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Impact of Deregulation on Renewable Energy Under Study

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By Allan Chen,

August 20, 1997

BERKELEY, CA -- 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 revenue.

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 pubs.html.

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.

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