Policies intended to encourage investment in renewable
energy could be more effective if policymakers design them with the specific
requirements of private sector financing in mind, according to researchers at
the Ernest Orlando Lawrence Berkeley National Laboratory.
"The record of renewable energy development in the United States is mixed, in
part because certain policies that are supposed to help develop renewable power
unintentionally erect barriers to attracting private financing," says Ryan
Wiser of Berkeley Lab's Environmental Energy Technologies Division, coauthor
with Steve Pickle of a study on the financing of renewable energy projects.
At the request of the California Energy Commission (CEC), Wiser is providing
technical assistance to Commission staff members, who are grappling with how to
implement renewable energy policies during the opening of the state's
electricity market to competition.
Wiser was also the facilitator of the California Public Utility Commission's
Renewables Working Group. He, Pickle and consultant Greg Morris were editors of
the Group's final report. Beginning January 1, 1998, all California consumers
will be able to choose their energy supplier.
Among the many complicated issues facing the CEC and the California Public
Utilities Commission is how to encourage the continued growth of the state's
renewable energy industry as the energy market opens up to competition.
California gets about 10 percent of its power from non-hydroelectric renewable
sources such as wind, biomass, solar and geothermal, more than any other state
in the U.S., and its renewable energy industry is a source of jobs and export
In AB 1890, the bill outlining how the state's electricity restructuring would
take place, the California state legislature mandated a surcharge on
electricity distribution, a portion of which ($540 million) is intended to help
fund renewable energy development for four years.
To better understand the possible consequences to the renewables industry of
different mechanisms for distributing these funds, the CEC is drawing on the
expertise at Berkeley Lab's Environmental Energy Technologies Division,
including Wiser's studies of the financing of renewable energy projects.
"Our assistance," says Wiser, "is in the form of helping CEC staff devise the
most effective renewable energy policy possible. Our report identifies several
different renewable policy options that have been discussed by state
authorities, the utilities industry, public interest groups and other
stakeholders during the last two years, and examines some of the advantages of
each as well as the possible barriers to success."
"The way the state develops a policy can impact the private financing process
that the project developer sees, and that can impact the effectiveness of the
policy's design. The report examines the three major support mechanisms that
the CEC and legislature considered in the period leading up to passage of AB
1890: a minimum renewables purchase requirement for each power provider selling
electricity in the state; a system of surcharges on the distribution of
electricity within the state, the proceeds of which help fund renewable
development; and green marketing, which encourages consumers to buy more of
their power voluntarily from renewable energy sources through marketing by the
sellers," Wiser continues.
Wiser and Pickle's report uses a financial spreadsheet model of a typical
renewable energy project such as a wind farm or a biomass plant. The modeler
can specify such variables as the planned project's capital structure (the
percentages of debt and equity), return on equity, interest rate, and maturity
of debt, renewable energy production tax credits, and other considerations that
investors and bankers look at in the real world.
The resulting price of renewable energy, and rate of return hint at whether
investors will find the financing mechanism attractive or not, and provide a
way of determining to what degree a policy's incentives will help the projects
chances of private financing.
"We've looked at case studies of renewable energy policies, and they have some
lessons for the policymaker," says Wiser. "For example, the United Kingdom
conducted two solicitations for a 'non-fossil fuel obligation,' an offering of
contracts for power generated from renewable sources. However, the first two
offerings limited the contract period to less than seven years. This means that
renewable energy suppliers had to get private financing for a contract whose
prices remained fixed for only seven years, at a maximum. Private financing
arrangements normally last about 10 to 15 years. Since financiers had to make
their money back so fast, this effectively raised the price of renewable energy
bid by contractors."
According to their study, one of the most important lessons for U.S.
regulators is stability. "Policies that do not provide long-term stability will
increase the financing costs and may reduce policy effectiveness," conclude
Wiser and Pickle. "Stable and predictable policy commitments can lead to a
decrease in financing costs which should result in reductions in renewable
energy costs and in more effective policies."
The study "Financing Investments in Renewable Energy: The Role of Policy
Design and Restructuring," by Ryan Wiser and Steven Pickle (LBNL-39826) is
available on the Web at
A shorter version of this report, with Berkeley Lab scientist Charles Goldman
as an additional author, is scheduled for publication later this year in the
journal The Electricity Journal An earlier report, "Renewable Energy
Finance and Project Ownership," is also available on the Web at the same
address, and in Energy Policy.
Berkeley Lab is a U.S. Department of Energy national laboratory located in
Berkeley, California. It conducts unclassified research and is managed by the
University of California.