Quotas for renewable energy

Countries have implemented different systems to encourage investments in renewables – one of these is determining quotas for companies to meet.

Quota systems for renewable energy

Some countries are switching to renewables by requiring power companies to produce more green power with policies called “quota systems.” These policies set targets for utilities to reach, and penalties can be imposed if the targets are not met.

The focus here is generally on cost, with the assumption being that utilities will choose the least expensive source of renewable power. For instance, the British Wind Energy Association lists wind projects as submitted, approved, refused, and built, categories that do not exist in countries with German feed-in tariffs. Rejections are thus a natural part of requests for proposals, which are also common in the US.

Overall, the difference between the two approaches – the German feed-in tariffs versus quotas – is striking. Under quotas, only the least expensive systems go up after time-consuming reviews, and they remain in the hands of corporations; under feed-in tariffs, everything worthwhile goes up quickly, and ownership of power supply rapidly transfers to citizenry.

This focus on cost is justified in quota systems (like Renewable Energy Portfolio Standards in the US) because excess profits would go into the hands of a small group of corporations. Proponents of such quota systems correctly charge that the cost impact of feed-in tariffs is generally greater than the cost of quota systems, but they overlook two aspects: first, countries with feed-in tariffs generally install a lot more renewable generating capacity; and second, if properly designed, profits from feed-in tariffs go back to small investors, not multinational players, thereby breaking the stranglehold that large corporations have on the energy sector. In other words, many of the people who face slightly higher retail rates also receive revenue from those increases.

Proponents of quota systems argue that they are “technology-neutral,” meaning that they do not prefer one technology over the other. They charge that feed-in tariffs “pick winners.” But the charge is unusual in light of the different market outcomes. Quotas promote the least expensive type of renewable energy, which has generally been onshore wind up to now. Not surprisingly, PV – relatively expensive until recently – has sometimes failed to win bids in auctions altogether unless there was a set-aside for photovoltaics (though that situation may be changing now that PV is so affordable). In contrast, markets with feed-in tariffs for all renewable sources generally see a buildup of everything. And if you want an energy transition, you will need a proper mix of renewable sources, not a focus on the cheapest one.

Ironically, the allegedly “technology-neutral” policy (quotas) has led to a focus on a single energy source (onshore wind), while the policy that allegedly “picks winners” has led to a healthy technology mix. Furthermore, while auctions are called “competitive,” competition takes place between energy sources; companies also compete with each other in auctions, but the auctions lead to greater market concentration. Feed-in tariffs have produced far more open markets, with new players competing on a level playing field against incumbents.

Until recently, the American Wind Energy Association (AWEA) had a section on its website called Projects, which listed wind farms by location, size, and owner. At the time, Germany had the most wind power capacity of any country in the world. Nonetheless, DEWI, the organization that collates statistics on German wind power, said they never produced such a table: “We cannot say who owns a particular wind farm in Germany because ownership is splintered across scores, and sometimes hundreds, of local citizens and businesses.”