finding is that current policy in Brazil does not meet farmers’ needs. The policy for price risk mitigation is based on direct government intervention in the market: when prices fall below a threshold, the government takes part of total output and allocates it out of the market. In 2013, the federal budget for price risk mitigation totaled BRL 5.4 billion, with over two fifths of it being destined for government buyouts and storage expenses. However, we find this policy yields only 8.03% of total production value, or BRL 4 billion per year in gains to producers of the four most important crops in Brazil – soybean, sugarcane, maize, and coffee.

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With new market structures and business models, consumers can help states reduce carbon emissions

July 8, 2014 |

 

On June 2, in a historic move towards addressing CO2’s climate impacts, the Environmental Protection Agency (EPA) released its Clean Power Plan proposed rule for regulating carbon emissions from existing power plants. The regulations encourage states to take advantage of a range of CO2-reducing methods, like energy efficiency and renewable energy, rather than requiring all emissions reductions to occur at the power plants themselves. Electricity consumers can play an important role in states’ plans to meet the regulations, if regulators can take advantage of all the resources they can provide. Fully utilizing consumers’ electrical resources may require the help of new market structures and business models.

The value that individuals, households, and businesses can provide to the electric grid could be quite significant. Technologies such as rooftop solar panels, “smart” thermostats, more efficient appliances, and electric vehicles, especially when combined with smart meters and other smart grid technologies, could enable consumers to reduce the demands on the grid at peak times and help absorb excess generation from renewable generation when demand is low. As CPI discusses in our Roadmap to a Low Carbon Electricity System, many factors are already conspiring to make these consumer-level resources more valuable and accessible.

Wise use of these so-called distributed energy resources could replace some of the fossil-fuel power plants that would otherwise be needed to balance a renewable-generation-heavy grid, creating cost-effective emissions reductions. They could even make the grid more resilient to future severe weather.

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Paving the way for emissions reductions in California

July 1, 2014 |

 

California’s budget for the next fiscal year, signed by Governor Brown on June 20, includes $832 million in auction revenues from the Cap and Trade Program, which will go toward high-speed rail, public transportation, energy efficiency, and other projects to support low-carbon, sustainable communities. Where did that money come from? In some cases, from industrial firms like cement producers and food processors, which are responsible for 20% of statewide greenhouse gas emissions and are required to buy allowances to cover some of their emissions.

Our new study, Cap and Trade in Practice: Barriers and Opportunities for Industrial Emissions Reductions in California, explores how those industrial firms are making decisions under the Cap and Trade Program. More specifically, we wanted to know if industrial firms, given their typical decision-making processes, would invest in the emissions reductions options that are most cost-effective on paper — and if not, what are the barriers? We focus on the cement industry, which is a major player in the industrial sector and is also the largest consumer of coal in California.

The carbon price is making a difference

We find that the carbon price is making a difference in how cement firms approach business decisions about actions that would reduce emissions, such as investing in energy efficiency or switching to cleaner fuel. Firms are considering the carbon price when they make investment decisions, and our modeling shows that the carbon price significantly changes the financial attractiveness of several abatement options.

As an example, this graph shows how the carbon price adds to the value of an investment in energy efficiency. The additional savings from reducing the firm’s obligations under the Cap and Trade Program would add around 50% to the value of the investment if the carbon price is near the price floor — or could more than triple the value of the investment if the carbon price is at the top of its target range.

Cap and Trade - Lifetime Value of Energy Efficiency Investment

The Cap and Trade Program magnifies the value of an energy efficiency investment

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The Clean Power Plan means changes for coal, but not the ones you might expect

June 18, 2014 |

 

Under President Obama’s recently announced Clean Power Plan, the Environmental Protection Agency (EPA) proposed that states cut greenhouse gas emissions from existing power plants by 30 percent from 2005 levels.

Commenters on both sides of the aisle say this rule means big changes for the coal industry.

But before we get fired up about the changes, it’s important to take a look at the facts: While states will need to retire coal plants at the end of their useful lives to meet the proposed limits, EPA’s rule would give states a great amount of flexibility to avoid coal asset stranding and still meet emissions reduction targets. In fact, valuing the right services from coal plants will prove the more important question for a low-cost, low-carbon electricity system.

Let’s look at why.

First, we need to understand what the rule really means for coal asset stranding. An asset is “stranded” if a reduction in its value (that is, value to investors) is clearly attributable to a policy change that was not foreseeable by investors at the time of investment.

In our upcoming analysis of stranded assets, Climate Policy Initiative finds that if no new investments are made in coal power plants and existing plants retire as planned (typically, 60 years for plants with pollution control technology investments and 40 years for plants without), the U.S. coal power sector stands to experience approximately $28 billion of value stranding from plants that are shut down. While that’s a big sounding number at first glance, it’s very small relative to the size of coal power sector. As the figure shows, that retirement schedule puts the U.S. coal power sector on track to come close to the coal power capacity reductions called for in the IEA 450 PPM scenario to limit global temperature increase to 2°C.

U.S. Coal Power w emissions (2)

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Adjustments to Indian renewable energy policies could save up to 78% in subsidies

April 21, 2014 |

 

Recently, the Government of India announced plans to award licenses for an additional one gigawatt of solar in the next year – about half the capacity of the Hoover Dam and enough to meet the energy needs of two million people. This move is part of India’s already ambitious targets for renewable energy that aim to address rising energy demand, decrease the country’s dependence on fossil fuel imports, and mitigate climate change.

To ensure the country meets these targets, India provides a package of renewable energy support policies that includes state-level feed-in tariffs and federal subsidies, which are in the form of a generation based incentive – a per unit subsidy; viability gap funding – a capital grant; and accelerated depreciation.

However, given the ambitious goals, but limited budget in India, the cost-effectiveness of these policies is an important factor for policymakers.

Our recent study “Solving India’s Renewable Energy Financing Challenge: Which Federal Policies can be Most Effective?” took on the question of cost-effectiveness by comparing a range of policy alternatives to the status quo.

Our findings were striking. We found that a policy that both reduces the cost of debt and extends its tenor is the most cost-effective. In fact, for wind energy, reducing debt cost to 5.9% and extending tenor by 10 years can cut the cost of total federal and state support by up to 78%. For solar energy, which is more capital-intensive, reducing debt cost to 1.2% and extending tenor by 10 years can cut the cost of support by 28%.

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Looking behind IPCC’s WG3 climate finance figures

April 15, 2014 |

 

Last Sunday, the Intergovernmental Panel on Climate Change (IPCC) released the final version of the Summary for Policymakers for its working group dedicated to the assessment of the options for mitigating climate change. This is the first time an IPCC assessment report features a chapter dedicated to investment and finance. We are thrilled to see that the results draw heavily on CPI Climate Finance pioneering work in the field.

To demystify the term ‘climate finance’ and better understand the magnitude and type of climate financing available, CPI has provided an overview of the climate finance landscape for the past three years. Three particular objectives have guided our work:

(1)  identifying the main dimensions of climate finance,
(2)  highlighting issues and gaps in the tracking of flows, and
(3)  pointing to remedies when needed.

The third edition of this study, the Global Landscape of Climate Finance 2013 is the most comprehensive look at climate investment to-date.

$356-363 bn. went to climate finance projects in 2012…

The Summary for Policymakers indicates that “published assessments of all current annual financial flows whose expected effect is to reduce net GHG emissions and/or to enhance resilience to climate change and climate variability show USD 343 to 385 billion per year globally.” These numbers are taken from the 2012 edition of the Global Landscape of Climate Finance and are relative to the year 2011. We updated these numbers in the 2013 edition and found that climate investment plateaued at an average $359 billion in 2012, far short of even the most conservative estimates of the investment need.

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Climate policy in 2014

February 14, 2014 |

 

Around the world, nations are striving to use increasingly scarce resources more productively, meet energy security goals, and reach economic growth targets, all while reducing climate risk. These are complex and urgent challenges, and policy plays a critical role in addressing them.

Since our inception in late 2009, Climate Policy Initiative has been working hard to answer pressing questions posed by decision makers through in-depth, objective analysis on some of the most significant energy and land use policies around the world, with a particular focus on finance.

As we continue to tackle these important and complex issues, your feedback on how we’re doing is extremely important. We hope you’ll help us reflect on the past, as we ring in a new year, by participating in a five-minute survey about our work.

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Is concentrated solar power getting any cheaper? And what role can policy play in bringing costs down?

January 22, 2014 |

 

In the past, renewable energy technologies have been much more expensive than their fossil fuel competitors but costs of wind and solar have come down after public support has deployed them at scale. In fact, costs of solar photovoltaic power plants have decreased roughly 20% and wind power plants 15% every time installed capacity has doubled.

For concentrated solar power (CSP), experts have projected a cost reduction of 10-15% for every doubling of capacity. However, new CPI analysis shows that CSP has not demonstrated cost reductions at the global level with increased deployment over the last five years, but it has done so in some regions for some CSP technologies.

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