KEY POINTS:
Cutting greenhouse gas emissions and reducing the taxpayer's Kyoto bill are not the only reasons the Government wants to foster investment in renewable electricity generation.
There is also the hope that it will slow down or limit the relentless rise in electricity prices.
The way the wholesale electricity market works, the most expensive power needed to ensure demand is satisfied sets the price that generators get.
The more renewable generation is available, the less likely it is that the marginal generator in any given period will be a gas-fired one.
With the Maui field in its declining years and in the absence of major new discoveries to back up the smaller fields coming into production, it is inevitable that gas prices will rise towards the price of imported liquefied natural gas. As LNG prices are a function of world oil prices, the prospect of them setting electricity prices is not an attractive one.
So quite apart from climate change and fiscal concerns there is a strong case for encouraging renewable generation.
The eventual policy framework to enable such generation is likely to be a carbon trading regime.
But designing that sort of regime for such a small market - while avoiding some of the mistakes the Europeans have made - will take years. Australia's mandatory renewable energy target scheme did.
And a regime which makes sense for larger players like the power companies is liable to be too complicated and risky for smaller operations whose collective contribution could be significant.
Which leads outfits like Mount Maunganui's Key Energy to advocate feed-in tariffs which are widely used in Europe.
Feed-in tariffs can be designed in different ways, but their purpose is to guarantee small-sale generators that any power they have to sell will be bought at a viable price.
Under the current German model the Government specifies a fixed price per kilowatt/hour for different kinds of renewable generation, and the rate at which that guaranteed price reduces over time.
Does it work? Well, between 2000 and 2004, renewable generation in Germany more than doubled from 14,000 GWh to 37,000 GWh, which is almost a much as New Zealand generated from all sources last year.
Key Energy's Allan Mountain and Christoph Kwintkiewicz, who knows the German system first hand, acknowledge they have an axe to grind. They are in the business of selling co-generation - or combined heat and power plants - to the likes of sawmills.
They say the advantages of feed-in tariffs for the potential investor in small-scale renewable generation are:
* Certainty of price, which is often key to whether a project is bankable.
* Low transaction costs.
* Speed. It is clear whether a project qualifies or not.As the cost of a technology falls, the tariffs on offer can be adjusted downwards - for new projects, that is. For existing ones a deal is a deal.
If it makes sense to levy electricity consumers to pay for emergency generation capacity at Whirinaki - idle almost all of the time - why not use the same mechanism to pay people to actually produce electricity?
The more power is generated by micro-generation or co-generation schemes, the less New Zealand's liability to other Kyoto governments will be.
In the right place, a project might reduce the need for investment in local lines networks.
It might also allow hydro generators to keep a bit more water in their lakes, which would be more valuable later in the year.
Feed-in tariffs can also be used to foster the development of new technologies, like the Pelamis wave power project under way off the coast of Portugal.
All of that assumes that incentives of some kind are needed to get small-scale renewable resources developed, and that we need to develop those resources.
A report by consultants ACIL Tasman, commissioned by the Greenhouse Policy Coalition and released this week, concludes that we probably don't need to incentivise renewables at this stage.
But if we did want to, the best way would be to subsidise the upfront capital investment, not the ongoing production, as feed-in tariffs do.
The report's author, Michael Hitchens, concludes from Electricity Commission projections that, looking beyond this year, renewable resources capable of generating between 5000 and 7000 MWh a year will be commercially available with no subsidy. That represents five to seven years' growth in demand.
An additional four to six years' supply from renewables is available at a subsidy of 1 or 2c/kWh, with the subsidy not required before 2015.
Alternative projections from the Ministry of Economic Development lead Hitchens to a similar conclusion.
But beyond that, the choice is finely balanced between renewables and gas- or coal-fired generation and an extra 2c/kWh could be needed to tip the balance in favour of renewables.
However these projections may be optimistic given steep rises in the cost of capital equipment for generation generally - reflecting strong global demand - and the prospect of a weaker kiwi dollar.
So relying on current projections of relative prices is a risky strategy.
And we may want to go beyond using renewables to cope with growth in demand. Shutting down coal-gobbling Huntly early (and anything before 2025 would be early in its owner's view), would require replacing 1000MW of generation. That would take hundreds of wind turbines.
Hitchens argues that subsidising capital costs is preferable to subsidising production over many years as it is less likely to get in the way of a broader future response to pricing greenhouse gas emissions through a carbon trading scheme or carbon tax.
It need not involve the Government picking winners either. The Government could set up a competitive market for grants, a kind of Dutch auction where the lowest bids for a given effective generating capacity win, regardless of which technology they use.
There are other options too, traversed in a report by consultants Covec late last year.
In choosing one for the transitional period before a more comprehensive regime post-2012, policymakers should avoid:
* Taking it as axiomatic that whatever the problem, the solution is a market
* Rejecting ideas on the grounds that they may work in practice but they don't work in theory.
* Creating schemes that involve too much hassle, too much cost and too much risk to be worth it for the little guys.
