Elsevier

Energy Policy

Volume 34, Issue 9, June 2006, Pages 1004-1014
Energy Policy

Valuing the attributes of renewable energy investments

https://doi.org/10.1016/j.enpol.2004.08.035Get rights and content

Abstract

Increasing the proportion of power derived from renewable energy sources is becoming an increasingly important part of many countries's strategies to achieve reductions in greenhouse gas emissions. However, renewable energy investments can often have external costs and benefits, which need to be taken into account if socially optimal investments are to be made. This paper attempts to estimate the magnitude of these external costs and benefits for the case of renewable technologies in Scotland, a country which has set particularly ambitious targets for expanding renewable energy. The external effects we consider are those on landscape quality, wildlife and air quality. We also consider the welfare implications of different investment strategies for employment and electricity prices. The methodology used to do this is the choice experiment technique. Renewable technologies considered include hydro, on-shore and off-shore wind power and biomass. Welfare changes for different combinations of impacts associated with different investment strategies are estimated. We also test for differences in preferences towards these impacts between urban and rural communities, and between high- and low-income households.

Introduction

Increasing the proportion of power derived from renewable energy sources is becoming an increasingly important part of many country's strategies to achieve reductions in greenhouse gas (GHG) emissions. However, renewable energy investments can often have external costs and benefits, which need to be taken into account if socially optimal investments are to be made. This paper attempts to estimate the magnitude of these external costs and benefits for the case of renewable technologies in Scotland, a country which has set particularly ambitious targets for expanding renewable energy. The external effects we consider are those on landscape quality, wildlife and air quality. Unlike other papers in the literature, we do not restrict our investigation to the effects of particular technologies (such as hydro or wind, Alvarez Farizo and Hanley, 2002; Hanley et al., 1998, Hanley and Nevin, 1999), but consider impacts applicable to a wide range of renewable technologies. We also consider the welfare implications of alternative investment strategies for employment and electricity prices. The methodology used to do this is the choice experiment (CE) technique. Renewable technologies considered include hydro, on-shore and off-shore wind power and biomass. Welfare changes for different combinations of impacts associated with different investment strategies are estimated. We also test for differences in preferences towards these impacts between urban and rural communities, and between high- and low-income households.

In what follows, Section 2 sets out some background detail on energy policy in Scotland. Section 3 provides a brief overview of the CE method, whilst in Section 4 we outline the design and conduct of our empirical study. Section 5 presents results from data analysis, including the conditional logit models estimated from the CE data. Section 6 evaluates the welfare effects of alternative investment strategies in renewables, whilst the final section presents some conclusions.

Section snippets

Scotland as a case study

Scotland has recently started down a new path in how it generates electricity (ROS, 2002). The Scottish Executive has set two challenging targets for use of renewable power sources in the next 20 years:

  • by 2010, 18% of electricity consumed should come from renewable generation,

  • by 2020, that portion should rise to 40%.

Currently only 10% of the electric energy produced in Scotland comes from renewable sources such as wind energy, hydro and waste-to-energy plants. These targets are thus ambitious,

The choice experiment method

Renewable energy investments in Scotland are thus expected to grow rapidly in the near future. These investments will produce a series of potential impacts on the environment, price of electricity and employment. Environmental impacts will include landscape effects, effects on wildlife and changes in air pollution (e.g. waste to energy plants emit air pollution). Exactly what environmental impacts occur, what happens to electricity prices through changes in cost, and any changes in employment,

Study design and implementation

To meet Scottish Executive targets, hundreds of renewable energy projects of all sizes and types of technology have been proposed. These range from large wind farms and new hydro-electric schemes that have significant impacts on the countryside and local communities, to small changes like the addition of solar panels to rooftops and district heating plans with impacts that may only be felt by the immediate residents. This paper's objective is to estimate the value of positive and negative

Data analysis

To model the information collected from the questionnaire, each choice set has three lines of code that combines the attribute levels, ASCs and socio-economic variables (Bennett and Blamey, 2001). The data matrix appeared in the form:alternativeplanA:Va=ASCa+βattributesX+βsocieconY,alternativeplanB:Vb=ASCb+βattributesX+βsocieconY,norenewablesoption:Vn=βattributesX+βsocieconY,(theneither/optoutplan)where V is the conditional indirect utility, ASCa,b are the alternative specific constants for

Welfare analysis for alternative investment plans

One of the strengths of CEs is that estimated coefficients of the attributes maybe used to estimate the economic value of different ways in which the attributes can be combined. In the context of this paper, alternative renewable energy investments may be compared in terms of the welfare changes that they are associated with. To determine the change in economic surplus from possible alternative projects in a multi-attribute MNL model, a “utility difference” is calculated aseconomicsurplus=-(1/β

Conclusions

Renewable energy offers a partial solution to the problem of reducing greenhouse gas emissions whilst meeting future energy needs. Yet different renewable energy projects can have varying external costs in terms of impacts on the landscape, wildlife and air pollution. In addition, strategies vary in their likely impacts on jobs and electricity prices. The choice experiment method used in this paper enables these effects to be jointly evaluated in welfare-consistent terms. This enables

Acknowledgements

We thank the Scottish Economic Policy Network for funding the research on which this paper is based, and an anonymous referee for many useful comments.

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