EME 801
Energy Markets, Policy, and Regulation

Lesson 8 Overview

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Overview

Low-carbon energy in many regions has started to become competitive with fossil-fuel generation on an LCOE basis when including certain incentives we will discuss in this section. The social costs of some harmful pollutants emitted when fossil fuels are burned for useful energy are not reflected in the price of the fuel itself or the price of the final energy output. It is also important to consider that while subsidies are given to renewable sources of energy, certain in-kind subsidies to fossil fuels such as low cost mineral rights and the ability to socialize environmental clean-up do not make it into the LCOEs of these sources.

One solution to this problem is to place a price on pollution, which would make non-polluting alternatives look more economically attractive. The United States and many other countries actually do this with some types of pollutants - sulfur dioxide and oxides of nitrogen, for example. The European Union (and some areas of the U.S.) impose a price on carbon dioxide emissions through a system of tradeable emissions permits. Whether those prices are sufficiently high as to reflect the true social cost of pollution is subject to a lot of debate, some of it quite heated. But in concept, it is possible to level the playing field by taxing or pricing pollution.

We'll talk a bit about taxes in this lesson, but will spend more time on the other alternative, which is to subsidize or incentivize energy sources that don't pollute. Many jurisdictions actually do a bit of both. The motivation for these subsidies can be as much about politics as environmental quality - in many cases renewable energy subsidies are a form of industrial policy, meant to promote growth in a specific sector (like wind or solar), rather than about reducing pollution per se. These subsidies and incentives can take several different forms, from providing payments for each unit of energy generated to lowering capital or financing costs for new investments.

Our focus here is really on how these subsidies and incentives affect the financial analysis of power plants. We won't go too deeply into the mechanisms behind each specific type of incentive program, nor will we talk too much about how effective the incentive programs might be. (Another course offered through the RESS program, EME 803, touches on these issues.) We'll also limit ourselves to those types of incentives that directly affect project financing or financial analysis. There are a very wide variety of policy options, apart from direct taxes, subsidies or incentives, that can have the effect of shifting investment decisions towards renewable energy.

Learning Outcomes

By the end of this lesson, you should be able to:

  • Discuss topics related to taxes, subsidies, and incentives for renewable energy resources
  • Describe the mechanisms by which tax credits, feed-in tariffs, rebates and loan guarantees all lower the cost of low-carbon energy resources as compared to fossil resources;
  • Illustrate the impact of different types of subsidies and incentives on the pro forma financial statements for a renewable energy project;
  • Use the DSIRE website (dsireusa.org) to gather information on available subsidies and incentives for use in a pro forma financial analysis;
  • Build a financial model for your project;
  • Construct the financial metrics for your project.  

Reading Materials

What is due for Lesson 8?

This lesson will take us one week to complete. Please refer to the Course Calendar for specific due dates. See the specific directions for the assignments below. 

  • Complete the Lesson 8 readings, including the lesson content
  • Participate in the Zoom discussion
  • Complete Quiz 6
  • Project work: Financial Model
  • Project work: Financial Metrics

Questions?

If you have any questions, please post them to our Questions? discussion forum (not email). I will not be reviewing these. I encourage you to work as a cohort in that space. If you do require assistance, please reach out to me directly after you have worked with your cohort --- I am always happy to get on a one-on-one call, or even better, with a group of you.