Deutsche Bank: Paying for Renewable Energy

TLC at the Right Price.

Deutsche Bank Climate Change Advisors (DBCCA) has released a new report that looks at funding for renewable energy. Using TLC (Transparency, Longevity and Certainty), they looked at the factors that support investor confidence and  renewable energy markets.

Renewable energy financing has been affectedc by investor’s lack of sophistication in energy markets and a finance model more akin to bio-tech than the internet, computers and consumer electronics.What this means is that investors have to look at longer time frames and more up-front investment.  One of the long term supports for such deals is the PPA (Power Purchase Agreements). However, utilities also need TLC  in order to sign up for long term contracts. By examining the elements that can come together to drive the markets, DBCCA looks to find the most efficient path to a robust renewable energy market.

Public Policy

Policy for the scale-up of renewable energy will satisfy a number of critical policy and economic goals including emissions targets, energy security and job creation. However, clarity in the public support mechanisms are needed to stabilize prices, reduce the cost of capital by providing a reasonably certain rate of return over a long time frame, and  support PPAs. However, DBCCA found that the US renewable policy framework in the context of US electricity markets is complex and fragmented. It attempts to reach for a “pure market,” lowest cost solution using Renewable Portfolio Standards (RPS) and Renewable Energy Certificates (RECs), interacting with Federal and other incentives. This can deliver results only if long term hedgeable REC markets emerge, as Federal incentives start expiring in 2010. DBCAA, after looking at German feed-in tariffs (FiTs) and their Global Climate Change Policy Tracker, considers a couple of factors that could help stabilize US renewable energy markets:

• Establishing a floor price which is  subject to advanced price discovery features.
• Standardizing the renewable energy contract so that all contracts can be compared “apples to apples”.

Given the complexity of the US regulatory landscape, DBCCA believes this may work best at the state level.

Carbon Markets

In the past, technology has looked at R&D–research and development. The outcome is a product that is market ready. However, renewable energy markets need R&D+D–research, development and demonstration–to prove that the technology is ready for large scale deployment.  DBCCA believes the funds for this sometimes lengthy and expensive process could come the renewable energy incentives that are planned to be integrated into carbon markets. Under the legislation working its way through the Senate, as well as the Waxman-Markey bill which passed the House, some funds from the purchase of allocations by large emitters would be used to fund RD&D. Robust carbon markets would also create incentives for companies to develop products that would qualify for carbon credits, and finally some legislation has earmarked funds to help cross “the valley of death”: the distance from prototype to commercialization.

Scale

DBCCA also looked at schemes that lead to the scale of deployment to create markets.  Again, by looking at the successful German feed-in tariffs, they analyzed what makes them advanced while still delivering enough TLC to achieve scale. They believe that key features include cost/price discovery processes and the flexibility to respond to markets, while still operating within a transparent framework. Germany in particular stands out and is able to demonstrate many benefits that come with a strong volume response while being responsive to significant market developments. In a North American context, the province of Ontario has many features of a strong policy design. In short, by creating a large market for alternative energy, notably solar, Germany has been able to create demand on a scale that has satisfied investor unease and created a market that has resulted in jobs, increased energy security and emissions that have worked toward meeting Germany’s Kyoto protocol agreements.

Consumers

Finally, there is some cost to all incentive regimes, however well they are managed over time. That cost is likely to be passed straight through to the consumer or spread across the tax base. Although the current legislation contains much to appease consumers, it is naive to believe that we can go forward in a carbon constrained environment and not see rises in energy prices. The question may not be, “Will prices rise?”, but will the cost provide the efficiency, jobs, security and emissions that we need going forward.