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Least cost way to incentivise renewable electricity

A new report by economic consultancy ACIL Tasman concludes that renewable electricity generation in New Zealand (hydro, wind and geothermal) is already competitive with or below the cost of new coal and gas generation, and that subsidies for renewable electricity should not be necessary before about 2015, provided other barriers (unnecessary impediments to approval of projects) are removed.

The report says if the Government does wish to incentivise renewable electricity generation prior to the introduction of future policy options (such as putting a price on carbon), the key design feature of a least-cost subsidy scheme would include a competitive capital investment subsidy scheme.

The report was prepared by ACIL Tasman for the Greenhouse Policy Coalition, an industry association representing energy intensive companies on greenhouse gas and climate change issues.

Executive Director of the Greenhouse Policy Coalition, Catherine Beard, said that the energy intensive sector was keen to promote policy options to the government that would help the country limit greenhouse gas emissions, while being the least costly for the economy.

Author of the report, Michael Hitchens, says options that minimise an increase in electricity prices paid by consumers, or taxes paid by taxpayers, are the options that will cause least damage to the economy.

Key Recommendations from the report are that if a subsidy scheme were to be introduced as a short term measure the key design features would include;

· A broad definition of eligible renewable energy sources (however quotas should not be set for each technology)
· Limit the subsidy to new projects (need to define ‘new’ and the starting date for a scheme)
· A competitive capital investment subsidy scheme is the cleanest – as it can be discontinued more easily when the time comes to introduce more comprehensive long term policy options (minimizing double dipping and overlaps)
· If the scheme is designed as an ongoing production subsidy – need to make those secure property rights with compensation payable by government if they are removed or infringed
· Scheme design should not allow market power to be exerted in the renewables or the electricity market – which NZ needs to be careful about because of the small size and vertical integration of the electricity market.

Michael Hitchens said that unless any unnecessary impediments to the approval of projects were removed, any subsidy scheme that might be considered for beyond 2012, or now for that matter, would be ineffective.

Catherine Beard said that with the release of the raft of policy papers covering climate change and the electricity sector, the government has sent a clear signal that it wants to incentivise renewable electricity generation.

“This report says that when the balance does need tipping in favour of renewables, the most cost effective way to do this is via a competitive capital investment subsidy scheme”.

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