Any capital-intensive disruptive technology or industry, in its infancy stages, faces challenges to sustain itself. Typically, the costs involved for such products are high while markets are undeveloped, and hence, such ventures prove to be non-profitable. However, such industries have to potential to sustain themselves in the long term by overcoming the learning curve, scaling up their economy, and developing a suitable infrastructure. Typical examples of such industries are those concerned with renewable energy.

On the other hand, governments foresee challenges that they would face in the future, and identify the significance of such industries. Hence, it becomes important for the government to develop such industries and support them till they become self-sustaining. Governments use policy as their primary driver, which has a substantial influence on the growth and shape of such industries. Growth of renewables is strongest where and when the policy-makers in charge have established favorable conditions.

With the current challenges based on fossil energy and climate change, is imperative to invest in renewable energy for long-term energy sustainability and security, economic development as well as control environmental pollution. Hence, it becomes important for governments to frame the right policies for renewable energy.

Developing Nations: The unstable markets in developing nations lack competition because investors do not want to put money into weak economies. These nations can focus their policy on attracting domestic and foreign investment and possibly restructuring publicly owned energy entities. However, privatizing the energy industry is tricky and may have unwanted side-effects such as social unrest and political instability.

For developing and transitional countries, it is increasingly evident that reducing fossil fuel subsidies will improve their energy problems. Reducing or eliminating subsidies provides internal revenues for investment, improves the prospects of attracting direct foreign investment, and improves the financial capacity of governments to pursue other development objectives. Subsidies that underprice electricity have cost developing nations $130 billion a year for the past decade.

The United Nations Development Program (UNDP) suggests a better solution for developing nations would be to reform subsidy programs by focusing them on financial, social and environmental sustainability. In addition, fundamental legal, institutional and social reforms will help attract energy sector investment. Also, local renewable projects, such as Barcelona's Solar Law have been successful because they combine government action with enough individual control to stimulate market competition.

Industrialized Nations: In industrialized nations, which already have sufficient investors and well-functioning markets, policies can concentrate on leveling the playing field for all competitors. Both removing subsidies and internalizing the social costs of burning fossil fuels will help eliminate market price distortions. Societies that want to account for external costs can create emission taxes, fiscal incentives (investment grants, tax credits, guaranteed prices for renewables), use ethical persuasion by educating the public on social costs of using energy sources and can implement certificate trading programs.

Other ways for industrialized countries to accelerate the use of renewables include setting targets, implementing renewable portfolio standards and certificate and emissions trading programs. All of these options allow flexibility for companies to choose the manner in which they increase the percentage of total renewables they produce and consume. Setting technology standards, such as vehicle emissions standards, ensure that companies develop cleaner technology, but also provide flexibility for their R&D.

Research and development of new energy technologies is important for all countries. In industrialized countries, current pricing systems provide few incentives for private investment; private companies also tend to invest in short term R&D, so public money should be spent on long-term development and demonstration. Developing nations must dedicate public funds to renewable R&D because technologies most adaptable to their communities (e.g., decentralized rural electrification) tend to be under-funded in industrialized nations. To complement the R&D, capacity building must be implemented to ensure the energy technology will be used effectively and maintained properly.

The relatively short history of renewable energy policy has already produced a vast variety of political measures intended to promote renewables. Various categories of policies can be classified as follows:

Most forceful are mandated market policies, which set mandatory quantities in the form of quotas (renewable portfolio standards (RPS), blending,...) or mandatory prices such as feed-in tariffs. They are applied in order to give renewable energy a considerable role in the electricity generation and transport fuel markets, and create a critical mass for the development of the industry. In segregated partial-markets, competitive bidding for renewable energy concessions and renewable energy or green energy tradable certificates also constitute mandated market policies. In some cases (e.g. off-grid areas where previously no market exist) policy must actually organize markets and the necessary institutional development.

Financial incentives constitute another category of policies, which is focussed more on cost reductions and improving the relative competitiveness of renewable energy technologies (RET) in given markets: capital grants, third-party finance, investment tax credits, property tax exemptions, production tax credits, sales tax rebates, excise tax exemptions, etc. Some of these measures can be well applied to RET invested by the users themselves. Taxes on fossil fuels also improve the competitive position of renewable energy and are particularly appropriate to internalize negative external effects on environmental or energy security.

Public investments giving RET preference in government procurement, infrastructure projects and use of public benefits funds etc. are another way of increasing the market share of renewables. This is also an area where renewable energy growth stimulation can be combined with development programmes.

RET can only occupy the markets if respective industry standards, permits, and building codes exist, as well as the respective environmental guidelines. This must therefore be an area of utmost concern for a meaningful renewable energy policy, especially as RET typically are new technologies that are constantly evolving.

Policy should also contribute and assure basic functions with regard to information, awareness building, education and capacity building.

As RETs are typically new technologies, research and development should also be an important element of renewable energy policy.

Distributed generation avoids some of the costs of transmission and distribution infrastructure and power losses, which together can total up to half of delivered power costs. Policies to promote distributed generation—including net metering, real-time pricing, and interconnection regulations—do not apply only to renewable energy, but nevertheless can strongly influence renewable energy investments.

Net Metering: Net metering allows a two-way flow of electricity between the electricity distribution grid and customers with their own generation. When a customer consumes more power than it generates, power flows from the grid and the meter runs forward. When a customer installation generates more power than it consumes, power flows into the grid and 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 allows customers to receive retail prices for the excess electricity they generate at any given time. This encourages customers to invest in renewable energy because the retail price received for power is usually much greater than it would be if net metering were not allowed and customers had to sell excess power to the utility at wholesale rates or avoided costs. Electricity providers may also benefit from net metering programs, particularly with customer-sited PV which produces electricity during peak periods. Such peak power can offset the need for new central generation and improve system load factors.

Real-Time Pricing: Real-time pricing, also known as dynamic pricing, is a utility rate structure in which the per-kWh charge varies each hour based on the utility’s real-time production costs. Because peaking plants are more expensive to run than base-load plants, retail electricity rates are higher during peak times than during shoulder and off-peak times under real-time pricing. When used in conjunction with net metering, customers receive higher peak rates when selling power into the grid at peak times. At off-peak times the customer is likely purchasing power from the grid, but at the lower off-peak rate. Photovoltaic power is often a good candidate for real-time pricing, especially if maximum solar radiation occurs at peak-demand times of day when power purchase prices are higher. Real-time metering equipment is necessary, which adds complexity and expense to metering hardware and administration.

Interconnection Regulations: Non-discriminatory interconnection laws and regulations are needed to address a number of crucial barriers to interconnection of renewable energy with the grid. Interconnection regulations often apply to both distributed generation and “remote” generation with renewable energy that requires transmission access, such as wind power. Interconnection regulations include Access Laws, Dynamic Generation and Transmission Scheduling, Elimination of Rate ‘Pancaking’ (remote-transmission costs and fees), Capacity Allocation, and Standard Interconnection Agreements.

Historically, renewable energy in developing countries has come from direct donor assistance and grants for equipment purchases and demonstrations. In recent years a number of new approaches have emerged for promoting renewable energy in off-grid rural areas, including energy service concessions, private entrepreneurship, microcredit, and comparative line extension analysis.

Rural Electrification Policy and Energy Service Concessions: Many developing countries have explicit policies to extend electric networks to large shares of rural populations that remain unconnected to power grids (globally, an estimated 1.7 billion people). However, in many areas, full grid extension is too costly and unrealistic. Policies and rural electrification planning frameworks have recently started to emerge that designate certain geographic areas as targets for off-grid renewable energy development. These policies may also provide explicit government financial support for renewable energy in these areas. Such financial support is starting to be recognized as a competitive alternative to government subsidies for conventional grid extensions.

Rural Business Development and Microcredit: Private entrepreneurship is increasingly recognized as an important strategy to fulfill rural energy goals. Thus, rural electrification policies have begun to promote entrepreneurship. Promising approaches are emerging that support rural entrepreneurs with training, marketing, feasibility studies, business planning, management, financing, and connections to banks and community organizations. These approaches include “bundling” renewable energy with existing products. Bundling can reduce costs if vendors of existing products and services add renewable energy to their activities—and use their existing networks of sales outlets, dealers, and service personnel. In conjunction with entrepreneurship, consumer microcredit has emerged as an important tool for facilitating individual household purchases of renewable energy systems like solar home systems. Credit may be provided either by the system vendors themselves, by rural development banks, or by dedicated microcredit organizations. Notable examples of consumer microcredit for solar home systems have emerged in some developing countries.

Comparative Line Extension Analyses: Economic comparisons of line extension versus distributed renewable energy investment are also emerging in developed countries. Some power line extension policies require that, in cases where utility customers must pay a portion of construction costs for utility power line extension to a remote location, the utility must provide information about on-site renewable energy technology options. Some of these policies require the utility to perform a cost/benefit analysis comparing line extension with off-grid renewable energy. Renewable energy options may be less expensive for rural customers, but without line extension policies, many customers would not be aware of this.

Subsidies and Rebates: Reduction in the initial capital outlay by consumers for renewable energy systems is accomplished through direct subsidies, or rebates. These subsidies are used to “buy down” the initial capital cost of the system, so that the consumer sees a lower price.
Investment Tax Credits: Investment tax credits for renewable energy have been offered for businesses and residences.

Accelerated Depreciation: Accelerated depreciation allows renewable energy investors to receive the tax benefits sooner than under standard depreciation rules. The effect of accelerated depreciation is similar to that of investment tax credits.

Production Tax Credits: A production tax credit provides the investor or owner of qualifying property with an annual tax credit based on the amount of electricity generated by that facility. By rewarding production, these tax credits encourage improved operating performance.

Grants and Loans: Grant and loan programs offer financing for the purchase of renewable energy equipment. Loans can be market-rate, low-interest (below market rate), or forgivable, and available to virtually all sectors—residential, commercial, industrial, transportation, public, and nonprofit. Repayment schedules vary, with terms of up to 10 years common. Interest rates for renewable energy investments can often be 1% or more higher than those for conventional power projects because of the higher perceived risks involved, so government-subsidized loans that offer below-market interest rates are also common.

Power sector restructuring is having a profound effect on electric power technologies, costs, prices, institutions, and regulatory frameworks. Restructuring trends are changing the traditional mission and mandates of electric utilities in complex ways, and affecting environmental, social, and political conditions. There are five key trends underway that continue to influence renewable energy development as discussed below:

Competitive Wholesale Power Markets and Removal of Price Regulation on Generation: Power generation is usually one of the first aspects of utility systems to be deregulated. The trend is away from utilities monopolies towards open competition, where power contracts are signed between buyers and sellers in wholesale “power markets.” Distribution utilities and industrial customers gain more choices in obtaining wholesale power. Such markets may often begin with independent-power-producer (IPP) frameworks. As wholesale electricity becomes more of a competitive market commodity, price becomes relatively more important than other factors in determining a buyer’s choice of electricity supplier.

Self-Generation By End-Users and Distributed Generation Technologies: Independent power producers may be the end-users themselves rather than just dedicated generation companies. With the advent of IPP frameworks, utility buy-back schemes (including net metering), and cogeneration technology options, more and more end-users, from large industrial customers to small residential users, are generating their own electricity. Their self-generation offsets purchased power and they may even sell surplus power back to the grid. Traditionally, regulated monopoly utilities have enjoyed economic advantages from large power plants and increasing economies of scale. These advantages are eroding due to new distributed generation technologies that are cost-competitive and even more efficient at increasingly smaller scales. In fact, newer technologies reduce investment risks and costs at smaller scales by providing modular and rapid capacity increments.

Privatization and/or Commercialization of Utilities: In many countries, utilities, historically government-owned and operated, are becoming private for-profit entities that must act like commercial corporations. Even if utilities remain state-owned, they are becoming “commercialized”—losing state subsidies and becoming subject to the same tax laws and accounting rules as private firms. In both cases, staffing may be reduced and management must make independent decisions on the basis of profitability.

Unbundling of Generation, Transmission and Distribution: Utilities have traditionally been vertically integrated, including generation, transmission and distribution functions. Under some restructuring programs, each of these functions is being “unbundled” into different commercial entities, some retaining a regulated monopoly status (particularly distribution utilities) and others starting to face competition (particularly generators).

Competitive Retail Power Markets and “Green Power” Sales: Competition at the retail level, the newest phenomena in power sector restructuring, means that individual consumers are free to select their power supplier from among all those operating in a given market. Competitive retail power markets have allowed the emergence of “green power” suppliers who offer to sell renewable energy, usually at a premium. As green power sales grow, these suppliers are forced to invest in new renewable energy capacity to meet demand, or buy power from other renewable energy producers. Green power markets have begun to flourish where retail competition is allowed, but often only in conjunction with other renewable energy promotion policies.