You are on page 1of 9

b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

Available online at www.sciencedirect.com

http://www.elsevier.com/locate/biombioe

The role of governments in renewable energy:


The importance of policy consistency

William White a,*, Anders Lunnan b,1, Erlend Nybakk c,2, Biljana Kulisic d,3
a
Natural Resources Canada, Canadian Forest Service, Northern Forestry Centre, 5320 122nd St. Edmonton, AB,
Canada T6H 3S5
b
UMB School of Economics and Business, 1432 Aas, Norway
c
The Norwegian Forest and Landscape Institute, Box 115, 1431 Aas, Norway
d
Energy Institute Hrvoje Pozar, Department for Renewable Energy Sources and Energy Efficiency, Savska 163,
HR-10000 Zagreb, Croatia

article info abstract

Article history: The renewable energy sector (RES) often receives financial, institutional or educational
Received 20 June 2012 support from the government. A significant challenge for the actors in the RES field is
Received in revised form policy consistency. When investments are carried out, a prognosis for future policies must
18 December 2012 be made. If the future is uncertain, larger risk margins should be included in the invest-
Accepted 22 December 2012 ment appraisals. Sudden, unexpected policy changes are one type of uncertainty that
Available online 12 January 2013 makes it more difficult to attract capital. In this article, we discuss the consequences of
discontinuities in policy support using a case study approach. In Ontario, feed-in tariffs
Keywords: were introduced in 2009 and resulted in a large uptake in the programme. In 2010, the
Bio-diesel subsidies were drastically cut, resulting in the RES community losing confidence that the
Wind sector government would offer consistent support to the sector. In Norway, a large new biodiesel
Solar PV sectors plant was opened by the Minister of the Environment only a few weeks before the gov-
Feed-in tariff ernment announced a major change in the bioenergy policy. As a result, the new plant was
Policy economics closed and restructured, and the investors lost nearly all of their investments. The gov-
Predictable policy measure ernment lost political credibility, making it difficult to raise private capital for new in-
vestments in this sector in Norway. We do not argue that policies should not be changed,
but the manner in which policies are changed plays an important role. Our study shows
that large, unexpected changes in policies increase uncertainty and may have a negative
impact on investments. This topic should be further researched.
Crown Copyright 2013 Published by Elsevier Ltd. All rights reserved.

1. Introduction support usually takes the form of financial, institutional, or


educational aid. Usually, governments provide financial sup-
Under the current energy market structure, renewable port by introducing subsidisation schemes, grants, and/or
energy systems often receive government support [1,2]. This feed-in tariffs/quota systems. These schemes are typically

* Corresponding author. Tel.: 1 780 435 7315; fax: 1 780 435 7359.
E-mail addresses: bwhite@nrcan.gc.ca, billwhite2334@gmail.com (W. White), anders.lunnan@umb.no (A. Lunnan), erlend.nybakk@
skogoglandskap.no (E. Nybakk).
1
Tel.: 47 64965686.
2
Tel.: 47 64949099.
3
Tel.: 385 1 6326 169.
0961-9534/$ e see front matter Crown Copyright 2013 Published by Elsevier Ltd. All rights reserved.
http://dx.doi.org/10.1016/j.biombioe.2012.12.035
98 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

aimed at promoting positive externalities or assisting infant consistency in general terms, which is followed by a review of
industries in which the private sector is not likely to be two case studies. The first review describes the green energy
involved, such as landfills. These types of involvement share policy of the Canadian province of Ontario, and the second
the common thread of involving a transfer of government review discusses a Norwegian biodiesel firm and the effects of
resources to the market to alter the behaviour of the other mid-stream changes in policy on the players involved. The
agents in the economy (firms and households). paper closes with several concluding remarks.
There are numerous studies on how to achieve policy goals
for renewable energy (e.g., [3]). When formulating new and
long-term support policies for bioenergy, not only should 2. Literature review
a clear target be set, but the target should also be accompanied
by a clear vision. An IEA report [3] highlights the following 2.1. The role of governments in renewable energy
points as important in developing bioenergy policy: to reach systems
long-term policy targets, concrete financial support types
must be developed; unsustainable production and the use of This section considers all levels of government from civic to
biomass and bioenergy carriers should be prevented; care county, regional to state and provincial to national govern-
should be taken to avoid (policy-induced) competition for ments. Implementing a successful RES policy has proven to be
biomass feedstock; the long-term continuity of policy support difficult for governments to achieve (see Mitchell and Connor
appears to be the single most important factor; and finally, [10] and Wood and Dow [11] for discussions regarding the
bioenergy support policies are a precondition, but not a guar- challenges faced by the United Kingdom). While private firms
antee, for the successful development of bioenergy. Addi- respond primarily to the drivers of profits, the actions taken by
tional factors include the legal, administrative, technological, governments should be driven by a desire to improve social
and cognitive frameworks, among others. welfare regardless of the role they (the governments) play
Despite the fact that the IEA [3] identify the long-term in RESs. Potential energy-related drivers for a government
continuity of policy support as the most important factor in seeking to improve social welfare include energy security, en-
achieving policy goals on renewable energy, scholars have ergy supply, energy affordability, sustainability, and adapting
failed to address this important issue in the bioenergy liter- to and mitigating climate change. Creating job opportunities,
ature. However, there has been interest in this topic among particularly in rural and remote regions, can also be an
experts in the rational expectations theory, and a key paper important driver for government involvement in RESs. Corpo-
was produced by Kydland and Prescott [4]). They argue that rate profitability, balanced with improvements in the overall
desired policy outcomes can best be obtained through con- standard of living, will also be a component of social welfare.
sistent policy rules rather than through discretionary policies. The potential roles of the government in the bioenergy econ-
Other important papers were written by Calvo [5] and Barro omy are described herein as the tools that governments have at
and Gordon [6]. All of these papers focus on macroeconomic their disposal to improve social welfare through the bioenergy
policy in general, with a particular focus on monetary policy. economy. The diverse set of goals that governments may
Other authors have investigated the role of policy consistency pursue and the many drivers that are affected by the govern-
in pollution regulations [7,8] and environmental policies [9]. ments make it difficult for them to have clear and consistent
With respect to environmental policy, arguments are made for policies, a factor that can hamper their efforts to assist the RES
policy consistency, but it is important to recognise that there market [10]. Government policies must also be developed with
are times when governments must react to abruptly changing a consideration for public support. A policy implemented
external conditions. without a reasonable level of public support will have difficult
To fill this gap, we will discuss the consequences of dis- time succeeding and the governments that implement them
continuities in policy support using a case study approach. may have trouble finding support from the public they need to
The aim of this study is to emphasise the impact of policy re-elect them.
inconsistencies on new investments and to address topics of The government may participate in the bioenergy econ-
further research. We achieve this by conducting two case omy as an owner of a production facility. This involvement
studies in which the effects of unexpected policy changes on can range from a community-owned district heating plant to
the agents in the renewable energy sector (RES) are examined. bioenergy production as part of a provincially or state-owned
The case studies are obtained from disparate geographies energy enterprise. Economic theory explains that government
(Ontario, Canada and Norway) and various renewable prod- intervention in the economy should occur in the case of
ucts (wind and solar in one case and biofuel in the other) to market failure and in cases where this intervention would
demonstrate that the issue is not restricted to a specific time, result in an improvement in social welfare. Thus, when
place or product. This paper will explore the importance of a government includes bioenergy as a part of the production
providing consistent policy signals to firms and consumers if process, it should only do so because social welfare is
the government desires for these agents to behave in a man- advanced by this action. The current profits should be a sec-
ner that produces the intended policy outcomes. ondary consideration along with the government revenues
The next section briefly compares the externalities asso- (i.e., taxes) that are required to operate the facility.
ciated with RESs (as opposed to their primary role as A more common role for governments in the bioenergy
a renewable energy source) with the governmental role in economy is in the development of policies that affect the
improving social welfare by preventing market failures. The behaviour of households and firms. Households maximise
following section discusses the importance of policy utility, a portion of which includes financial well-being,
b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5 99

while firms respond to costs and profits, which are their Could a national government attempting to contribute to
primary drivers. Through taxes, subsidies and regulations, global welfare actually harm its own countrys welfare? This
governments can have a direct impact on these factors. The occurrence is not outside the realm of possibilities. From
typical tools used to assist the start-up of RES firms involve a theoretical perspective, we know from Tinbergen [16] that
either influencing the price (i.e., feed-in tariffs) or the different goals require different policy instruments. Generally,
quantity (i.e., quotas). there must be at least one more measurement than there are
A comparison of the support schemes for the market- goals. In theory, this model works well. In practice, however,
based deployment of renewable energy in the UK and Ger- goals and instruments at different levels are not independent,
many showed that the feed-in tariff (FIT) reduced the costs to thus making it difficult to determine whether the Tinbergen
consumers and resulted in larger deployment mechanisms model is working efficiently.
than quota and auction mechanisms [12]. Other studies have The most important role of the government in the RES
also shown that the German EEG (Erneuerbare-Energien- market is to provide an environment through rules and reg-
Gesetz) has been more effective in increasing the share of ulations that will support free market forces, i.e., that will
renewables than in generating policies in England and Wales provide a system for market development that will not require
[13]. Even if the FIT in Germany is gradually reduced by 5% government intervention to maximise social welfare. Clearly,
annually, the production of renewable electricity will increase intervention remains an option for the government if market
annually [14]. While the FIT is changing, the consistent annual failure persists. A set of rules should lead companies toward
reductions are an example of the policy consistency that has achieving the governments aims for RESs, regardless of the
characterized German policy. different aspects (energy, sustainability, climate change,
Developing an optimal policy by aggregating individual employment) of the RES projects that fall under the jurisdic-
preferences either via indifference-curve mapping or through tions of various governmental bodies. The governments set of
utility functions is not as straightforward a solution as eco- drivers should not confuse the company but instead direct the
nomic theory would suggest. Policies cannot be directly company toward the governments goals. Lewis and Wiser [17]
inferred from individual preferences [15] because they depend present an additional benefit of the assistance of the govern-
on additional political and institutional factors. A government ment in market development by stating that a strong local RES
must be aware of the existing drivers and weigh those pref- industry can develop into a strong international company.
erences to tailor their implementation plans for achieving Numerous studies [1,18] suggest that bioenergy is the
desirable strategic goals. For example, the government sub- renewable energy source that provides the most positive ex-
sidisation of district heating may help firms overcome barriers ternalities. Bioenergy is not without negative externalities as
to enter the market and may allow them to profitably sell much has been written in the press about the role of bioenergy
energy at lower prices than they otherwise could, which, in and biofuels in causing a rise in food costs. It has been
turn, would increase the quantities demanded by households claimed, however, that renewable energy prices are not
and firms that choose to purchase bioenergy. These measures competitive with fossil fuel prices because fossil fuel prices do
could be aimed at discouraging the use of non-renewable not offset the negative externalities associated with fossil
energy sources or promoting renewable substitutes. fuels. This phenomenon may explain the findings of Burer
A lack of complete and accurate information is an impedi- [19], who found that the method preferred by businesses that
ment to both firms and households in selecting optimal levels can be used to assist in making renewables competitive with
of bioenergy and to governments in developing policies. Gov- fossil fuels is the FIT. The logic appears to be that if the cost of
ernments can supply information in a cost-effective manner, fossil fuels is artificially low because the externalities are not
but they will only do so if they believe that the cost involved internalised, then we should make the cost of renewables
will be justified by the resulting increase in social welfare. artificially low by providing a FIT. Governments affect the
Governments can accomplish this goal through demon- actions of individuals and firms through laws or taxes (known
stration projects, by funding and disseminating research re- as Pigovian taxes) which affect prices, and cause a redis-
sults, and through various forms of media, pamphlets or tribution of income. The goal of these interventions is to
websites that inform potential customers about bioenergy and correct the negative externalities in the overall economy by
other related topics. improving the social welfare function, thus collectively ben-
Governments, at each level, assume the role of shaping the efitting the people even if it is at the expense (loss of utility or
economy according to their strategy for development. A chal- profit) of some individual households or firms [20]. While the
lenge for governments is the existence of different goals for the efforts in and means for improving social welfare create
different levels of government. A local government interested additional costs to society, the government can use bioenergy
in the local control of the energy supply and in creating more as a tool with which to address other social issues, as well as
local jobs may opt for a bioenergy project. Hypothetically, this to improve its energy portfolio [21] by participating in the RES
situation could lead to workers migrating from another region market, thereby creating positive externalities for the overall
of the country where, for example, poverty is an extreme welfare of a society. Ideally, this situation would be achieved
problem, and these job losses will only exacerbate the prob- through profitable ventures wherever possible to optimise the
lem. The national government, which is interested in social use of tax revenues.
welfare at the national level, views this action as one that A governments task is complicated by the fact that they
negatively impacts overall social welfare. Should the national cannot consider the bioenergy sector in isolation, but rather as
government intervene? A similar challenge faces national a part of a complex economy composed of households and
governments that are negotiating in international agreements. firms, each of which may be affected by policy changes. In this
100 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

same light, governments cannot separate economic and social example of a country that has benefited from consistent pol-
policies; all of the actions that ultimately affect household or icies in implementing RESs and the US as a country that has
firm behaviour fall, by definition, within the realm of eco- suffered from inconsistent policies [27]. The 2009 amendments
nomics. Finally, a governments task is never complete. In of the FIT system in the Austrian O kostromgesetz (Eco-elec-
a world of constant change on the global to local scales, gov- tricity Act) affected most of the investments in biogas plants
ernments must constantly be monitoring the current condi- [28]. Similarly, Raven and Gregersen [29] cite changes in envi-
tions and values of their citizens to ensure that their polices ronmental and energy policies as key factors in the setback of
are augmenting social welfare. Globalisation is pressuring biogas plants in Denmark.
governments to reduce the tax burdens on business activities. Advocacy groups for renewable energy consistently note
Thus, governments should seek projects and solutions that the need for policy stability and consistency. Canadas Rural
raise incomes and directly increase their revenue collections Partnership [30] states the importance of .policy support
from income and other taxes when they believe that the [being] consistent, long term, and predictable to avoid boom-
increased expenditures will increase social welfare. bust cycles. At the annual meeting of the American Council
on Renewable Energy, a long-term consistency in govern-
2.2. Policy consistency ment policy was requested [31], and the keynote speaker, US
Senator Lisa Murkowski, stated that, we need policies that
To understand the importance of policy consistency, one can endure both the passage of time and shifts in party lines,
must first understand how firms and households make de- and that will receive consistent funding for five years or ten
cisions. People or households have preferences, or likes and years or longer. In the United Kingdom, the Confederation of
dislikes, and they are able to translate these likes and dislikes British Industry and several key industry leaders called on the
into how much they value one good over another good. This United Kingdom government to end policy uncertainty in the
phenomenon is known as consumer sovereignty. People make area of renewable energy [32]. This occurrence followed the
rational choices that are constrained by budgets, laws, social substantial decreases in the FIT for wind and solar shortly
norms, and other factors to make themselves as well off as after they were introduced.
possible. A rational choice is defined as any choice that is The previous discussion is not meant to imply that policies
viewed as the best choice from the point of view of the person should not be changed. Policies must be flexible enough to
making the decision. Choices are made based on the infor- adapt to new technologies and changing markets, and they
mation that is available at the time the decision is made. must ensure that new ventures are economically feasible until
When a household must consider a favourable governmental they can stand on their own. What must be avoided are the
policy when making a decision, the governments past per- frequent and unpredictable policy changes that disrupt mar-
formance in maintaining their policies becomes an important kets and discourage investments [24].
consideration.
Economic theory portrays firms as profit maximisers.
Therefore, firms choose optimal levels of capital, labour and 3. Materials and methods
other inputs, as well as a production process, to meet this goal.
A firms choices are shaped, similar to individual choices, by In this study, a descriptive perspective is used to exemplify the
budgets, laws, and regulations. As with households, potential effect of unexpected changes in the policies on renewable
changes in policy can be an important consideration in a de- energy firms and industries. Through case studies, we illus-
cision to make a particular investment. Nybakk et al. [22] trate how policy changes have affected an industry and a -
studied fourteen bioenergy companies across Europe and liquid wood bioenergy firm (Norway), as well as a firm in
found that policy and policy measures played an important a broader suite of renewable energy firms (Ontario, Canada).
role in the innovations of the companies. Furthermore, When the main question is how and the aim is to exemplify
Nybakk [23] emphasised the importance of risk in the inno- rather than generalise, a qualitative case study approach is
vation of SMEs. recommended [33].
The importance of policy consistency is noted by numer- To identify two information-rich cases, we investigated
ous groups that have had an interest in promoting RESs. secondary information, including newspaper articles on the
Miranda [24] notes the importance of both clarity and con- chosen policy changes and reports and speeches from industry
sistency in RES policies, noting that many projects will require conferences. The case study data were collected in 2010 and
access to credit because they require large capital investments 2011 using secondary data and primary data from a phone
in excess of what a household or firm may have available in interview (see Table 1 for more information). Secondary data
equity. If there is uncertainty that a government policy that is were chosen because they were readily available at low cost and
necessary to make the project feasible will remain in place, provided easy access to a number of viewpoints. The potential
loans will be difficult (and costly) to obtain. Similarly, if a pol- drawbacks of such data include the potential bias stemming
icy is unclear, it may be difficult to determine if government from the political views of a particular newspaper or the se-
funding can actually be obtained. lective reporting of the more sensational aspects of a story,
Mallon [25] argues that an unstable policy is worse than no while neglecting key but mundane details. These challenges
policy at all. The negative consequences of the collapse of a were overcome by reading a number of accounts from different
project or projects may outweigh the positive effects that could sources and by verifying the consistency of the reports.
have resulted from projects that did not depend on govern- Analysing case study data is challenging due to the large
ment incentives. The author cites Germany (see also [26]) as an variability in the data [33]. In the Norwegian case, personal
b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5 101

Table 1 e Data collected from the two case studies.


Case study Case description Data collected

Canada Sudden changes to Ontarios Green Energy Sources of secondary data included a Google search and
Act affected investments already in place and a search of urban Ontario newspaper websites. The website
planned investments in wind and solar power. of the Ontario Power Generation corporation was used to
This case study reviews the changes resulting obtain feed-in rates and official announcements of
from these unexpected changes in policy. feed-in tariff changes. The important references used
include the Ontario Power Authority [35]; Hamilton
Star [36]; Globe & Mail [37]; Globe & Mail [38];
Globe & Mail [39]; and ClearSky Advisors [40].
Norway The Norwegian governments removal of tax Data were obtained from semi-structured phone
exemptions for biodiesel was unanticipated. interviews with key people. The manager of a key
The case study reviews the impact on a new company was affected by the changes.
company that invested in a large biodiesel plant. Sources of secondary data included a Google search
with relevant keywords, newspapers, research
reports, presentations given by CEOs and business
journal articles.

interviews were conducted. Notes were taken during the implementing solar projects and, along with the solar in-
interview, and the full version of the case study was com- dustry, were the players that were most affected. In fact,
pleted within 24 h after the interview [34]. 20,000 farmers were awarded contracts and were affected by
the reduction in the FIT. Approximately 1,000 farmers were
told that the province did not have the transmission capacity
4. Results from the case studies to move forward with their projects, many of whom had
already made investments to implement their projects.
4.1. The case of Ontario, Canada In early 2012, uncertainty continued in the Ontario RES and
in the solar sector in particular. The Ontario government
By passing the Green Energy Act in 2009, Ontario became the reduced the number of proposals that would be eligible for the
first province to introduce a FIT to encourage renewable en- 20-year fixed FIT. The proposals submitted more than a year
ergy, which made them a green energy leader in Canada. The previously were not eligible for the current FIT rates. The
rates were considered generous when they were introduced revised prices mentioned earlier in this section are under re-
and included z.0063V per MWh (.0080 $ CDN converted view by the Province and the Ontario Power Authority [35].
at .7878 18 Dec 2012) for solar PV, z.001 V per MWh (.00135 The industry is aware that new prices are being implemented
$CDN converted at 1 CAD .7878 V 18 Dec 2012) for (which they did not know with the changes noted earlier), but
wind power, and a range of z.0008 to .0015 V per MWh there is now uncertainty due to the lack of knowledge
(.00105e.00195 $ CDN per MWh converted at 1 CAD .7878 V 18 regarding the yet to be announced rules and rates that will be
Dec 2012 for bioenergy). Domestic content requirements were applied to most new contracts. The motivation for the review
expected to create 55,000 new jobs in Ontario primarily in was that the solar and other green power production costs
businesses that would build, install and operate RESs. were expected to decrease, along with the governments
These rates were considered to be too generous by those desire to pass on these savings to consumers rather than to
who believed it could only result in increased taxes and higher producers.
tariffs for traditional energy sources. Adopters of new tech- An example of how these recent changes can affect a pro-
nology welcomed the rates and this resulted in a large uptake ducer can be illustrated by the Region of Waterloo Ontario.
of the programme. A total of 16,000 micro-FIT applications The region borrowed funds to install 25 rooftop solar-power
were received, with 80% of the applications being for small projects and had expected to recoup its investment and
ground-mount solar systems. When the programme was make a profit based on the 20-year FIT rates under which they
designed, the government was planning to provide a small FIT applied for funding. However, seven of those proposals were
for small ground systems but was convinced to treat ground- caught in the retroactive cap and will be subject to the new
mount and rooftop systems similarly, believing that there lower pricing. As a result, the region may have to revisit their
would be a small number of ground-mount applications. plans.
This belief was a serious misjudgement and resulted in the The overall expected impact of the sudden changes that
planned reduction of the FIT for ground-mount systems occurred in 2010 and the proposed, but unknown, changes on
to z.0046Vper MWh (.00588 $CAD converted at CAD .7878 V the horizon have varied. Several producers were hurt when
18 Dec 2012). A compromise of z.0051V per MWh (.00642 they planned investments under one policy but had to live
$CDN converted at CAD .7878 V 18 Dec 2012) was finally under another. Other producers were able to implement their
implemented. The solar industry was unhappy with this de- plans, but the policy did not account for the fact that the grid
cision because many companies had already ordered in- capacity constraints imposed by the local distribution com-
ventory and hired staff, for example, based on the expected panies would inhibit the sale of power to the grid. Despite this
demand at the higher FIT. Farmers were the leaders in circumstance, the Ontario PV market experienced significant
102 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

growth in 2011, and significant growth is also expected in The environmental NGOs opposed this proposal. There was
2012, although this finding is dependent on the outcome of the considerable opposition to the proposal within the govern-
FIT review. One of the reasons for optimism is the expectation ment, but the prime minister managed to convince the gov-
that the FIT review will provide a system with greater cer- ernment to back the proposal. In the public debate, the
tainty in terms of the application process, grid connections, government was massively criticised, with only a few econo-
and prices. If the review process takes longer than expected, mists supporting the proposal. In November 2009, the tax
an element of uncertainty will be added to the process and will exemption for biodiesel was decided on by Parliament with
slow the impressive growth of the sector. only a small change; namely, biodiesel would receive a 50%
Ontarios wind power was also affected by a mid-stream tax exemption in 2010 and no tax exemption in 2011. The
policy change. In February 2011, the province announced situation for Uniol was critical because the company required
that it would not allow any offshore wind power projects on an additional 6.5 M V (50 M NOK converted at NOK .1351 V 18
the Great Lakes until further environmental assessments Dec 2012 (from their investors to continue production. After
were conducted. Onshore wind power projects were not the major change in policy, the investors were not willing to
affected by the policy change. invest any more money in the company and controlled liqui-
dation was the only option. The investors lost most of their
4.2. The Norwegian case study (removal of tax money, the employees lost their jobs, and Raffeisenbank took
exemptions for biodiesel) over the plant. Uniol was sold in 2011 to a Russian/Canadian
consortium and is now focussing on the production of bio-
From 1999 to 2010, there was a Norwegian car diesel tax diesel from animal fat. Habiol was sold to Scanbio in May 2010,
exemption on biodiesel, which affected vehicles such as and the investors in Habiol accepted a loss of (z10 mill V)
electrical cars and cars using biogas and natural gas. The tax (73 M NOK converted at NOK .1351 V 18 Dec 2012).
exemption was a generous indirect subsidy for biodiesel that The main insights from this case are that annual budgets
equalled approximately .45 V per litre. The main principle of with no long-term strategies introduce uncertainty in the
the Norwegian environmental policy is the polluter pay prin- renewable energy industry and make it difficult to raise cap-
ciple. Because biodiesel cars also contribute to wear on the ital for investments. The industry is requesting predictable
roads, particulate emissions, queues and road accidents, the policies and not necessarily subsidies. Without predictable
drivers should pay for those costs, regardless of the type of policies, long term-investments will not occur.
fuel that is used. If the government desires to reduce the use of
fossil fuels, according to economic theory, the best alternative
would be to impose a tax on fossil fuels. However, because an 5. Discussion and implications
increase in the tax on fossil fuels is politically controversial,
politicians prefer to subsidise alternative fuels. The main consequence of the major policy change in Norway
Habiol, the first company to promote biodiesel in Norway, is that it is currently difficult to raise private capital for
was founded in 1994. In 2002, the company began planning renewable energy investments in Norway. To meet this
a large biodiesel plant (capacity of 100,000 tons) in southern challenge, the government announced in 2011 that the recent
Norway. The investors of Habiol consisted of two venture policy regime concerning biofuels will be maintained until
companies with 48% of the shares, 60 farmers, and several 2015. In addition, the government postponed the 50% tax
minor investors. In 2006, the plans were completed, and a new exemption until 2015. If Uniol had been aware of this policy
company, Uniol, was founded. The investors of Uniol included when the controlled liquidation was performed, the company
Habiol (31%), a biorefinery company; Borregaard (16%), an may have been able to raise the required amount of capital.
aquaculture company; Cermaq (40%), an agricultural cooper- Indirectly, the uncertainties with respect to future policies
ative; stfoldkorn; and several other minor investors. In total, have also played a major role in the abandonment of other
the equity capital of Uniol was z27 M V (200 M NOK converted planned larger investments in new biodiesel plants in Nor-
at NOK .1351 V 18 Dec 2012). To build the factory in Fredrik- way. At the same time that the change in the tax regime for
stad, a loan of z20.3 M V (150 mill NOK converted at biodiesel was implemented in 2009, the government decided
NOK .1351 V 18 Dec 2012) was obtained from Raffeisenbank in that all of the diesel sold in Norway must contain 2.5% bio-
Vienna, Austria. Before beginning the construction of the plant, diesel. This decision may have been a good solution for Uniol,
the board of Uniol held a meeting with politicians in the Nor- but the blending of the fuel is controlled and implemented by
wegian Parliament, where they discussed the policy frame- the oil companies, which is a market that has been considered
work for the plant. The vast majority in Parliament was highly to be too uncertain. There was also considerable uncertainty
supportive of the plan as a climate measure and assured Uniol regarding the actual implementation of this regulation. A
that there would be no major policy changes in the coming main problem for the industry is that government budgets are
years, which was sufficient for the board to make a final in- decided annually, and no decisions are legally binding in the
vestment decision. The plant was opened on June 6, 2009 by the coming years. Even if the parliament decides that a policy
Minister of the Environment. The biodiesel plant in Fredrikstad should not be changed in the next five years, a policy may still
was, at that time, the most modern plant in Europe and was be changed within the following year. Since the 2009 experi-
designed to be able to use a wide variety of inputs. ence, the industry has been sceptical; thus, political promises
At the same time that the plant was opened, the govern- must be critically reviewed.
ment completed its budget proposal for 2010. In this budget, In the Ontario case, the reactions to the policy changes
the tax exemption for biodiesel was proposed to be removed. have been mixed. The amount of FIT paid to renewable energy
b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5 103

producers has resulted in higher electricity costs for Ontario will call for a price on carbon emissions [22]. However, the
power consumers; thus, changes that result in less money importance of policy consistency has attracted less attention
being spent on solar power and that may result in lower among scholars.
electricity prices are welcomed. People concerned about the As previously mentioned, we have found little research on
potential health and visual effects of wind turbines support how firms should prepare themselves for policy changes
the cut-backs of this programme. In contrast, supporters of when developing their business plans. A potential research
green energy criticise that the policy flip-flops, claiming that agenda could include the following topics: How should the
it will shake investor confidence and that no one will take the market prepare for major shifts in policy? What is the role of
government seriously when it promises industry assistance policy-makers and the government in the long-term devel-
[36]. One firm, Trillium Power Wind Corp., has filed suit opment of RES markets? What is the value of introducing
against the provincial government, citing losses of z4 M V increased policy predictability for the actors in the market?
($5.3 M CDN converted at CDN .7878 V 18 Dec 2012) in What actions can governments take so that policy changes
planning its first wind farm and over z1.5 million V ($2 billion meet the criteria of being small and infrequent?
CDN converted at CDN .7878 V 18 Dec 2012) in future profits Unforeseeable events will require policy changes, but how
when the government suddenly cancelled all offshore pro- can the inconvenience be minimised by practicing due dili-
jects. John Kourtoff, Trilliums president, has said that the gence in the development of policies. For example, before the
change .destroys Ontarios credibility globally [37]. With announcement of FITs for different elements of a renewable
respect to the change in the solar policy, David Watts of Solera energy strategy, research could be performed to estimate the
Sustainable Energies said, It has shaken investments in expected uptake at different rates, i.e., the government could
Ontario to the core [38]. calculate how much uptake they desire at their highest price
The literature, as cited earlier in the paper, favours con- and then publish a formal schedule of lower incremental
sistent and ex ante policy approaches compared with frequent prices at uptake prices beyond that level. Social acceptability
changes in policy or an ex post approach in which policy is research could be conducted in advance of passing a policy on
chasing the current state of affairs. The two cases exemplify wind power, given the challenges that all jurisdictions have
the notion that policy inconsistencies cause problems for the experienced in placing wind turbines in locations that will not
industry in both the short and long term. Profitable businesses draw the ire of local residents. A good example of the effect of
can rapidly be made unprofitable, and investments in the a predictable policy is the evidence from the FIT in Germany.
future development of the industry can become more difficult The actors know that once a PV system is installed, the tariff
to obtain. remains constant over a 20-year period. They are also aware
Managers in companies working with RESs must consider that if they wait one year to make their investment, they will
their associated political risk. They must remain up to date receive 5% less. This reduction also introduces a predictable
with the best information possible and not rely on advice from pressure on the PV industry to innovate and decrease the
idealistic interest groups and NGOs. One implication of the costs of solar electricity [14].
unexpected changes in the policies in both Canada and Nor- Sufficient attention and research must be balanced against
way may be the increased lobbying activity. Managers have the timely implementation of policies. Moreover, researching
observed that large policy changes may suddenly occur, and a policy to the point that it is not implemented in a timely
the industry must be aware of what is going on as early as manner is not acceptable. Governments are under pressure to
possible to influence the decision-making process to the meet the demands of their constituents on current issues, so
greatest possible extent. they must carefully balance the need for sound policy with the
A key demand of those who want to invest in RESs or need for timely policy and weigh these needs against the
support such developments for social or environmental rea- costs of suddenly changing a policy. This circumstance clearly
sons is the implementation of long-term stable policies that presents a great challenge. In this article, we presented evi-
minimise uncertainty. This finding is consistent with basic dence from two case studies on the negative effects of large,
economic theory, which states that uncertainty will have unexpected changes in RES policy. However, this article
a negative impact on investment. In their seminal work on presents only a brief case study, and additional research is
macroeconomic policy consistency, Kydland and Prescott [4] required to confirm the effects and to generate stronger con-
found that where there were rational economic agents, clusions pertaining to the value of a consistent RES policy for
a consistent policy outperformed changing policies to suit the the market actors and the government.
given circumstances. While the case studies do cross geographic boundaries and
It is expected that policymakers will change their policies renewable energy products, they do not and cannot represent
because there are times when the circumstances change so a comprehensive suite of case studies. For case studies of
substantially that change is the only prudent course. However, Germany, France, Italy, and Spain see Campoccia et al. [41]
these changes should be as minimal and as infrequent as and for recent insight into United States solar policy see
possible. Ideally, policy changes should be synchronised with Kwan [42]. To provide adequate detail to more studies would
evolving RES markets. We have observed a gap between the result in a paper far too lengthy for presentation in this me-
political ambitions regarding bioenergy use and the actual use dium. We do touch on other jurisdictions without going into
in many countries [22]. One obvious reason for this finding is detail. For example, the United States is noted as at various
that bioenergy has not been price-competitive due to its high times in the paper as an example of inconsistent policy
cost. Other reasons have emphasised the unwillingness of making but we do not focus on it as a standalone study.
policy-makers to establish markets and/or institutions that Similarly, Germany is held as an example of a jurisdiction that
104 b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5

has benefited from consistent policy. Another interesting case England and Wales and the feed-in system in Germany.
study in a Canadian context could have been done based on Energ Policy 2006;34:297e305.
the province of British Columbias revenue neutral carbon tax [14] Bundesministerium fur Umwelt Naturschutz und
Reaktorsicherheit. Erneuerbare-Energien-Gesetz. Berlin:
which is an interesting contrast to Ontarios emphasis on FITs.
Internet-Update Ausgewalter Daten; 2011.
We note in the papers conclusion that more work needs to be [15] Cusack T, Iversen T, Rehm P. Risk at work: the demand and
done in studying this issue, and case studies focussing on supply sides of government redistribution. Oxford Rev Econ
these two countries would be examples of further work that Pol 2006;22:365e89.
could be done. [16] Tinbergen J. On the theory of economic policy. North-
Holland, Amsterdam, The Netherlands: Elsevier; 1952.
[17] Lewis J, Wiser H. Fostering a renewable energy technology
industry: an international comparison of wind industry
Acknowledgement policy support mechanisms. Energ Policy 2007;35:1844e57.
[18] Sims REH. The brilliance of bioenergy e in business and
practice. London: James and James; 2002.
The work for this paper was financed by the Norwegian
[19] Burer MJ, Wustenhagen R. Which renewable energy policy is
Research Council, project Bioenergy markets (grant number a venture capitalists best friend? Empirical evidence from
192279/10). We would like to thank Sebastian Elbe of Sprint a survey of international cleantech investors. Energ Policy
GbR, Darmstadt, Germany, the anonymous reviewers, and 2009;37:4997e5006.
national and international participants at the Bioenergy [20] White W, Kulisic B, Domac J. Economic and social drivers to
Market project workshops in Oslo in 2010 and 2011, for val- encourage bioenergy market development. 15th European
uable feedback. biomass and biofuels Conference, Berlin; 2007.
[21] Awerbuch S. Getting it right: the real cost impacts of
a renewables portfolio standard. Public Utilities Fortnightly;
Febuar 15, 2000.
references [22] Nybakk E, Niskanen A, Bajric F, Duduman G, Feliciano D,
Jablonski K, et al. Innovation in the wood bio-energy sector
in Europe. In: Weiss G, Pettenella D, Ollonqvist P, Slee B,
[1] IEA. World energy outlook 2011. Paris: IEA, OECD; 2011. editors. Innovation in forestry: territorial and value chain
[2] Lunnan A, Vilkriste L, Asikainen A, Mizaraite D. Policy and relationships. Wallingford: CABI; 2011. p. 254e75.
economic aspects of forest energy utilisation. In: Roser D, [23] Nybakk E. Innovation and entrepreneurship in small firms:
Asikainen A, Raulund-Rasmussen K, Stupak I, editors. the influence of entrepreneurial attitudes, external
Sustainable use of forest biomass for energy. Managing relationships and learning orientation. PhD Thesis:
forest ecosystems, vol. 12 (XIV). Springer-Verlag; 2008. Norwegian University of Life Sciences 2009/07; 2009.
[3] IEA. Bioenergy e a sustainable and reliable energy source. [24] Miranda T. Designing a national renewable electricity
IEA bioenergy. Paris: IEA, OECD; 2009. standard: five key components [Monograph on the internet].
[4] Kydland F, Prescott E. Rules rather than discretion: the Washington, DC: Carnegie Endowment for International Peace:
inconsistency of optimal plans. In: Lucas R, Sargent T, [cited 2012.11.10]. Available from:, http://carnegieendowment.
editors. Rational expectations and econometric practice, vol. org/files/renewable_electricity_standard.pdf; 2010 Nov 2.
2. Minneapolis, MN: University of Minnesota Press; 1977. [25] Mallon K. Ten features of successful renewables markets.
[5] Calvo GA. On the time consistency of optimal policy in In: Mallon K, editor. Renewable energy policy and politics:
a monetary economy. Econometrica 1978;46(6):1411e28. a handbook for decision making. London: Earthscan; 2006.
[6] Barro R, Gordon D. Rules, discretion, reputation in a model of p. 35e84.
monetary policy. J Monet Econ 1983;12:101e21. [26] Wustenhagen R, Bilharz M. Green energy market
[7] Cumberland JH. Interregional pollution spillovers and development in Germany: effective public policy and
consistency of environmental policy. In: Seibert H, Walter I, emerging customer demand. Energ Policy 2006;34:
Zimmerman K, editors. Regional environmental policy: the 1681e96.
economic issues. New York: New York University Press; 1979. [27] Swisher R, Porter K. Renewable policy lessons from the US:
p. 255e81. the need for consistent and stable policies. In: Mallon K,
[8] Kennedy P, Laplante B. Environmental policy and time editor. Renewable energy policy and politics: a handbook for
consistency: emission taxes and emission trading. In: decision making. London: Earthscan; 2006. p. 185e98.
Petrakis E, Sartzetakis E, Xepapadeas A, editors. [28] Kulisic B, Jelavic B, Vorkapic V, Rutz D, Wellinger A,
Environmental regulation and market power. Cheltenham, Kirchmeyer F, et al. Optimising biogas benefits for the
U.K.: Edward Elgar; 2000. society by developing sustainable biogas markets. 19th
[9] Petrakis E, Xepapadeas A. Location decisions of a polluting European biomass conference and exhibition. Berlin,
firm and the time consistency of environmental policy. Germany; 2011. p. 2510e6.
Resour Energy Econ 2003;25:197e214. [29] Raven R, Gregersen K. Biogas plants in Denmark: successes
[10] Mitchell C, Connor P. Renewable energy policy in the UK and setbacks, vol. 11. Renewable and Sustainable Energy Rev;
1990e2003. Energ Policy 2004;32:1935e47. 2007. 116e132.
[11] Wood G, Dow S. What lessons have been learned in [30] Government of Canada. Renewable energy policies for
reforming the renewables obligation? an analysis of internal remote and rural communities. http://www.rural.gc.ca/
and external failures in UK renewable energy policy. Energ RURAL/display-afficher.do?id1290792790023&langeng.
Policy 2011;39:2228e44. [31] Business Wire. Despite sluggish economy, renewable energy
[12] Butler L, Neuhoff K. Comparison of feed-in tariff, quota and shows strength in, http://www.businesswire.com/news/
auction mechanisms to support wind power development. home/20110929005820/en/Sluggish-Economy-Renewable-
Renew Energ 2008;33:1854e67. Energy-Shows-Strength-2011; 2011 [accessed 11.10.11].
[13] Mitchell C, Bauknecht D, Connor PM. Effectiveness through [32] AVC Group. CBI and industry leaders call for clarity and
risk reduction: a comparison of the renewable obligation in consistency in UK green energy policy. http://www.avcgroup.
b i o m a s s a n d b i o e n e r g y 5 7 ( 2 0 1 3 ) 9 7 e1 0 5 105

co.uk/news/industry-news/cbi-and-industry-leaders-call- [38] Globe and Mail. Wind energy firm trillium power sues
for-clarity-and-consistency-in-uk-green-energy-policy/. Ontario. http://www.theglobeandmail.com/report-on-
[accessed 11.10.11]. business/industry-news/energy-and-resources/wind-
[33] Yin RK. Case study research design and methods. 4th ed. energy-firm-trillium-power-sues-ontario/article2183816/.
London: Sage; 2009. [accessed 15.10.11].
[34] Miles M, Hubermann A. Qualitative data analysis: an [39] Globe and Mail. Time running out for Ontario solar-power
expanded sourcebook. Thousand Oaks: Sage Publications; investors. http://www.theglobeandmail.com/news/politics/
1994. time-running-out-for-ontario-solar-power-investors/
[35] Ontario Power Authority. Ontario power authority feed-in article2262527/. [accessed 12.03.12].
tarifff program backgrounder, http://www.fit.powerauthority. [40] ClearSky Advisors. A year of change in Ontarios PV market
on.ca/Page.asp?PageID924&ContentID10616; 2009 with more change to come, http://www.clearskyadvisors.
[accessed 10.11.11]. com/1243/what-the-flux/; 2011 [accessed 12e03 2012].
[36] Hamilton Star. Hamilton: clouds over Ontario solar plan. [41] Campoccia A, Dusonchet L, Telaretti E, Zizzo G. Comparative
http://www.thestar.com/business/cleanbreak/article/ analysis of different supporting measures for the production
836499ehamilton-clouds-over-ontario-solar-plan. [accessed of electrical energy by solar PV and wind systems: four
11.10.11]. representative European cases. Sol Energy 2009;83:287e97.
[37] Globe and Mail. Ontarios wind power flip-flop draws ire [42] Kwan L. Influence of local, environmental, social, economic
accessed. http://www.theglobeandmail.com/globe-investor/ and polictical varibles on the spatial distribution of
ontarios-wind-power-flip-flop-draws-ire/article1910439/ residential solar PV arrays across the United States. Energ
[accessed 11.10.11]. Policy 2012;47:332e4.