Editing IPCC:AR6/WGIII/Chapter-9 (section)

=== 9.9.5 Policies Mechanisms for Financing for On-site Renewable Energy Generation ===

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On-site renewable energy generation is a key component for the building sector decarbonisation, complementing sufficiency and efficiency. Renewable energies (RES) technologies still face barriers due to the upfront investment costs, despite the declining price of some technologies, long pay-back period, unpredictable energy production, policy incertitude, architectural (in particular for built-in PV) and landscape considerations, technical regulations for access to the grid, and future electricity costs ( [[#Mah--2018|Mah et al. 2018]] ; [[#Agathokleous--2020|Agathokleous and Kalogirou 2020]] ).

Several policy instruments for RES have been identified by scholars ( [[#Fouquet--2013|Fouquet 2013]] ; [[#Azhgaliyeva--2018|Azhgaliyeva et al. 2018]] ; [[#Pitelis--2020|Pitelis et al. 2020]] ): direct investments; feed-in tariffs; grants and subsidies; loans and taxes; (tradable) green certificates or renewable/clean energy portfolio standards; information and education; strategic planning; codes and standards; building codes; priority grid access; research, development and deployment and voluntary approaches. There are specific policies for renewable heating and cooling ( [[#Connor--2013|Connor et al. 2013]] ). In 2011, the UK introduced the Renewable Heat Incentive (RHI) support scheme ( [[#Balta-Ozkan--2015|Balta-Ozkan et al. 2015]] ; [[#Connor--2015|Connor et al. 2015]] ). The RHI guarantee a fixed payment per unit of heat generated by a renewable heat technology for a specific contract duration ( [[#Yılmaz%20Balaman--2019|Yılmaz Balaman et al. 2019]] ).

The most common implemented policy instruments are the feed-in tariffs (FiTs) and the Renewable/Energy Portfolio Standards (RPSs) ( [[#Xin-gang--2017|Xin-gang et al. 2017]] a; [[#Alizada--2018|Alizada 2018]] ; Bergquist et al. 2020), with FiTs more suited for small scale generation. More than 60 countries and regions worldwide have implemented one of the two policies (Sun and Nie 2015). FiT is a price policy guaranteeing the purchase of energy generation at a specific fixed price for a fixed period ( [[#Barbosa--2018|Barbosa et al. 2018]] ; [[#Xin-gang--2020|Xin-gang et al. 2020]] ). RPS is a quantitative policy, which impose mandatory quota of RES generation to power generators ( [[#Xin-gang--2020|Xin-gang et al. 2020]] ).

A flat rate feed-in tariff (FiT) is a well-tested incentive adopted in many jurisdictions to encourage end-users to generate electricity from RES using rooftop and on-site PV systems ( [[#Pacudan--2018|Pacudan 2018]] ). More recently, there has been an increasing interest for dynamic FiTs taking into account electricity costs, hosting capacity, ambient temperature, and time of day ( [[#Hayat--2019|Hayat et al. 2019]] ). Since 2014, EU Member States have been obligated to move from FiT to feed-in premium (FiTP) ( [[#Hortay--2019|Hortay and Rozner 2019]] ); where a FiTP consist in a premium of top of the electricity market price. [[#Lecuyer--2019|Lecuyer and Quirion (2019)]] argued that under uncertainty over electricity prices and renewable production costs a flat FiT results in higher welfare than a FiTP. One of the main concerns with FiT systems is the increasing cost of policies maintenance ( [[#Zhang--2018|Zhang et al. 2018]] ; [[#Pereira%20da%20Silva--2019|Pereira da Silva et al. 2019]] ; [[#Roberts--2019a|Roberts et al. 2019a]] ). In Germany, the financial costs, passed on to consumers in the form a levy on the electricity price have increased substantially in recent years ( [[#Winter--2019|Winter and Schlesewsky 2019]] ) resulting in opposition to the FiT in particular by non-solar customers. A particular set up of the FiT encourage self-consumption through net metering and net billing, which has a lower financial impact on electricity ratepayers compared with traditional FiTs ( [[#Pacudan--2018|Pacudan 2018]] ; [[#Roberts--2019b|Roberts et al. 2019b]] ; [[#Vence--2019|Vence and Pereira 2019]] ).

In some countries, for example, Australia ( [[#Duong--2019|Duong et al. 2019]] ), South Korea ( [[#Choi--2018a|Choi et al. 2018a]] ), China ( [[#Yi--2019|Yi et al. 2019]] ), there was a transition from subsidies under the FiT to market-based mechanisms, such as RPSs and tendering. Compared with FiT, RPS (or Renewable Obligations) reduce the subsidy costs ( [[#Zhang--2018|Zhang et al. 2018]] ). A number of scholars ( [[#Xin-gang--2017|Xin-gang et al. 2017]] ; [[#Liu--2018a|Liu et al. 2018a]] , 2019a) have highlighted the RPSs’ effectiveness in promoting the development of renewable energy. Other authors ( [[#Requate--2015|Requate 2015]] ; [[#An--2015|An et al. 2015]] ) have presented possible negative impacts of RPSs.

Both FiT and RPS can support the development of RES. Scholars compared the effectiveness of RPSs and FiTs with mix results and different opinions, with some scholars indicating the advantages of RPS ( [[#Ciarreta--2014|Ciarreta et al. 2014]] , 2017; [[#Xin-gang--2017|Xin-gang et al. 2017]] ), while [[#Nicolini--2017|Nicolini and Tavoni (2017)]] showed that in Italy FiTs are outperforming RPSs and Tradable Green Certificates (TGCs). [[#García-Álvarez--2018|García-Álvarez et al. (2018)]] carried out an empirical assessment of FiTs and RPSs for PV systems energy in EU over the period 2000–2014 concluding that that FiTs have a significant positive impact on installed PV capacity. This is due to the small size of many rooftop installations and the difficulties in participating in trading schemes for residential end users. Similar conclusions were reached by ( [[#Dijkgraaf--2018|Dijkgraaf et al. 2018]] ) assessing 30 OECD countries and concluding that there is a ‘positive effect of the presence of a FiT on the development of a country’s added yearly capacity of PV’. Other scholars ( [[#Lewis--2007|Lewis and Wiser 2007]] ; [[#Lipp--2007|Lipp 2007]] ; [[#Cory--2009|Cory et al. 2009]] ; [[#Couture--2010|Couture and Gagnon 2010]] ) concluded that FiT can create a stable investment framework and long-term policy certainty and it is better than RPS for industrial development and job creation. [[#Ouyang--2014|Ouyang and Lin (2014)]] highlighted that RPS has a better implementation effect than FiT in China, where FiT required very large subsidy. [[#Ford--2007|Ford et al. (2007)]] showed that TGC is a market-based mechanism without the need for government subsidies. [[#Marchenko--2008|Marchenko (2008)]] and [[#W¸edzik--2017|W¸edzik et al. (2017)]] indicate that the TGCs provide a source of income for investors. [[#Choi--2018a|Choi et al. (2018a)]] analysed the economic efficiency of FiT and RPS in the South Korean, where FiT was implemented from 2002 to 2011 followed by an RPS since 2012 ( [[#Park--2018|Park and Kim 2018]] ; [[#Choi--2018b|Choi et al. 2018b]] ). Choi concluded that RPS was more efficient for PV from the government’s perspective while from an energy producers’ perspective the FiT was more efficient. Some scholars proposed a policy combining FiT and RPS ( [[#Cory--2009|Cory et al. 2009]] ). [[#Kwon--2015|Kwon (2015)]] and [[#del%20Río--2017|del Río et al. (2017)]] concluded that both FiT and RPS are effective, but policy costs are higher in RPSs than FiTs. RPS, REC trading and FiT subsidy could also be implemented as complementary policies ( [[#Zhang--2018|Zhang et al. 2018]] ).

Tenders are a fast spreading and effective instrument to attract and procure new generation capacity from renewable energy sources ( [[#Bayer--2018|Bayer et al. 2018]] ; [[#Batz--2019|Batz and Musgens 2019]] ; [[#Bento--2020|Bento et al. 2020]] ; [[#Ghazali--2020|Ghazali et al. 2020]] ; [[#Haelg--2020|Haelg 2020]] ). A support scheme based on tenders allows a more precise steering of expansion and lower risk of excessive support ( [[#Gephart--2017|Gephart et al. 2017]] ). [[#Bento--2020|Bento et al. (2020)]] indicated that tendering is more effective in promoting additional renewable capacity comparing to other mechanisms such as FiTs. It is also important to take into account the rebound effect in energy consumption by on-site PV users, which might reduce up to one fifth of the carbon benefit of renewable energy ( [[#Deng--2017|Deng and Newton 2017]] ).

Financing mechanisms for RES are particularly needed in developing countries. Most of the common supporting mechanisms (FiT, RPSs, PPA, auctions, net metering, etc.) have been implemented in some developing countries ( [[#Donastorg--2017|Donastorg et al. 2017]] ). Stable policies and an investment-friendly environment are essential to overcome financing barriers and attract investors ( [[#Donastorg--2017|Donastorg et al. 2017]] ). [[#Kimura--2016|Kimura et al. (2016)]] identified the following elements as essential for fostering RES in developing countries: innovative business models and financial mechanisms/structures; market creation through the implementation of market-based mechanisms; stability of policies and renewable energy legislation; technical assistance to reduce the uncertainty of renewable energy production; electricity market design, which reflects the impact on the grid capacity and grid balancing; improved availability of financial resources, in particular public, and innovative financial instruments, such as carbon financing ( [[#Lim--2013|Lim et al. 2013]] ; [[#Park--2018|Park et al. 2018]] ; [[#Kim--2018|Kim and Park 2018]] ); green bonds; public foreign exchange hedging facility for renewable energy financing, credit lines; grants and guarantees.

The end-user will be at the centre as a key participant in the future electricity system ( [[#Zepter--2019|Zepter et al. 2019]] ; Lavrijssen and Carrillo Parra, 2017) providing flexibility, storage, energy productions, peer-to-peer trading, electric vehicle charging. Zepter indicates that ‘the current market designs and business models lack incentives and opportunities for electricity consumers to become prosumers and actively participate in the market’. [[#Klein--2019|Klein et al. (2019)]] explore the policy options for aligning prosumers with the electricity wholesale market, through price and scarcity signals. Policies should allow for active markets participation of small prosumers ( [[#Brown--2019|Brown et al. 2019]] ; [[#Zepter--2019|Zepter et al. 2019]] ), local energy communities and new energy market actors such as aggregators ( [[#Iria--2019|Iria and Soares 2019]] ; [[#Brown--2019|Brown et al. 2019]] ). Energy Communities are new important players in the energy transition ( [[#Sokołowski--2020|Sokołowski 2020]] ; [[#Gjorgievski--2021|Gjorgievski et al. 2021]] ). Citizens and local communities can establish local energy communities, providing local RES production to serve the community, alleviate energy poverty and export energy into the grid ( [[#DellaValle--2020|DellaValle and Sareen, 2020]] ; [[#Hahnel--2020|Hahnel et al. 2020]] ). Energy Communities have as primary purpose to provide environmental, economic, or social community benefits by engaging in generation, aggregation, energy storage, energy efficiency services and charging services for electric vehicles. Energy communities help in increasing public acceptance and mobilise private funding. Demand response aggregators ( [[#Mahmoudi--2017|Mahmoudi et al. 2017]] ; [[#Henriquez--2018|Henriquez et al. 2018]] ) can aggregate load reductions by a group of consumers, and sell the resulting flexibility to the electricity market ( [[#Zancanella--2017|Zancanella et al. 2017]] ). Regulatory frameworks for electricity markets should allow demand response to compete on equal footing in energy markets and encourage new business models for the provision of flexibility to the electricity grid (Shen et al. 2014). Renewable energy and sufficiency requirements could be included in building energy codes and implemented in coordination with each other and with climate policies, for example, carbon pricing ( [[#Oikonomou--2014|Oikonomou et al. 2014]] ).

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