By David Jacobs

Solar photovoltaic markets have managed to increase rapidly over the last decades. Solar PV has become the fastest growing power generation technology in the world since the installed capacity increased by 60% annually between 2004 and 2009. The total installed capacity worldwide reached about 21 GW in 2009. Despite the global financial crisis, the solar PV sector continued to grow in the previous years--including another record-breaking year in 2009 with a newly installed capacity of about 7 GW globally.

However, the growth of the solar PV market still depends on national support mechanisms. Even though power generation costs were reduced considerably in the last years--between 2000 and 2007 the power generation costs were reduced by more than 50%--grid-connected solar PV is still not competitive with conventional energy sources. Therefore, national support frameworks have proven to be crucial for the market development of solar PV. As of 2010, more than 80 countries worldwide have adopted policies for the support of renewable energy sources and more than 85 countries had policy targets.

A Range of Support Mechanisms

Policy makers have made use of a large range of support instruments for renewable electricity over the last decades, including quantity-based support mechanisms and price-based support frameworks. Quantity-based mechanisms include quota obligation (tradable green certificate schemes or renewable portfolio standards) and auctioning mechanisms. Price-based support instruments include rebates, tax incentives, net metering and feed-in tariffs.

Quantity-Based Support Mechanisms

Under a quota-based mechanism, the legislator obliges the electricity supplier to provide a certain share of electricity from renewable energy sources. The supply company or utility can either produce electricity itself or buy it from other green electricity producers. In order to increase the flexibility of the system, in many countries the obliged party is also allowed to reach the share by trading certificates which serve as proof for compliance. Therefore, these mechanisms are often called Tradable Green Certificate schemes (TGC). In the U.S., they are often called Renewable Portfolio Standards (RPS), as supply companies are obliged to provide a certain share of the electricity portfolio from renewable energy sources. RPS mechanisms sometimes operate without certificate trading. They can also be combined with tender mechanisms or feed-in tariffs.

In the case of certificate trading, renewable electricity producers have two income sources. First, they sell their electricity at the spot market for electricity at the given market price. Second, they can sell their certificates at the national green certificate market. In theory, the certificate sales shall compensate for ‘greenness’ of the electricity, that is, the positive attribute of renewable electricity compared to conventionally produced ‘grey electricity’. The obliged party can either obtain certificates by producing renewable electricity itself or by buying them on the certificate market. The certificates allow the obliged party to prove that they have ‘produced’ a certain share of their electricity from renewable energy sources.

Even though quota obligations have been successful in triggering investment in certain low-cost renewable energy technologies, such as biomass and wind energy, their contribution to increasing the share of solar PV has so far been very limited. This is largely due to the fact that quota obligations usually do not offer technology specific support. Therefore, more costly technologies, such as solar PV, normally do not profit from this sort of support instrument. The U.K. implemented technology support into its quota obligation in 2008. Instead of issuing the same amount of certificate for each unit of renewable electricity, the U.K. started the ‘banding’ of certificates, that is, more costly technologies receive more certificate for one unit of electricity fed into the grid that already rather mature technologies. More precisely, solar PV will receive two certificates for each unit of electricity whereas wind energy only receives one certificate. However, this is a rather recent development and it is still too early to assess the effects of this policy modification.

Under an auctioning mechanism, the legislator auctions a certain amount of renewable power generation capacity and then public and private companies are competing with each other. The bidder with the lowest necessary financial support wins the auction and has the exclusive right to profit from the support granted. Similar to quota-based support frameworks, auctioning mechanisms have so far mostly been used for technologies such as hydro power, wind energy or biomass. An auctioning mechanism usually involves high administrative costs and is, therefore, not a viable option for small-scale solar PV systems. Some legislators, for instance, the French legislator in 2009, have started auctions for large-scale, freestanding PV systems. However, this is also a rather recent development and the effectiveness of this support mechanism cannot yet be fully assessed.

Price-Based Support Frameworks

In order to support solar PV, most legislators around the world make use of price-based support mechanisms. In the 1980s and at the start of the 1990s, rebates, tax incentives and soft loans were the primary sources of financial support for renewable energies and solar PV in many countries. Today, these support instruments are generally used additionally to some of the other support instruments that are discussed in this article. However, the growth or solar PV in some countries still depends on these support frameworks. In the United States, for instance, tax credit schemes have driven a large share of the newly installed capacity in 2009 (470 MW). However, tax incentives tend to favor large-scale power plants and wealthy people as one needs to have sufficient income to use tax credits effectively. Therefore, these support mechanisms sometimes implicitly exclude individuals and small businesses from participating in the renewable energy business.

In the case of net metering, independent power producers have the right to get connected to the grid and the local utility is obliged to purchase all excess electricity which is not directly consumed. Historically, consumers that intended to produce renewable electricity from solar PV at home and sell the excess power to the grid had to use two separate meters. This ‘double metering’, however, has often created unfair conditions for consumers as utilities only wanted to pay very small rates for the electricity fed into the grid. The name of the support instrument refers to the meter measuring the electricity consumption. In the case of most net metering schemes, the meter starts turning ‘backwards’ once excess electricity is fed into the grid. Currently, net metering is applied in more than 40 states of the U.S. and several other countries, such as Denmark, Canada and Japan. Even though net metering has proven to be successful on a few regions of the world--California managed to install 20,000 solar PV systems partly thanks to the existing net metering policy--in most cases these incomes generated by selling the excess capacity to the grid were not high enough in order to finance the solar modules. Net metering has mostly been successful in market with high retail electricity markets, as this also meant high ‘incomes’ for renewable electricity producers once the meter starts turning backwards. In California, for instance, the retail electricity price in peak demand periods during the summer goes up to 50 US$cent/kWh, thus making net metering a financially interesting option.

Feed-in tariff has proven to be by far the most successful support instrument in incentivizing investment in new solar PV generation capacity. At least 86% of the worldwide, newly installed capacity in 2009 has been deployed in feed-in tariff countries. The success of this support instrument also explains the popularity of this support scheme among policy makers. As of 2010, at least 50 countries and more than 70 jurisdictions have implemented this type of policy mechanism in order to foster electricity generation from renewable energy sources.

The concept of a feed-in tariff mechanism is relatively simple. First, the legislator obliges the grid operator or utility to purchase all the power that is produced from renewable electricity generators. Second, the policymaker has to calculate the power generation costs of renewable electricity producers and accordingly fix a tariff payment per kilowatt-hour. Third, this tariff payment is usually guaranteed over a long period of time reflecting the average lifetime of renewable electricity power plants (15 to 25 years). With these three minimum design options in place, legislators have been able to create a very high degree of investment security, which largely explains the effectiveness of feed-in tariffs all over the world.

In addition to these basic feed-in tariff design features, legislators have added a large number of additional design options. Some of them have been implemented in order to avoid wind fall profits for power producers. One of them is the so-called tariff degression--the automatic, annual reduction of feed-in tariff payment. Through annual tariff degression the legislator aims to anticipate technical progress, economies of scales, rationalization and the overall learning potential of a given technology. In the case of solar photovoltaics, for example, historic figures suggest that a doubling of the globally installed capacity has decreased photovoltaic module prices by 22% annually in recent decades.

Fixing tariff rates for solar PV has become an increasingly difficult task for policymakers all over the world as the cost of PV-based electricity decreased rapidly over the last years. Even though policymakers can partly anticipate some of the cost reduction via tariff degression, many legislators significantly reduced the tariff payment for solar PV, including Italy, the Czech Republic, Spain, France and Germany. Almost all countries in the world also limit the number of newly installed PV installations via so-called capacity caps. Even though capacity caps have frequently distorted the national market development, many policymakers consider capacity caps to be the only option for controlling the additional costs for solar PV promotion which usually have to be covered by the final electricity consumer via a small increase of the retail electricity price.

The new German feed-in tariff law of 2010 includes an interesting design feature which is intended to incentivize direct consumption and anticipate ‘grid parity’, which is the moment when producing electricity from solar PV is just as expensive as buying electricity from the local supply company. In order to anticipate grid parity, the new legislation offers power producers that directly consume their electricity without feeding it into the grid an average additional remuneration of 3.6cent/kWh. This additional premium is paid in order to prepare producers for grid parity and let them gather some experience with direct consumption. Besides, the impact of solar PV generation on the electricity grid can be reduced. This remuneration option is available for all power plants up to 500 kW. In the case that direct consumption exceeds 30% of the total electricity production, the additional tariff payment will even rise to 8 cent/kWh. This way, the German legislator is trying to incentivize investment in storage capacity. Moreover, the new regulation can be understood as an incentive to install smaller-scale units, since it is easier to reach a share of directly consumed electricity of above 30% with these power plants.

In sum, a wide variety of support mechanisms has been applied so far to support electricity generation from renewable energy sources. In the case of solar PV, only feed-in tariffs have so far proven to be effective, establishing annual gigawatt markets in several countries around the world. Since calculating the actual power generation costs for solar PV has become increasingly difficult, most legislators are now controlling the costs via annual capacity caps. In order to improve the accuracy of tariff calculation, national policymakers should enter into bi-lateral or multi-lateral cooperation in order to avoid windfall profits and unnecessary high costs for the final consumer.

David Jacobs is independent renewable energy consultant and researcher at the Environmental Policy Research Centre (FFU) of the Freie Universitt Berlin. Besides, he is Co-author of the book Powering the Green Economy--The Feed-in Tariff Handbook (Earthscan, November 2009).

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