Renewable energy portfolio
A renewable energy portfolio refers to a system designed to ensure a certain percentage of electricity comes from renewable sources, such as wind, solar, and biomass. This quota-based approach, known as renewable portfolio standards (RPS) in the United States and the green certificate system in Europe, is established by governments to promote the development of renewable energy. Under this structure, electricity suppliers must meet specific renewable energy targets, which they can achieve by generating their own renewable energy or purchasing certificates confirming the production of renewable electricity.
Globally, at least 49 countries have adopted similar systems, with varying degrees of implementation. In the U.S., while there is no comprehensive national RPS, many states have set their own targets, which typically range from 10% to 14% of energy from renewable sources by compliance dates stretching between 2025 and 2030. Successful implementation relies on well-structured policies that create clear market signals and flexible compliance options. However, challenges exist, as larger companies tend to dominate the market, potentially sidelining smaller producers and limiting innovation. Additionally, the fluctuating prices of certificates can impact long-term investment in renewable technologies. Overall, renewable energy portfolios aim to increase the share of renewable energy in the electricity supply while navigating complex market dynamics and regulatory frameworks.
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Renewable energy portfolio
Summary: The renewable energy portfolio is a quota-based system that specifies a target percentage of energy to be supplied by renewable sources.
The renewable energy portfolio, referred to as the green certificate system in Europe or renewable portfolio standards (RPS) in the United States, is a quantity-based system that specifies a target percentage of energy to be supplied by renewable sources. The government establishes the quantity of renewable energy produced, while the market sets the price of the electricity produced. Often, renewable energy operators will individually negotiate the sale electricity price to the grid operator. Renewable energy electricity generators receive a certificate of origin for every unit of electricity produced, which then can be sold in the market to offset the premium required to generate electricity from renewable sources. The demand for the certificate is artificially created by the state through setting a fixed quota. As the demand for certificates increases, the price of the certificate will subsequently increase. Under the system, retail electricity suppliers must supply a certain amount of electricity from renewable energy sources to end users. Utilities can comply either by purchasing exchangeable certificates or by owning a renewable energy electricity generation facility and its generated output. Failure to comply often results in financial penalties.
There are a growing number of countries implementing quota systems—at least 49 countries or regional localities. The RPS in the United States is among the most commonly cited renewable energy portfolio policies. Although there is currently no comprehensive mandatory national RPS enacted in the United States, many states have voluntarily pushed RPS targets forward. Iowa was the first state to adopt the RPS, in 1983. The implementation process and criteria for RPS differ in each state. As of December 2023, 28 states and the District of Columbia had established a variation of the RPS, four with an “alternative portfolio standard” and four with a “renewable and alternative energy goal.” The alternative portfolio standard is similar to the RPS but includes alternative energy forms such as nuclear energy. State RPS goals range between 10 and 14 percent. Compliance dates fall between 2025 and 2030. Some states have also set “carve-out” targets, which establish requirements within the RPS for certain renewable energy sources, particularly solar power.
The success of RPS policies depends on the details and the method of execution. Well-designed policies have contributed to increasing the share of renewable energy in the electricity mix at minimal cost to electricity end users. Some key factors for successful policy design include establishing a long-term quota to provide a clear signal to the market regarding the commitment level toward renewables. Furthermore, the structure must be well planned and precisely implemented, even more than the feed-in tariff system. The quota system should place mandatory obligations on the utilities, and a transparent method for accounting renewable energy production is required, either through energy production (in megawatt-hours) or through installed capacity (in megawatts). The quota targets and timeline must be clearly announced, and there should be a flexible compliance structure to account for factors such as a shortage of renewable energy electricity generation. Providing incentives, such as credits for early compliance, can encourage earlier adoption of renewable energy.
One of the challenges of the quota system is that it favors large renewable energy generators and low-cost technologies. Since prices are generally fixed for electricity generation, additional compensation often occurs through the sales of certificates. The certificate prices do not differentiate the cost of electricity generation; thus, naturally, the most economical renewable energy technology would be developed first in the highest resource locations. As a result, larger players, often consisting of multinational firms, invest in large-scale projects such as wind farms and biomass generation plants. This trend can push out smaller market participants, since they cannot benefit from the economies of scale. The number of renewable energy generators is limited, and there is little space in the market for small-scale household electricity generation from renewable sources.
Additionally, because of the limited number of participants in the renewable energy markets, there is lower pressure for homegrown innovation and competition; as a result, technologies are often purchased from abroad. Other technologies in earlier phases of development, including solar photovoltaic (PV) and geothermal systems, are often neglected given their higher generation costs. Furthermore, the prices of certificates are dependent on the market, which fluctuates according to supply and demand. This lack of long-term security may dampen the investment enthusiasm for the renewable energy market. Compared to the feed-in tariff structure, designing and managing a quota system may be more difficult for policymakers, and generators may have to deal with more complex development procedures and contract agreements.
Bibliography
Adam, David. “Britain Set to Miss EU Renewable Energy Target.” The Guardian, June 19, 2008. www.guardian.co.uk/environment/2008/jun/19/renewableenergy.alternativeenergy. Accessed 1 Aug. 2024.
"Renewable Energy Explained." US Energy Information Administration, 30 July 2024, www.eia.gov/energyexplained/renewable-sources/portfolio-standards.php. Accessed 1 Aug. 2024.
Stein, Zach. "Renewable Energy Portfolio." Carbon Collective, 1 Aug. 2024, www.carboncollective.co/sustainable-investing/renewable-energy-portfolio. Accessed 1 Aug. 2024.