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Feed-in tariffs and a policy instrument for promoting renewable energies and green economies in developing countries

Feed-in tariffs and a policy instrument for promoting renewable energies and green economies in developing countries

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This report is intended as a resource for policy makers in developing countries to make informed policy decisions about the whether,when and how of FITs and to support nationally appropriate policy measures to scale up renewable energy. The report is also intended to improve the understanding of the potential benefits and challenges for developing countries to design FITs as well as the factors influencing their success, more in depth from the policy and legal foci, whilst also analysing the funding and capacity implications. Throughout the report, FITs are construed as interacting with national energy and non-energy policies in a dynamic manner.
This report is intended as a resource for policy makers in developing countries to make informed policy decisions about the whether,when and how of FITs and to support nationally appropriate policy measures to scale up renewable energy. The report is also intended to improve the understanding of the potential benefits and challenges for developing countries to design FITs as well as the factors influencing their success, more in depth from the policy and legal foci, whilst also analysing the funding and capacity implications. Throughout the report, FITs are construed as interacting with national energy and non-energy policies in a dynamic manner.

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Published by: United Nations Environment Programme on Aug 10, 2012
Copyright:Attribution Non-commercial

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03/26/2013

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Tradable RECs were first developed in the United States as a compliance mechanism for the first
wave of state-level RPS policies in the late 1990s (Rader and Norgaard, 1996). A REC
represents a measured unit of electricity and can be unbundled from the electricity itself and sold
as a separate and tradable commodity. Utilities purchase RECs from eligible renewable
generators in order to demonstrate compliance with renewable energy mandates or targets. As
originally envisioned, tradable RECs utilize market forces to efficiently deliver the lowest policy
costs. As currently implemented, however, RECs are procured using a broad range of
mechanisms, including short-term trading, competitive tenders, bilateral negotiations, and
standard offers.

Policy maker perspective: When traded, RECs are unbundled from electricity and typically sold
on the spot market or via short-term agreements. Prices can vary according to supply and
demand and may be capped by alternative compliance payment rates or penalties. The variability
in REC prices creates significant investor risk and many lenders discount the projected value of
tradable RECs when evaluating investments (Baratoff et al., 2007; Ford et al., 2007). Because
RECs are sold separately from electricity, generators are exposed to the added risk of having to
negotiate and enter into multiple contractual arrangements for different commodities (i.e.
electricity and RECs) (Mitchell et al., 2006). As tradable REC markets have evolved, however,
policy makers have increasingly introduced price securitization mechanisms, such as price

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floors and long-term contracts to reduce market price volatility (Bird et al., 2011; Wiser et al.,
2010).

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