Subsidising dissemination
A large number of approaches have been taken to subsidise technology developments, from earmarked
taxes to straightforward government (or government-run specialised agency) subsidies, to tax exemptions
to other fiscal arrangements (e.g., allowing accelerated depreciation of clean investments). However, given
public fiscal limitations, governments are increasingly seeking to have consumers rather than taxpayers
subsidise renewable energy technology developments.
However, governments continue to provide direct subsidies to technology. Ongoing policies are a reaction
– given the need to take action – to the difficulty in setting up market-based instruments such as taxes or a
cap-and-trade system. While subsidies are a “second-best” instrument, they are politically acceptable. It
has also been argued that some technologies require further “learning” investments to become competitive
in markets – even if all externalities were fully incorporated into the price. Governments,
have a long-term
interest in promoting more efficient technologies – in the case of climate change, carbon-free or carbonlean technologies – and ensuring they will be available in the future at acceptable price. One way of
ensuring this is to bring such technologies further down their learning curve; one tool for doing so is to
subsidise them.
However, making the choices on which technology to promote is not an easy task. Jacoby (1998) states
that “picking winners is a difficult art, and spending money effectively is a daunting challenge in the midst
of regional and industrial demands for a share of the pie.” He notes that the expertise in many technical
areas resides in private industries – particularly oil, chemicals and electric power. “Government-industry
COM/ENV/EPOC/IEA/SLT(2003)4
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partnerships and tax subsidies can help direct their efforts, and useful experiments are now being tried. But
the only way to truly attract industry attention is through an influence on the bottom line, which necessarily
involves (among other things) price expectations. In the energy sector at least, large-scale technical change
with no price incentive is a non sequitur.”
Various instruments have been used to support renewable energy technology dissemination, including:
bidding processes (Ireland, France and UK); fixed feed-in tariffs (US in the 80s, Germany, Spain,
Denmark, France, India); tradable green certificates schemes (Italy, Belgium, UK).
The first might be
characterised as “quantity” instruments, the second as “price” instruments, and the third as “quantity with
flexibility” instruments.
Price instruments that do not allow controlling quantity but allow controlling marginal cost have proven,
somewhat paradoxically, to offer less control on total costs than quantity mechanisms (Ménanteau et al.,
2001). Guaranteed prices have proven more effective in fostering deployment: within the EU more than
80% of added wind power capacities in 2000 were in the countries with guaranteed prices, notably
Denmark, Germany and Spain (Lamy et al., 2002). UK and France have given up the bidding processes,
replaced by fixed feed-in tariffs in September 2001 (France) and a green certificates scheme in April 2002
(UK). India also moved from investment incentives to feed-in tariffs (Philibert, 2001). Feed-in tariffs may
easily be differentiated amongst technologies if the political intent is to promote various technologies at
different stages of maturity.
However, the value of fixed feed-in tariffs has been questioned: it raises costs to electricity consumers, and
may not provide any significant incentive for innovation.
Diversified tariffs, decreasing both with site
productivity and over time, may help provide continuous incentives to technical improvements. A balance
must be found, however, between providing this incentive by progressively reducing the extra cost paid as
a learning investment and the risk of suppressing the minimum long-term security needed by developers.
Green certificates are thought to provide some advantage in stimulating competition, and particularly
relevant in more deregulated markets. However, unless certificates are granted preferentially to certain
technologies, this policy tool may serve less well. This is particularly true if all technologies are in
competition and if the political intent is to promote various technologies at different stages of maturity.
Moreover, the need for developers to get bank loans and for distributors to hedge against certificate price
volatility may privilege long-term contracts and shrink green certificate market size.
Procurement programmes also allow governments to promote the dissemination of efficient, clean
technologies. The scale of government purchasing give producers confidence in the depth of the markets,
ultimately allowing them to proceed with production, and reap the advantages of both experience and
economies of scale.
