By Anna Leidreiter
PV is seen as one of the main pillars for the energy transition as capacity was added in more than 100 countries during 2010. These achievements are mainly policy driven and depend not only on policy choice, but also on policy design and implementation. The details of design and implementation are critical in determining the effectiveness and efficiency of a policy.
Policy frameworks that are transparent and sustained can reduce investment risks and facilitate deployment of RE and the evolution of low-cost applications. Several studies have concluded that Feed-in Tariffs (FiTs) have been most effective and efficient at promoting PV electricity, mainly granted to the combination of long-term fixed price or premium payments, network connections, and guaranteed purchase of all RE electricity generated.
PV as an Emerging Market
In 2010, the Solar Photovoltaic (PV) industry had an extraordinary year with a global production more than doubling. The global capacity in 2010 is estimated at about 40 GW which is more than seven times the capacity in place 2005 (Global Status Report 2011). Only in 2011, the total added PV capacity was 17 GW, compared with just under 7.3 GW in 2009 (Global Status Report 2011). The vast majority of installation today is grid-connected. The EU dominates the global PV market, led by Italy and particularly Germany, which installed more PV in 2010 than the entire world did the previous year. In one year, Germany has seen roughly 50 million square meters covered by about 40 million solar panels (Solarplaza 2011). Germany was three times bigger than the number two Italy. Both markets have a Feed-in Tariff (FiTs) providing financial incentives for consumers and investors. Beyond Europe, the largest PV markets were Japan (nearly 1 GW), the United States (0.9 GW), and China (0.6 GW). It is worthwhile mentioning that recently Japanese and Chinese lawmakers approved a nationwide solar feed-in tariff legislation that would create a national mechanism from 2012 onwards. The United States is, therefore, the only industrialized global player without a nationwide FiT law.
The rapidly growing international solar industry leads to decreasing prices for module and turnkey systems. Policymakers often mistakenly believe that as more renewables are added to the system, the total cost of electricity increases. However, experiences with the Merit-Order-Effect show that large amounts of renewable generation actually drive down costs of electricity. The implication is that the addition of the currently more costly solar PV generation has a positive effect on power markets by putting downward pressure on prices.
The figures prove that PV is rightly seen as one of the main pillars for the energy transition as capacity was added in more than 100 countries during 2010 (Global Status Report 2011). Hereby, PV remained the world’s fastest growing power-generation technology. However, Jacobson/ Delucchi (2009) analyzed that out of the 580 TW accessible sources for solar, only 0.008 TW are used. In order to harvest the whole potential we have to overcome the following barriers (IPCC RE 2011):
-Institutional and policy barriers related to existing industry, infrastructure and regulation of the energy system;
-Market failures, including non-internalized environmental and health costs, where applicable.
-Lack of general information and access to data relevant to the deployment of RE and;
-Lack of technical and knowledge capacity; and
-Barriers related to societal and personal values and affecting the perception and acceptance of RE technologies.
The Role of Policy
Government policy is often the catalyst that shapes the market, stimulates business activity and, if introduced appropriately, supports long-term behavioral and structural changes across an industry or sector. The big challenge for the renewables industry has been to make the cost of clean energy competitive with heavily-subsidized conventional energy. Private or public investors who wanted to install wind turbines or solar panels have been faced with lengthy payback times. They have been forced to make a choice based on ethics rather than economics. If in the 1950s and 1960s, the manufacturers of coal or nuclear power plants had been faced with the barriers that the renewables industry still faces in many countries, they may not have built a single power plant. Without increased consumer demand and political measures to facilitate access to the market, manufacturers of, for example, solar photovoltaic panels cannot produce the unit volumes needed to bring prices down and drive technological innovation. However, not all policies have been equally effective in supporting these developments. The success of such efforts depends not only on policy choice, but also on policy design and implementation.
Best PV Policy
The details of design and implementation are critical in determining the effectiveness and efficiency of a policy. Policy frameworks that are transparent and sustained can reduce investment risks and facilitate deployment of RE and the evolution of low-cost applications. Several studies have concluded that Feed-in Tariffs (FiTs) have been most effective and efficient at promoting RE electricity, mainly granted to the combination of long term fixed price or premium payments, network connections, and guaranteed purchase of all RE electricity generated.
An effective support scheme for PV is one that provides tariffs for all levels, from domestic to large-scale developments and takes into account the different levels of development of the technology. The calculation of tariffs must, therefore, be market-based-oriented. The degression rate must reflect the market situation. Further the policy must guarantee long-term investment security and is ideally administratively simple. The scheme should be easy to explain in order to ensure public acceptance. Well-designed FiTs cover these criteria.
Learning from the world’s leader, German authorities have gradually marked down tariffs to align with falling costs of solar parts, avoiding above- or below-market pricing. Germany followed these decreasing costs in the market to profit from the benefits of the dramatically decreased cost in solar energy. Resulting, a rooftop solar project under 100 kilowatts in Germany costs about 2€ per watt. Contrarily, the effect of a too-rapid reduction of tariffs can be currently seen in the U.S. The dramatic cuts cause market pressure which the economy is not ready for. The first PV companies have already declared bankruptcy.
One of the world’s largest banks, Deutsche Bank, recently issued a report examining how to design feed-in tariffs for solar Photovoltaic (PV) that ensure rapid development while minimizing cost to ratepayers. The report goes as far as saying explicitly that Germany’s solar PV tariffs will remain a key contributor to driving solar PV prices down toward competitiveness with on-peak fossil-fired generation. It gives Germany ‘Best-in-Class’-Rating for Transparency, Longevity, & Certainty (TLC).
In many places around the world, the lack of long-term policy certainty and stability became a strong factor for the PV markets. In response to continuing cost reductions and the global financial crisis, many governments undertook reductions of financial incentives. As a result, one could have got the impression that Europe is scaling back. Spain, France, the Czech Republic and the United Kingdom have cut their FiTs for PV after often too generous rates have stimulated a solar boom followed by major breaks. Spain and the Czech Republic in particular have become a cautionary tale about the dangers of rapidly conceived renewable energy incentives. The key of a best policy that accelerates the deployment of PV or RE in general is building investor confidence in that country’s industry. Consequently, the primary restraint has been the continued changes in the policy environment and the discontinuity of political commitments.
According to the Deutsche Bank analysis, there are three possible triggers for setting and reducing solar PV tariffs:
-Capacity- or generation-based, and
Deutsche Bank comes to the conclusion that time-based revisions, such as is used Ontario and Germany are the most effective. The explanation is simple: Time-based triggers are more transparent and create the investment certainty for investors that is valued in well-designed programs. Capacity-based or generation-based triggers, as e.g. used in the California Solar Initiative, are less transparent because participants cannot always anticipate when the trigger will be reached. Cost-based triggers are the least transparent because investors can’t monitor progress. Program costs, or actual generation, can only be monitored after the fact.
The importance of TLC also becomes clear when comparing FiTs with other renewable energy support policies like competitive bidding, quota policies or tax incentives. Analyses show that mainly the following factors result in a meaningful uptake of PV:
-Purchase obligation of generated electricity ─Utilities are obliged to buy the electricity from the producer.
-Money against performance─Incentives are only paid if electricity is generated.
-Calculation of tariffs─The calculation of tariffs is cost-oriented and technology specific. It is regularly reviewed and adapted to the current market situation. Hereby, incentive policies distinguish from subsidies.
-Duration of tariffs─Long-term contracts reduce the risks for investors and allow a secure return of investment.
However, there is no one-size-fits-all policy. As also the IPCC report on Renewable Energy (2011) states different policies or combinations of policies can be more effective and efficient.
However, rate limiting factors are the level of technological maturity, affordable capital in the country, ease of integration into the existing system and the local and national RE resource base.
The Future of PV Policies
A look at the world’s 10 biggest PV markets shows that all markets are still driven by financial support programs. This situation is likely to change in the coming years. Support programs are being reduced, and force the industry to decrease their costs and prices.
According to the Fraunhofer Institute, the political framework in Germany already achieved grid parity for wind energy whereas PV is expected to reach that overall goal in 2013. In sunny regions like Italy grid parity for photovoltaic is already accomplished (Fraunhofer Institute ISE 2010).
On the other hand, more solar PV markets are emerging. And the strongly reduced module prices─more than 60% in three years─will make solar competitive soon in more of the sunny countries such as India, the U.S.A., the Middle East and China. These markets have a huge potential and are climbing in Solarplaza´s overview of the world’s biggest PV markets. Also China and India are expected to join the list of main PV industry players. While in Europe the leading countries are discussing and further reducing incentives (e.g., France, Belgium), India introduced a National Solar Mission, and China just recently announced its own solar feed-in tariff program. Several new markets are emerging as well, from the Philippines to Israel and Canada to South Africa. This shows that the solar PV market is diversifying and shifting towards the sunnier places on the globe, a sign that solar PV as an energy source─and with it, its industry ─is maturing. Economies of scale in the growing manufacturing industry and reduced incentives will lead to further reduced production costs.
Policy support mechanisms that provide incentives will not be needed anymore. Photovoltaic solar energy is on its way to becoming a competitive energy source. However, one has to remember that this success has been possible because FiTs provided the necessary framework to enable investors not only by giving them a secure return of investment but also the guaranteed grid access.
Anna Leidreiter works as a Policy Officer in the Climate and Energy Department for the World Future Council (www.worldfuturecouncil.org), Hamburg, Germany. In her studies in International Development Studies at the University of Amsterdam, Leidreiter focused on environment and development from a social science perspective. She gained her first practical experiences in a forestation project in Ecuador as well as in the renewable energy industry, working for the photovoltaic company Solarteam Nord. As academic assistant, she further worked at the German Institute for Global and Area Studies (GIGA Hamburg) on the topic of climate change and resource management in Africa. Writing her thesis on “Community Participation in Natural Resource Management”, Leidreiter carried out her fieldwork in rural Ethiopia. She authored and co-authored various publications on climate change and energy subjects.
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