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Issues in Green Energy Markets in India with Special Reference to
Renewable Energy Certificates (RECs)
*Dr.V.P.Sriraman
*Associate Professor, Bharathidasan Institute of Management, Trichy, Tamilnadu
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Abstract: This paper discusses the issues surrounding the Indian REC Market, its
structure, its working, and its problems and issues. The paper also looks into similar
initiatives elsewhere in the world and tries to give some suggestions to circumvent the
problem so that the REC market can survive and become vibrant.
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1. INTRODUCTION
As per US-EPA (Environmental Protection Agency), Global carbon emissions from
fossil fuels have significantly increased since 1900s. CO2 emissions have increased by about
90% since 1970, with 78% contribution to GHG from fossil fuel combustion and industrial
processes emissions.In 2016, the largest CO2 emittersin the world were United States and
three members of the BRIC countries namely Russia, India and China. India is the third
largest carbon emitter with a share of 6.24% of total emissions, next to China (28.21%) and
USA (15.99%). However, India‘s per capita energy consumption at 25 GJ, however,
represents approximately a quarter of the energy required for a decent quality of life.
According to the 2014 Off-Grid Business Indicator report released by the Solar
Energy Foundation, with an estimated market size of $27.4 million a year, India ranks highest
in the top five off-grid markets in the world. It is estimated that roughly 55% of rural Indian
households do not have access to electricity. This segment annually spends over $60 billion
on energy through inefficient and antiquated sources like kerosene which in turn increases the
carbon foot print. Another study sights that 290 million men, women, and children in India
suffer from energy poverty, unable to power their homes, livelihoods, and their dreams.
Chart.No.01 - The Energy Demand Projection in India (in billion units)
Source:www.greenpeace.org/india/Global/india/report/2013/powering-ahead-with-renewables.pdf
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Table.No.01 - The Energy Demand Forecast and Corresponding Renewable Energy
Table.No.02 - The Installed Capacities of various sources as of January 2019
The gross generation from various sources can also be seen from the pie chart below. It can
be observed that although the installed capacity of thermal sources was around 64% of the
total installed capacity, the generation from these sources was around 77% of the total
generation. Also the share of renewable energy sources in the total installed capacity is about
21%, its total generation is only 9%.
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Chart.No.02 - The Gross Generation (GWH) 2018-19 as on 31.12.2018
Chart.No.03 - The Share of Renewable Energy in Current Installed Capacity (MW)
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Chart.No.04 - The Projected Figures as per Central Electricity Authority (CEA) reports of the Likely
Installed Capacities and Likely Gross Generation (MW) in 2029-30
Chart.No.05 - The Projected Figures as per Central Electricity Authority (CEA) reports of the Likely
Installed Capacities and Likely Gross Generation (MU) in 2029-30
The path to a low carbon economy which supposedly limits global warming induced
climate change needs to be balanced with the developmental needs of developing countries,
including India. This calls for innovative and affordable solutions. Many measures are
suggested to reduce carbon emissions that include reforestation, the introduction of a price for
carbon, carbon capping, reducing energy use, reduction of livestock and a decreased use of
fossil fuels in energy generation. In addition, major economies in the world including United
States, China, India and Brazil have started to add renewable sources to their energy mix. As
of February 28, 2017, grid connected installed capacity of renewable energy sources in India
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stood at 15.86%, in September quarter of 2017, India‘s total renewable energy capacity
crossed 60,000 MW.
The Energy Transitions Commission (ETC) is exploring how to accelerate change
towards low-carbon energy systems that prospects progress on four dimensions: One,
decarbonisation of power, combined with extended electrification. Two, decarbonisation of
difficult to electrify activities, through routes such as fuel substitution, carbon capture,
storage or use, and possible product substitution. Three, acceleration in energy productivity
improvement, including the shift towards more efficient urban design, and the development
of a circular and sharing economy. And fourth, optimisation of fossil fuel use.
In April 2016, 174 countries, including India signed the Paris agreement (COP21).
The principle aim of the Agreement is to accelerate and intensify the actions required for a
sustainable low carbon future. India‘s commitments in COP21 have come into force and
mandatory emission reduction targets are expected by 2020. The base line for India is, the
country will have to diversify its power generation sources and shift them significantly
towards renewable energy sources to reduce volumes of emissions per unit of GDP. In
numbers, by 2025, India will need a 175 gigawatt-power production capacity from non-fossil
fuel sources.
An important measure of India's energy policy and its commitment to reduce carbon
emission under international treaties obligations is to promote co-generation and generation
of electricity from renewable sources of energy and increase the share of Renewable Energy
("RE") in the country's total electricity production and consumption. With the recent
ratification of the Paris Climate treaty, India has committed to an annualised reduction of
nearly 1200 million Tonnes of Carbon dioxide equivalent by 2030. Specifically, the industrial
energy efficiency (EE) potential is marked as much as 350 MT CO2 of reduction in GHG
emissions by 2030. The National Action Plan For Climate Change ("NAPCC") announced
in June 2008 stipulated renewable energy injection of 5% into the national grid (for the year
FY 2009-10) and an annual increase of 1% till a target of 15% was reached by 2020. This
would mean NAPCC envisages renewable energy to constitute approximately 15% of the
energy mix of India. This would require quantum jump in deployment of renewable energy
across the country.
The Indian government, meanwhile, proposing regulatory frameworks to measure and
monitor consumption and emission of GHGs. In February 2017, the Securities Exchange
Board of India (SEBI) suggested that the top 500 companies adopt Integrated Reporting on a
voluntary basis from FY 2017-18. The report of the Task Force on Climate-related Financial
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Disclosure set up by the Financial Stability Board (FSB) advocates that businesses need to
disclose material climate-related risks in their financial reports and filings, and Indian
companies like Tata Steel are already making such disclosures.
Strong Policy Measures, Proactive Regulatory Framework and Innovative Financing
Instruments would be required, if the desired level of penetration of renewable energy is to be
achieved. One such policy instrument prescribed in NAPCC is Renewable Energy Certificate
(REC) Mechanism which would enable large number of stakeholders to purchase renewable
energy in a cost effective manner.Though the concept of Renewable Energy Certificates is
plagued by some challenges, it is still relatively new in India and holds great promise in
promoting the growth of renewable energy and taking India on path of being a low carbon
economy.
All the energy consuming companies (who consume above a certain defined limit)
need to comply with RPOs (Renewable Energy Obligations), meaning they need to buy or
use a certain amount of energy from renewable energy sources either by having their own
infrastructure or through buyingelectricity generated by specified ‗green‘ sources from other
power producers or by buying the equivalent of that as RECs from the market (energy
exchanges). One REC is equivalent to 1 MWh of renewable energy.The ‗obligated entities‘
are mostly electricity distribution companies and large consumers of power. RECs are issued
to companies that produce green power, who opt not to sell it at a preferable tariff to
distribution companies.
2. CLIMATE INSTRUMENTS RENEWABLE ENERGY CERTIFICATES (REC)
The evolving climate policy is debating a market-based approach of adopting ‗climate
instruments‘ for mitigating the greenhouse gas emissions through carbon markets and
promote sustainable energy practices through tradable Renewable Energy (Green)
Certificates (RECs) (Linares et al., 2008; EC Directive, 2009; Massetti and Tavoni, 2012;
Goulder, 2013; World Bank, 2013; UNEP, 2011). These climate instruments comes in
different forms: i) government allocated emissions ‗rights‘ (also known as allowances) and
remittance ‗obligations‘ under a ‗cap-and-trade‘ scheme (Böhringer and Lange, 2013); and
ii) certificates or ‗rights‘ issued by a regulator to acknowledge verifiable emissions reductions
under a ‗baseline-and-credit‘ mechanism (Garcia and Roberts, 2008). Similarly, to promote
investment in clean energy, other type of ‗climate instruments‘ - Renewable energy
certificates (RECs) - are granted by market regulators to renewable energy producers
(Couture and Gagnon, 2010). In case of RECs, the renewable energy producer can sell them
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to power distributors and energy consumers who have a compliance need to have a specific
amount of power sourced from renewable energy resources (Couture and Gagnon, 2010).
India has three market-based mechanisms to fight climate change: trading in renewable
energy certificates (RECs), where power utilities have to buy a share of their power from
renewable energy producers; second is the launch of the Perform Achieve Trade (PAT)
scheme wherein firms that have been able to achieve certain levels of energy efficiency will
be able to sell Energy Saving Certificates (ESC) for the amount of their surplus energy
improvements. Trading will happen through the two power exchanges while prices will be
fully determined by the market; and third, a pilot emissions trading scheme (targeting air
pollution) launched in Gujarat, Tamil Nadu and Maharashtra.
3. REC MECHANISM
RECs are tradable, intangible energy commodities which represent the attributes of electricity
generated from renewable resources, having validity of 1095 days after issuance. Under REC
mechanism, an entity can generate electricity through renewable resources in any part of the
country.
Fig.No.01 - REC MECHANISM
The generator receives the cost equivalent of electricity produced from any source while the
environment attribute is sold through the exchanges at market-determined price. Trading in
RECs – which happens for two hours on the last Wednesday of each month on one of the two
Indian Power Exchanges, IEX or PXIL. In 2016-17, there are around 1,200 projects in the
REC mechanism with a capacity of 5,383 Mw. A total of 1,291 participants traded at IEX
with 802 participants in non-solar segment and 489 participants in the solar segment. Overall,
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a total of 3,386 participants are registered in the REC segment at IEX. The exchange
accounts for over 90 per cent of the domestic electricity trading market. Of this, 851 are
Eligible Entities (RE Generators) 2,516 are Obligated Entities (Discoms, Open Access
Consumers and Captive Generators) and 19 are registered as voluntary entities.
3.1. REC MECHANISM STEPS
3.1.1. Accreditation: The generating company will submit its application for accreditation to
the host state nodal agency. A separate application needs to be submitted for each RE
generation project in case a project developer has multiple projects.
3.1.2. Registration: After getting accredited from the state agency, the applicant needs to
apply for registration to the central agency. 'Certificate for Registration' will be granted to the
applicant after necessary verification and due diligence
3.1.3. Issuance: Application for the issuance of RECs is also to be made to the Central
Agency Trading and Redemption. RECs shall be traded in the power exchanges within the
price band specified by CERC.
3.1.4. Trading and Redemption: The RECs are traded in the two power exchanges and they
can be redeemed through the power exchanges or can be retained by the RE generators which
can be redeemed in future.
Fig.No.2. Operational Framework of REC Mechanism
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3.2. Pricing
The Price of Certificates shall be as discovered in the Power Exchange. Though they would
be allowed to trade only within the range of floor price and forbearance price set by the
CERC. Through its order CERC issues forbearance and floor price for RECs.
Table.No.03 - The Current Prices
1 REC = 1 MWH Floor Price (Rs./REC) Forbearance Price (Rs./REC)
Non-Solar 1000 3000
Solar 1000 2400
Table.No.04 - The Number of Buyers, Sellers and RECs Traded through The Power Exchanges.
As can be seen from the table, the number of RECs increased significantly from 10.15
lakhs in 2011-12 to 126.00 lakhs in 2018-19 with a CAGR of 43%. The number of buyers
and sellers also increased over the years from 397 to 988 and from 197 to 830 respectively.
There was a negative growth of 22% in number of RECs transacted during 2018-19.
4. Issues and Challenges
There exist certain issues and challenges with the concept of RECs and their trading.
The chart below shows the number of RECs bought and sold in IEL from Jan 2016 to
December 2016. The graph shows that the sales are more than that was bought. It also shows
the increasing gap between RECs bought and sold. This will obviously affect the cash flows
of the RE project developers who won‘t be able to rely on them as a source of revenue. The
other two graphs show the solar and non-solar RECs position of what was bought and sold.
Though the trend is same as the one discussed above, we could see that the non-solar RECs
are what are bought and sold in high volumes than solar RECs and also solar RECs are what
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are sold in higher volumes, which means the production of energy from solar sources are
increasing over a period of time than non-solar sources. The main reason for lower demand is
the lack of interest shown by obligated entities in meeting their RPO (Renewable Purchase
Obligation).
Another issue is that of Renewable Purchase Obligation, an instrument through which
every consumer of electricity is mandated to consume certain percentage of energy from
renewable energy sources. Since tracking every consumer is practically not possible, the
obligation is passed on to power distribution companies. This would enable obligated entities
to procure RECs and surrender the same to satisfy its RPO target. On the whole, the objective
of Government policy and regulations, was to, over a period of time, progressively increase
the share of electricity from non-conventional sources by mandating obligated entities to
purchase a specified minimum percentage of their total power consumption (including
transmission and distribution losses for a distribution licensee) from non-conventional
sources.
5. Enforcement of RPO
There needs to be stricter enforcement of state RPOs. If states don‘t fulfil their mandatory
renewable energy requirements, then the penalties must be strictly enforced. Due to a clear
lack of enforcement of RPO targets and carry forward/waiver of RPO targets, the purchase of
RECs for fulfilling RPO targets diminished as there was no requirement for obligated entities
to incur additional costs. Twenty-five states in India have fallen behind their renewable
purchase obligation (RPO) targets. for example, the state-wise installation targets set by the
Ministry of New and Renewable Energy (MNRE) have not been met in 2016; only 2,250
MW of solar was installed through December 31, 2016, compared to the targeted 12,000 MW
for financial year (FY) 2016-17. States are now being requested by MNRE to ensure RPO
compliance including through purchase of renewable energy certificates (RECs).
Most of the state energy regulators have not penalized power users, for not meeting
their RPO obligation. As a result of which most RECs generated do not get bought. This has
led to most of the solar RECs going untraded and the developers who have used the REC
business model to build solar power plants have failed. The problem lies with electricity
being a concurrent subject, which allows both state and central government to legislate
policy. Even if one state regulator fails to penalize, then the whole house collapses. Other
states then have no incentive to penalize their own distribution utilities. The government of
India recently raised the RPO obligation from 3% by 2022, to 8% by 2022. This sharp jump
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was done as the government wants 100 GW of solar power to be installed. However, this
RPO has not spurred governments at the state to act.
Table.No.05 – Solar Power Capacity Deficits States as per Actual RPO for 2016-17
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While a lot of RECs have been issued, there has not been substantial trading or
purchase of RECs. Consequently, this has impacted the cash flows of, and corresponding
investment into, REC generators. The REC mechanism which could have spurred investment
in new RE projects and added much required RE capacity eventually lost its appeal, leading
to a decline in the accreditation and registration of RE projects under the REC mechanism.
In the Indian context, if the REC mechanism is to survive, strict RPO compliance is
required. Also state agencies need to create more awareness about RECs amongst the obligated
entities and ensure the higher uptake of RECs. Increased awareness would provide a much needed
boost to this market. From a survey by Kinetics and Climate Connect among 24 key industry
respondents, which included IPP‘s, regulators, Power Exchanges and other stakeholders of
power sector,Transmission constraint, RPO Non-compliance and Energy Forecasting
emerged as key challenges facing renewable energy IPPs
Fig.No.2. Key Challenges Facing Renewable Energy IPPs
Fig.No.03, India Solar CEO survey 2017 as shown below lists the challenges in the solar market.
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6. International Practices and Possible Lessons
The graph annexed below shows the capacity addition of solar PV in leading
international markets. We could see the growth in five major countries in the world, where
India stands at number three.
Fig.No.04.The Capacity Addition of Solar PV in Leading International Markets.
RECs have been used extensively as a successful market based policy instrument to
promote renewable energy in many countries, such as Australia, Japan, US, Netherlands,
Denmark and UK. However, these schemes vary in detail and need to be customized for local
legislations and market situations.
UK case: ‗Buy out‘ mechanism is an unique feature of the UK – ROCS. Under this
mechanism, liable entities which are not able to purchase ROCs pay ‗buy out‘ price to
the administrator of the scheme for shortfall in ROCS. The money thus received in
‗buy out fund‘ is redistributed to the liable entities to the extent they surrender ROCS
to meet their obligation. This mechanism assists in improving the viability of the
scheme
Australian Case: Liable entities (also include large buyers of electricity) are required
to discharge their liability by surrendering RECs to the Regulator or pay a shortfall
charge, which is significantly higher than the average price of REC.
Swedish Case: A penalty can either be a fixed price per certificate or a multiple of the
average or maximum market price in the (previous) compliance period (say 150% of
average certificate price of previous year).
Indian Case: In case of non-compliance state regulations have provisions to not only
collect penalties at the forbearance price and deposit into a separate fund but also
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impose additional penalties. The amount thus collected may be used to purchase
RECs in the power exchange or used for any SERC related expenses—e.g.,
distribution and transmission infrastructure; development of renewable energy; etc.
But enforcement is the issue.
Poor RPO compliance by States led to decline in registration of projects in REC mode on
the one hand and increase in number of unredeemed RECs available in designated exchanges
on the other. There was no policy guidelines for unredeemed RECs, which would affect
planned cash flow of generators registered for REC regime.
RE projects are capital intensive, long duration investments which ideally should provide
relatively steady returns over the life cycle of the project with minimum variability. The lack
of long term RPO targets, weak enforcement by SERC coupled with issues related to
liquidity and lifetime of RECs creates uncertainty, which is detrimental to the development of
the RE sector. Adding to all, the MoP has also given the RPO obligations by year, which
shows a sharp 2% increase till FY19: FY17 – 2.75%, FY 18 – 4.75% and FY 19 – 6.75%.
The quick building of solar power plants and their sharply falling costs, RPO may not be
needed in the coming years.
7. International Policies on Renewable Energy Trading
Twelve of the most notable types of policies that have promoted renewable energy
worldwide are given below:
7.1. U.S. Public Utility Regulatory Policies Act (PURPA) of 1978
PURPA required utilities to purchase power from small renewable generators and co
generators – otherwise known as independent power producers (IPPs) – through long-term
(10-year) contracts, at prices approximating the avoided costs to the utilities. These avoided
costs represented the marginal costs to the utilities of building new generation facilities,
which could be avoided by purchasing power from the IPPs instead.
7.2. Electricity Feed-in Laws
The electricity feed-in laws in Germany and similar policies in other European countries in
the 1990s, set a fixed price for utility purchases of renewable energy. For example, in
Germany starting 1991, renewable energy producers could sell their power to utilities at 90%
of the retail market price. The utilities were obligated to purchase the power. The law
changed in 2000, when pricing became based on fixed norms unique to each technology,
which in turn were based upon estimates of power production costs and expectations of
declines in those costs over time. Other countries in Europe with renewable electricity feed-in
laws include Denmark, France, Greece, Italy, Portugal, Spain, and Sweden.
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7.3. Competitively Bid Renewable Resource Obligations
The United Kingdom tried competitive bidding for renewable energy resource
obligations during the 1990s under its Non-Fossil-Fuel Obligation (NFFO) policy. Under the
NFFO, power producers bid on providing a fixed quantity of renewable power, with the
lowest- price bidder winning the contact. With each successive bidding round (there were
four total), bidders reduced prices relative to the last round. The UK abandoned the NFFO
approach after the fourth round of bidding in 1997. Other countries with similar
competitively-bid renewable resource mechanisms have included Ireland, France, and
Australia.
7.4. Renewable Energy Portfolio Standards (RPS)
An RPS requires that a minimum percentage of generation sold or capacity installed
be provided by renewable energy. Obligated utilities must ensure that the target is met, either
from their own generation, power purchases from other producers, or direct sales from third-
parties to the utility‗s customers. Typically, RPS obligations are placed on the final retailers
of power. At least twelve U.S. states have enacted an RPS, ranging from 1% to 30% of
electricity generation. In Europe, the Netherlands has been a leader among RPS initiatives.
Dutch utilities have adopted an RPS voluntarily, based on targets of 5% of electricity
generation by 2010, increasing to 17% by 2020. Other countries with RPS-type regulatory
requirements include Australia, Brazil, Belgium, Denmark, France, Japan, Spain, Sweden,
and the United Kingdom.
7.5. Renewable Energy (Green) Certificates
Renewable Energy (Green) Certificates are emerging as a way for utilities and
customers to trade renewable energy production and/or consumption credits in order to meet
obligations under RPS and similar policies. Standardized certificates provide evidence of
renewable energy production, and are coupled with institutions and rules for trading that
separate out renewable energy attributes from the associated physical energy. This enables a
paper market for renewable energy to be created independent of actual electricity sales and
flows. Green certificate trading is gaining ground in the UK, Belgium, Denmark, Australia,
and the United States. Europe embarked upon a test phase of an EU-wide renewable energy
certificate trading system during 2001 and 2002.
7.6. Cost Reduction Policies: A number of policies are designed to provide incentives for
voluntary investments in renewable energy by reducing the costs of such investments. These
policies can be characterized into five broad categories. Cost Reduction Policies can:
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Reduce capital costs up front (via subsidies and rebates)
Reduce capital costs after purchase (via tax relief)
Offset costs through a stream of payments based on power production (via production
tax credits)
Provide concessionary loans and other financial assistance
Reduce capital and installation costs through economies of bulk procurement.
Many examples of these policies exist in individual U.S. states, several countries in Europe,
India, and Thailand.
7.7. Public Benefit Funds
In the United States, public funds for renewable energy development are raised through a
system benefits charge, which is a per-kWh levy on electric power consumption. Similar
levies exist in some European countries for fossil-fuel-based generation. The funds collected
in this manner serve a variety of purposes, such as subsidizing the cost difference between
renewable and traditional generating facilities, reducing the cost of loans for renewable
facilities, providing energy efficiency services, funding public energy education, providing
low-income energy assistance, and supporting research and development.
7.8. Market Infrastructure Policies
A variety of market-facilitation policies are used to build and maintain renewable energy
market infrastructure – the capabilities, institutions and rules which underlie a market –
including design standards, sitting and permitting requirements, equipment standards, and
contractor education and licensing. Policies may also require that market participants have
local on-the ground presence (or joint-venture type requirements).
7.9. Net Metering
Net metering allows a two-way flow of electricity between the distribution grid and
customers with self-generation. When consumption exceeds self-generation, the meter runs
forward, and when self-generation exceeds consumption, the meter runs backward. The
customer pays only for the net amount of electricity used in each billing period, and is
sometimes allowed to carryover net electricity generated from month to month. Net metering
in effect allows customers to receive retail prices for their self-generation. At least 38 U.S.
states now have net metering laws. Net metering is also common in parts of Germany,
Switzerland and the Netherlands, and allowed by at least one utility in the UK. Thailand is
one of the few developing countries to have enacted net metering laws.
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7.10. Transport Biofuels Policies
Bio Fuels Mandates and Tax Policies in Brazil, the United States, and Europe have
accelerating development of biofuels. Biofuels mandates require a certain percentage of all
liquid transport fuels be derived from renewable resources. Tax policies may provide tax
credits or exemptions for production or purchase of biofuels. Brazil has long mandated
blending of ethanol with all vehicle fuels sold in the country, as well as the availability of
pure ethanol fuels at service stations. India has recently mandated blending in some states.
The United States has several policies, such as a federal ethanol tax credit and an Iowa
mandate that government vehicles use ethanol-blended fuel. Many European countries utilize
small amounts of biodiesel blended with conventional diesel, and some, like France and Italy,
also provide tax incentives. Germany provides tax exemptions for pure biodiesel.
7.11. Emissions Trading Policies
Policies to reduce power plant emissions, including NOx, SOx, and CO2, have the
potential to affect renewable energy development. Many emissions-reduction policies create
allowances for certain emissions (representing the right to emit a certain amount of that
pollutant). Credits made available to renewable energy generators can offset these allowed
emissions and can be sold by renewable energy producers at market value to other electricity
generators who must comply with emissions limits.
7.12. Renewable Energy Targets
Several countries have adopted or are proposing national renewable energy targets.
The European Union collectively has adopted a target of 22% of total electricity generation
from renewables by 2010, with individual member states having individual targets above or
below that amount. Japan has adopted a target of 3% of total primary energy by 2010. Recent
legislative proposals in the United States would require 10% of electricity generation from
renewables by 2020. China and India are the first developing countries to propose renewable
energy targets. India has proposed that by 2012, 10% of annual additions to power generation
would be from renewable energy; China has a similar goal of 5% by 2010. Other countries
with existing or proposed targets are Australia, Brazil, Malaysia, and Thailand. In addition, a
group of countries from around the world placed increased attention on renewable energy
targets at the U.N. World Summit for Sustainable Development in 2002.
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