Elsevier

Ecological Economics

Volume 53, Issue 2, 15 April 2005, Pages 147-167
Ecological Economics

Methods
Sustainability-guided promotion of renewable electricity generation

https://doi.org/10.1016/j.ecolecon.2004.12.016Get rights and content

Abstract

In recent years, the threat of global climate change, high fuel import dependence, and rapidly rising electricity demand levels have intensified the quest for more sustainable energy systems. This in turn has increased the need for policy makers to promote electricity generation from renewable energy sources. Guaranteed prices coupled with a buy-back obligation for electricity fed into the grid is a popular renewables promotion instrument, especially in Europe. More recently, driven mainly by electricity market liberalisation efforts, quota targets for the share of renewables in combination with tradable ‘green’ certificates (TGC) have received considerable attention. TGC offer a greater theoretical potential for economic efficiency gains, due to price competition and the greater flexibility assigned to the obliged parties. While guaranteed prices and TGC schemes support the operation of renewable energy technology systems, bidding schemes for renewable energy generation capacity are used to raise economic efficiency on the plant construction side. All of these policy instruments suffer from the shortcoming that they do not explicitly account for the often widely varying environmental, social and economic impacts of the technologies concerned. In this paper, we propose a methodology for the design of renewable energy policy instruments that is based on integrated assessment. In particular, we argue that using participatory multicriteria evaluation as part of the design of renewable energy promotion policies would make it possible: (1) to differentiate the level of promotion in a systematic and transparent manner according to their socio-ecological economic impact, and (2) to explicitly account for the preferences of stakeholders. A further problem of existing TGC and bidding schemes is that diversity of supply could be severely diminished, if few low-cost technologies were allowed to dominate the renewable energy market. To ensure a certain diversity of technologies, our scheme suggests the use of different technology bands for technologies that are relatively homogeneous with respect to their maturity.

Introduction

The promotion of renewable energy technologies (RET) for a more sustainable development has become one of the primary goals of energy policy makers in many countries (European Commission, 1999, UNDP/UNDESA/WEC, 2000, IPCC, 2001, IEA, 2004a). Policy makers increasingly assign high priority to promote RET because they contribute to the mitigation of climate change and local environmental pollution, stretch-out of the non-renewable resource base, decrease of import dependence, increase of (local) employment, and the support of remote and rural communities. Furthermore, they can be useful to increase energy supply diversity, improve the national balance of trade, and because most of them are less prone to terrorist attacks than, say, nuclear power stations or oil and gas supply infrastructure (the obvious exception being large dams for hydropower generation). Besides, the RET manufacturing and services sector is increasingly seen as an important domestic industry that is able to create new jobs and exports.

In 2002, renewables accounted for some 14% of total primary energy supply worldwide, while 18% of global electricity was generated by use of renewable sources. By far the largest renewable energy source is still biomass (two-thirds of which is used traditionally for cooking and heating), followed by hydropower. Over the next 30 years, in the absence of major technological breakthroughs, incisive policy action will be needed to increase the share of renewables in the future primary energy mix and to “steer the global energy system onto a more sustainable path” (IEA, 2004b). Reasons are that many countries, especially developing ones, switch from traditional biomass to more ‘modern’ (usually fossil) fuels in their attempt to satisfy rapidly growing energy demand, and that ‘new’ (i.e., non-hydro) RET only start from a very low base. Renewable energy promotion instruments1 are in place in many countries, because higher generation cost and/or capital intensity would hinder the transition to an increased use of RET. Typically, such promotion schemes create sub-markets, which are protected from competition against conventional technologies, a feature that can be undesirable in the longer term when RET are more mature and have gained substantial market shares. Clearly, instruments that create protected and subsidised sub-markets are ‘second-best’ solutions, compared to the most obvious solution, namely to make energy consumers pay for the full costs that arise from energy supply by means of a Pigovian tax (Hall, 1992).

Mostly two instruments have been used to promote the generation of electricity from renewable energy sources: (1) guaranteed feed-in tariffs and (2) quota targets combined with tradable ‘green’ certificates (TGC) for renewable electricity fed into the grid (also referred to as Renewable Portfolio Standards, RPS). Feed-in tariffs provide certainty about the achievable per unit revenues from selling renewable electricity to the grid and allow for ‘planned’ technology diversity, but cannot ensure that a certain amount of renewable electricity is actually provided. In contrast, TGC are based on competitive market principles. Typically, with few exceptions, they feature mandatory quota targets and involve certificate trading and cost minimisation. Therefore, while the amount of renewable electricity can be safeguarded, the certificate price is variable, creating uncertainty about the profitability of the RET investments.

In Europe, in particular, guaranteed feed-in tariffs have been used widely to support the generation of electricity from renewable energy sources (RES-E) directly.2 With growing market shares of RES-E, however, the distortionary effects and the cost burden of fixed feed-in tariffs (the latter is either put on taxpayers via the fiscal budget, or on utilities who pass it on to electricity consumers) become increasingly problematic. At the same time, TGC schemes with prescribed quotas for the amount of renewable energy in overall energy supply were praised for their potential to raise economic efficiency and introduced in several countries since the late 1990s (e.g., Madlener and Fouquet, 1999, Berry, 2002, Menanteau et al., 2003, Nielsen and Jeppesen, 2003; among many others).

The substitution of renewable energy sources for fossil and/or nuclear fuels is no panacea either. Extensive use of renewable energy sources can lead to important adverse environmental and social impacts. These impacts differ widely across renewable energy sources and the technologies concerned (e.g., Abbasi and Abbasi, 2000, Tsoutsos et al., 2005). When designing policy instruments for more sustainable energy futures, therefore, the aim from a sustainability point of view ought to be to generate the lowest possible adverse socio-ecological economic (SEE) impact per unit of electricity generated, while ensuring a certain degree of economic efficiency. Both of these also depend on local conditions and other project-specific circumstances, which of course create some fuzziness and ask for a maximum possible local adaptation of the instruments used. The SEE impact can be assessed by an array of sustainability criteria and with data based on life-cycle analysis. Building on Bossel (1996), we aim to derive sustainability criteria such that they represent the main system functions; the second key criterion is data availability. The relevant impacts are the net impacts that arise when RET substitute for conventional energy technologies (while our approach can be extended in this way, a comprehensive discussion of this dimension is beyond the scope of this paper). A widely applied method to compare and rank options by a large number of criteria is multicriteria evaluation (MCE). MCE provides policy makers with information which is not forthcoming from other ‘valuation’ instruments (Munda, 1996).

Besides the multiple dimensions of SEE impacts, the diversity of technology options is essential for the adaptiveness of an energy system. In view of uncertainty about potentials and SEE impacts of technologies, and the danger of negative long-term consequences of lock-in effects, renewables promotion schemes also need to foster RET diversity (on the issues of flexibility, risk, and diversity of energy supply systems see also Hall and Thomas, 1984).

Given these two main goals – minimal SEE impact and a certain degree of diversity among the renewable energy sources used – TGC have two important shortcomings. On the one hand, all renewable energy sources are treated as homogeneous in their environmental and socio-economic impacts. On the other hand, ordinary TGC schemes fail to meet the goal of assuring diversity. In this paper, therefore, we suggest a methodology for adapting the policy instruments for the promotion of RES-E such that they can overcome these two shortcomings.3 Note that while our approach allows to assess and rank RET according to their SEE impacts, it is the policy makers who have to decide by how much feed-in tariff levels, or the number of certificates issued, are varied for different RET.

The remainder of the article is organised as follows: Section 2 contains a concise literature review on the use of MCE methods in energy studies. Section 3 outlines the conceptual framework on which we base our analysis. An overview of the institutional framework related to the promotion of commercially available RES-E follows in Section 4. Section 5 critically reviews the different policy instruments for direct price support of RES-E, and Section 6 introduces the basic design of a multicriteria-based participatory scheme to evaluate different RET along sustainability criteria, and shows how it can be applied for redesigning conventional renewable energy policy instruments. Section 7 concludes.

Section snippets

Literature review on multicriteria evaluation of (renewable) energy use

MCE is widely used in electricity generation planning and energy policy design. Applications include the construction of indices summarising the environmental performance of energy systems for accounting, managerial or planning purposes (Stewart and Horowitz, 1991, Mirasgedis and Diakoulaki, 1997); construction of sustainability indices at the energy conversion plant level (Afgan et al., 2000, Afgan and Carvalho, 2002); transmission and distribution system planning (Weedy, 1989, Ramirez-Rosado

Theoretical framework

Sustainability requires minimising adverse biophysical impacts from human action, while fulfilling other goals like maintenance of human well-being and minimising the waste of economic resources. Two main groups of economic policy instruments aim to reduce the biophysical impact of our economies. They are quantity-based instruments, like standards and tradable permits (certificates), on the one hand, and price-based instruments, like taxes (or subsidies) and fees, on the other hand (for

Guaranteed feed-in tariff schemes

Guaranteed feed-in tariffs (or buy-back rates) are regulated prices for renewable electricity fed into the grid, set by law for a certain period of time, and typically set higher than the achievable market prices. They can be seen as subsidies granted for electricity generation that provides benefits to society otherwise unaccounted for. They imply that utilities (or, alternatively, final consumers) are subject to a purchase obligation for electricity produced from certain eligible renewable

Institutional framework

In this section, we introduce some aspects concerning the institutional framework for the increased use and promotion of RES-E, primarily from a European perspective. As Midttun and Koefoed (2003) have noted, the ‘greening’ of the electricity industry in Europe is characterised “by a multiplicity of challenges and contradictory patterns”, including (1) a mixture of global, regional and local environmental problems; competition between national and EU-based regulation to solve them; (3)

Towards an operational concept

In order to move from these theoretical and institutional considerations towards an operational concept, we need to address the question how the differences in the biophysical and socio-economic impacts of the different RET can be accounted for. We refer to them as ‘socio-ecological-economic’ or ‘SEE’ impacts. In order to distinguish different electricity generation technologies by their SEE impact, the options must be compared by a number of criteria. Criteria can be measured with indicators,

Conclusions

This paper focuses on the improvement of renewable energy promotion schemes, such as guaranteed feed-in tariff, tradable green certificate, and generation capacity bidding systems, in a way that they allow for a dynamic and targeted attempt to promote sustainable development. The consideration of life-cycle-based SEE impact factors in the design of such policy instruments allows for the achievement of better environmental and social quality, the avoidance of lock-in in less (or un-) sustainable

Acknowledgements

The authors gratefully acknowledge fruitful comments received from Jeroen van den Bergh, Jens Drillisch, John Gowdy, Klaus Hubacek, Peter Kaufmann, Jochen Markard, Adrian Müller, Herbert Walther, participants in the 3rd ESEE conference 2000 and the 2nd International Energy Economics Conference 2001 (both held in Vienna, Austria), and three anonymous referees.

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