Energy Sector Strategies to

Support Green Growth

Module 02

Policy Instruments for Renewable Energy

Lesson 1

Regulations, Standards, and Quantity Instruments

World Bank
Institute

Presentation Script

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

About this Presentation

In the previous lesson, we outlined the available policy instruments for

greening the energy sector. The next two lessons focus on policy instruments
for renewable energy.

This lesson provides an overview of global renewable energy trends, and then
discusses two specific sets of sector specific instruments for renewable
energy: standards and quantity instruments.

Page 1 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

Before discussing specific policy options, it is useful to review some key
points regarding renewable energy.

First, renewable energy make up almost 17% of the total global electricity
supply, or about one fifth of the global energy supply mix, while fossil fuels
make up over 80%. However, renewable energy is the fastest growing
component of the mix, especially wind and solar technologies.

Within renewables, traditional biomass is the most widespread technology
and constitute over half of renewable energy capacity.





Page 2 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

The second point is that the costs of renewable energy have been decreasing
rapidly in recent years. For example, the graphic illustrates the installed unit
cost of photovoltaic systems smaller than 100 kW in Europe, Japan and the
US between 1988 and 2010. In all three regions, it is clear that photovoltaic
systems are becoming cheaper. Other renewable energy technologies such as
wind have also experienced a substantial fall in costs over similar time
periods.

The decreasing cost trend is expected to continue into the future as the
technologies improve and the scale of production increases in large
manufacturing countries such as China.

Page 3 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

The third point is that renewable energy capacity and investment have
witnessed substantial growth in the last few years.

For example, the global capacity of wind power has increased over tenfold
between 2000 and 2010.

The trend in installations is mirrored in renewable energy investments.
Global new investments in renewable energy have increased substantially
between 2004 and 2011, increasing from $39 billion to $257 billion. China,
the United States, Germany, Italy, and India were the top countries for total
investment for 2011.

As a comparison, in 2011, investment in renewable energy was greater than
investment in natural gas.

Page 4 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

As noted, one of the reasons for the increase in investment in renewable
energy has been the falling costs of renewable energy. Another important
reason is the implementation of policies promoting renewable energy.

Renewable energy policies have become increasingly prevalent throughout
the developed and developing world. In 2005, only 55 countries had some
type of policy target or renewable support policy at the national level. By
early 2011, this number more than doubled to 118 countries. Developing
countries represent more than half of all countries with renewable energy
policies.

Focusing on policies that support power generation, the table at the bottom
of the screen illustrates the number of countries in the different country
categories with policies in place.

Page 5 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

The majority of new electric capacity that will be added in the next 20 to 30
years will be in developing countries. How much of this additional electric
capacity will be renewable energy? What about Fossil Fuels?

Even with important policies in place, it is clear that we need to do more to
scale up the deployment of renewable energy to achieve the key objectives
of green growth. Achieving more aggressive renewable energy targets will
require additional policy support.

Some recent modeling by the International Energy Agency used three
different scenarios with varying policy assumptions to answer this question.
The modeling estimated the projected new energy capacity additions
between 2008 and 2035 in non-OECD countries under the different scenarios.
Click on first policy scenario to see the current policy scenario.

Page 6 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

The Current Policy Scenario considers all energy policies already formally
adopted and implemented. In this scenario, renewable energy in developing
countries is expected to make up 28% of new energy capacity additions while
fossil fuels are expected to make up 68% of new growth.

Click on the next policy scenario to see how the energy mix changes under
different policy assumptions.

Page 7 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

Including both current policies and new policy commitments that have
already been announced, we can see that the distribution of new capacity
changes. In the New Policy Scenario, renewables are now expected to
contribute 49% of new energy capacity while the share attributed to fossil
fuels decrease to 46%.
Click on the next policy scenario to see the next scenario.

Page 8 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Overview of Renewable Energy

This third scenario assumes an aggressive set of policies to promote

renewables to stabilize atmospheric greenhouse gas levels at 450 ppm. In this
450 Scenario, renewable energy in developing countries is expected to make
up 75% of new energy capacity additions while fossil fuels are expected to
make up only 14%.

Of course, there will be costs associated with the widespread deployment of
renewable energy, but some recent studies suggest these costs may only be
marginally more than conventional power development.

The key point to take away from these different scenarios is that the
expected growth of renewable energy uptake largely depends on the scale of
public policies. This is because the renewable energy market is, to a large
extent, a policy-driven market.

Page 9 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Renewable Energy Policies

As reviewed in the previous lesson, there are a wide variety of policy
instruments for renewable energy such as regulations and standards,
quantity instruments, procurement strategies, and price instruments. This
lesson reviews regulations and standards, and quantity instruments.
Procurement strategies and price instruments are covered in the next lesson.

Page 10 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Regulations and Standards

Regulations and standards are currently being employed in almost every

country that has renewable energy policies.

Regulations and standards can either promote renewable energy directly or
indirectly.

Direct regulations and standards specifically target renewable energy
sources. Policies that specifically target renewable energy can be used to
increase demand for renewable energy or remove burdensome regulations
and other noneconomic barriers.

Indirect regulations and standards target non-renewable power sources. For
example, some jurisdictions set strict emission standards or other
performance standards for power generating plants that make it not feasible
to develop fossil-fuel power plants.

Page 11 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Both direct and indirect policies increases the relative attractiveness of
renewable energy compared to other power sources.
Regulations and Standards

Lets explore some of the direct regulations and standards that specifically
target the promotion of renewable energy.

One of the main types of these regulations are renewable energy mandates.
Renewable energy mandates require a certain energy share or equipment
requirement for a building to come from renewable energy sources. By
amending the national or local building codes to include renewable energy
mandates, new buildings can reduce their reliance on traditional energy
sources and enhance energy security. For example, solar hot water mandates
have been used in many countries to quickly stimulate demand for renewable
energy.

Page 12 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Israel, Spain, India, and several other countries have a national-level solar hot
water mandate. Brazils program My House, My Life, is planning to install
300,000 to 400,000 solar water heaters in social housing projects in the next
few years. Overall, the Brazilian program is targeting an increase from 6
million meters squared of total solar collector area by 2010 to 15 million by
2015.

Click on the map of India to learn more about their program.
Regulations and Standards

Page 13 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Regulations and Standards

One potential noneconomic barrier to the deployment of small scale
renewable energy projects is the lack of grid access. Allowing more flexible
access to the energy grid can be a useful policy to promote renewable
energy.

One such policy is net metering or net billing. Net metering is a power supply
arrangement that allows customers to supply energy to the electricity
distribution grid from their own generation systems. With net metering,
households or customers use the electricity generated from their small scale
renewable energy source when they need it, and when there is a surplus of
electricity, the households or customers can sell any surplus electricity they
do not need. Customers are only charged for their net electricity use, total
consumption minus self-generation. This two-way flow of electricity is
especially important for small scale rooftop solar photovoltaic systems.

Page 14 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Regulations and Standards

Regulations and standards that target non-renewable power sources limit
their use or increase the costs of power from these sources and, thus make
renewable energy relatively more attractive financially.

For example, in the absence of any policies, the costs of a coal plant may be
less than the costs of implementing renewable energy as shown in the left
graph. Now lets assume a jurisdiction introduces a regulation mandating
that all coal plants have to implement carbon capture and storage (CCS)
technologies. This policy would increase the costs of operating coal plants as
shown in the right graph. The increase in the coal costs decreases the relative
costs of renewable energy. Therefore, even though this policy indirectly
affects the feasibility of renewable energy, this example illustrates that
regulations and standards applied to non-renewable power sources can
improve the economics of renewable energy.

Page 15 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

We now turn our attention from regulations and standards towards quantity
instruments. Quantity instruments are market-based instruments that use
quotas or other quantity-setting mechanisms to define a specific target or
absolute quantity for renewable energy production. A key attribute of
quantity instrument is that although the target can be directly controlled by
the policy maker, the prices or incentive amounts are determined in the
market.

There are two interrelated quantity instruments that we cover in this lesson:
Renewable Portfolio Standards and Renewable Energy Certificates. As well
will see, these two policy instruments are often used in tandem.

Page 16 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

The most prevalent quantity instruments for renewable energy are
renewable portfolio standard (RPS) policies. In different jurisdictions, RPS is
also known as renewable electricity standards, renewable obligations, and
mandated market shares.

RPS policies mandate the introduction of a certain percentage or absolute
quantity of renewable energy capacity or generation at unspecified prices.
For example, a jurisdiction may set a 20% renewable energy standard and all
energy suppliers that provide power to the grid must meet this standard.
However, this may pose challenges for small energy firms or producers that
only operate fossil-fuel based power plants.

Page 17 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

To increase the flexibility of the RPS policy, and to lower overall costs, energy
suppliers may be able to use tradable renewable energy certificates (RECs) to
meet the compliance targets. Recs are a non-tangible, tradable commodity
that represent proof that one megawatt-hour (MWh) of electricity was
generated from a renewable energy source. The supply of Recs is created by
renewable energy producers.

Recs can improve the cost-effectiveness of RPS policies by lowering the
overall costs of compliance. Recs represent the renewability attribute of a
certain amount of electricity, not the electricity itself. Consequently, Recs can
be bought and sold with the actual electricity, which is called bundled, or
Recs can be bought and sold independently, which is called unbundled.
Whether Recs are bundled or unbundled does not affect the level of
environmental effectiveness.

Page 18 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

While the supply of Recs come from renewable energy producers, the
demand for Recs can come from either consumers through voluntary markets
or from utilities through compliance markets.

In voluntary markets, consumers can purchase Recs to demonstrate that they
are using clean electricity. Voluntary markets are generally not related to
formal RPS targets, but rather consumers provide direct incentives to
renewable energy producers.

In Compliance markets, utilities or electricity distributors use Recs to meet
the formal requirements of RPS policies and local or international targets.

The interactions between these two sets of markets is not always clear, and
careful policy design is required to ensure Recs are not double counted.

Page 19 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

Lets look at how a typical market works when Recs are sold independently
from the electricity.

First, lest review the key actors. In general there are three types of actors:

Page 20 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

The suppliers of Recs are the renewable energy producers.

Quantity Instruments
Page 21 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

The Rec purchasers who are either electricity distributors in a compliance
market or consumers in voluntary markets.

Quantity Instruments

Page 22 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

And the regulator who issues Recs and oversees the market.

Quantity Instruments

Page 23 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Now that we know the actors, lets see the four key steps in a Rec market.

In the first step, the regulator issues the Recs to eligible renewable energy
producers based on their megawatt hours of production. Normally, one Rec is
provided for each megawatt hour of renewable energy produced.

Quantity Instruments
Page 24 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

In the second step, both renewable energy and conventional energy
producers sell electricity to the grid.

Quantity Instruments

Page 25 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

In the third step, the renewable energy producers sell Recs to consumers in
voluntary markets or electricity distributors in compliance markets. The price
of Recs is determined by the demand and supply for Recs in the market and
that will determine the financial incentive received by the renewable energy
producer. Because the Recs are unbundled in this example, the Rec purchaser
cannot dictate which electrons they receive from the grid.

Quantity Instruments

Page 26 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

In the final step, Recs are retired when used for compliance with an RPS
policy. The regulator usually verifies that each electricity distributor has
enough Recs to be in compliance with the standard.

Key Design Characteristics in RECs and RPS Programs

Page 27 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Now that we know how RPS and Rec policies work, lets review some of the
key design characteristics of these programs. Click on the design issue to
learn more. Advance to the next screen to continue when you are finished.

Quantity Instruments

Page 28 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Many countries have used quantity instruments to promote renewable
energy. Click on each case study to learn more about policies already in place.

Quantity Instruments

Page 29 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

Quantity Instruments

Page 30 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

A total of 29 states have implemented RPS policies. The renewable energy
targets vary across the different states. Only three programs do not allow
some form of Rec trading. The characteristics of nine different western states
are presented on this screen.

Quantity Instruments
Page 31 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

RPS and Rec policies can provide several advantages for project developers
and policy-makers.

For project developers, quantity instruments have the potential to offer new
revenue streams for renewable energy projects.

For policy-makers, these instruments provide incentives to develop the
cheapest renewable energy technologies currently available, which lowers
the overall economic burden of the program.

In addition, these instruments provide greater certainty over the renewable
energy market share because policy-makers themselves set the targets.

Furthermore, policy-makers do not need to set tariff or incentive rates, which
can be a difficult process.

Quantity Instruments

Page 32 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

RPS and Rec policies also present several challenges.

First, there is a need for a liquid Rec market with many buyers and sellers to
ensure that the efficiency gains can be realized. This may be difficult in small
markets, or in markets with only a few renewable energy developers and
energy suppliers.

Second, because the price of Recs is set in the market and may fluctuate over
time as supply and demand changes, there is less certainty to investors of the
level of economic incentive. This uncertainty may inhibit renewable energy
development.

Third, because a separate marketplace for Recs must be set up which
includes verification and monitoring, the transaction costs of these types of
policies may be large.

And finally, the RPS target sets an upper limit on renewable energy

Page 33 of 34

Energy Sector Strategies to Support Green Growth

Module 2: Lesson 1 Regulations, Standards and Quantity Instruments

Presentation Script

deployment. Once the target is met, there is no continuing incentive to

increase renewable energy development.

References and Recommended Readings

You have completed the first lesson on regulations, standards, and quantity
instruments. Here are some links to more information on the topics covered
in this lesson.

Page 34 of 34