Renewable energy in global energy scenarios

This project has the objective to define an RETD Scenario with a high uptake of renewable energies. Computer models of the global energy system were, for the most part, developed under assumptions of smooth demand growth met primarily with large, centralised infrastructure, and perform well under these conditions. However, these assumptions are being undermined by several changes that require a re-evaluation of modelling algorithms. In an effort to address these changes and better understand their impact, RETD has defined its own scenario and developed it in collaboration with the Energy Technology Systems Analysis Programme (ETSAP) Implementing Agreement, making use of a techno-economic bottom-up methodology. The scenario was modelled using the ETSAP-TIAM model.

RENWA

Scoping study on the synergies between renewable energy and fresh water production.
IEA-RETD investigated the opportunities for coupling renewable energy systems with fresh water supply systems. The four main conclusions of the scoping study, carried out by Ecofys, are:

  1. Fresh water production based on desalination technologies provide most options for synergies with renewable energy production.
  2. Linking desalination to renewable sources is currently not economically viable.
  3. There is a large potential for small scale (decentralised) desalination plants.
  4. Current commercially-sized desalination technologies are in need of a constant operation point. Reverse osmosis and thermal membrane technologies might give future synergies as deferrable load.

BUBE

The use of biomass in the energy and transport sectors has become one of the key issues on the political agenda. This project provides policy makers and other stakeholders with concrete means for supporting sustainable bioenergy deployment, and thereby contributes to the international debate on the use of biomass in global energy systems in the context of climate change mitigation (COP/MOP). This activity is a joint project of IEA-RETD and IEA Bioenergy with support from the IEA Secretariat.

The overall aim of the project is to provide policy makers and other stakeholders with concrete means of supporting sustainable bioenergy deployment, and thereby contribute to the international debate on the use of biomass in global energy systems in the context of climate change mitigation (COP/MOP).

The project has resulted in a presentation of a position paper at a side event during COP15 in Copenhagen (15/12/2009), and a background report with more details and case studies. The results were also presented in DIREC in 2010.

The project is a joint initiative of IEA RETD and IEA Bioenergy.

Policy instrument design

The project “Policy instrument design to reduce financing costs in RE technology projects” aims to provide a better insight into the key elements of best practice policy design for renewable energy technologies which altogether will result in lower financing costs.
Well designed policies, aimed at reducing the financing costs for renewable electricity projects, can reduce costs of renewable electricity by up to 30%. Policies influence the risks of financing renewable energy projects. If debt/equity providers consider these risks to be too high, the cost of the project – and hence the required policy support – will increase.
In a study for IEA-RETD, Ecofys addressed this impact of policy design on costs of renewable electricity. A detailed assessment was made for four technologies (on- and offshore wind, large-scale solar-PV, and biomass-CHP) and six countries.

Summary

The study identifies policy design elements that reduce perceived policy risks and provides best practice examples of implemented international, national or regional policy designs that reduce perceived risks. Amongst others, policy makers can reduce the cost of renewable electricity in the following ways:

  • Ensure a long-term political and societal commitment towards renewable energy. Commitment, stability, reliability and predictability are all elements that increase confidence of market actors, reduce regulatory risks, and hence significantly reduce cost of capital. A proper translation of this commitment in the design and timeframe of the support instruments can have a significant impact on the costs of electricity: as compared to a situation with no particular support scheme in place, the levelised cost of electricity can be reduced by 10 to 30%, with different values for different technologies.
  • Remove risks by removing barriers. Policies that improve the success rate of the project development phase will reduce the project investment and hence levelised energy costs of renewable energy technologies.
  • Remove risk by sharing risk. Government loan guarantees, government project participation, and investments in infrastructure can significantly reduce the cost of capital. By underwriting all or part of the debt for a project, lenders have significantly lower risk in case of default of underperformance of the project. This risk reduction is translated in lower interest rates (e.g. 1-2%, resulting in reductions up to 5-10% in the levelised cost of electricity), but potentially also in longer debt terms and more favourable debt service requirements with even higher reductions in the cost of capital. Government project participation, for instance by investing in large-scale electrical infrastructure solutions for offshore wind energy, can reduce levelised cost of electricity by for instance 15% or more (with about one third as a direct effect of a reduction in the cost of capital).
  • Influence the economic lifetime by a correct policy design. The period of support offered in main policy support schemes (such as feed-in tariff (FIT) and feed-ion premium (FIP) schemes), as well as the debt term applied in government loans, have a direct impact on the economic lifetime that is used by investors and lenders. The closer the economic lifetime is to the technical lifetime, the lower the required level of support.
  • Policies that reduce the required return on equity by investors potentially have significant cost reduction implications. Improved design of existing policy support schemes may be more effective in this respect, than a switch to a different policy scheme. Reducing the required return on equity encompasses a wide range of measures that create stability and predictability of markets, amongst others:
    • long-term and sufficiently ambitious targets should be set,
    • the policy instrument should remain active long enough to provide stable planning horizons and for a given project, the support scheme should not change during its lifetime,
    • stop-and go policies are not suitable and a country’s ‘track record’ in renewable energy policies probably massively influences perceived stability.

It is recommended that the financing of the support scheme is kept outside the government budget. Furthermore, in designing new policy instruments and schemes, the changing landscape of renewable energy financing solutions should be closely monitored and incorporated into this design. In designing support schemes, all market actors should be involved. Investment funds and banks, in particular, will be able to provide feedback on the risks related to the design of these instruments.