Policy Issue Paper 14-08
Study on the Estimation of Willingness-To Pay for Renewable Energy and Improvement Plans for
Public Acceptance
C.Y. Lee
Ⅰ. Background and Issues / 1
Ⅱ. Study Results / 3
Ⅲ. Policy Implications / 13
Ⅵ. Expected Achievements / 18
<References> / 21 Contents
Ⅰ. Background and Issues
1. Background
□ Despite high overnight costs and intermittent nature, the renewable energy industry is on the rise globally.
○ As global awareness of climate change increases, the importance of the renewable energy is increasingly highlighted as well.
○ Reserves of fossil fuel, such as oil, gas, and coal, is limited, so its price is likely to keep rising. That is why alternative energy is needed.
○ Technological progress and economies of scale make the renewable energy market more competitive. Future potential of renewable energy is expected to be significant.
□ It is necessary to reach a consensus over more aggressive deployment of renewable energy. As most policies to spread renewable energy are funded by people’s money, public acceptability is all the more crucial to create more funding opportunities and strengthen legitimacy of renewable energy projects.
○ Public acceptance of renewable energy is crucial to mobilize financial resources and increase project legitimacy because electricity customers’
money is the main source of renewable investment.
○ Energy projects that do not earn people’s support eventually fail in the
long run, which is well evidenced by the local resistance against the Miryang power-line tower.
2. Reasons and Purposes of Study
□ Reasons of study
○ Even though the public acceptability is necessary for spreading renewable energy, however, the studies on this issue have been insufficient.
- The existing studies on the promotion policy of renewable energy analyzed either suppliers’ costs and business value or the RPS (Renewable Portfolio Standard), which has been in place since 2012.
○ Therefore, it is time to grasp the current condition of Korea’s social acceptability by estimating WTP (Willingness to Pay) of the public for domestic renewable energy.
- It is also necessary to examine how WTP of Korean people for renewable energy has been changed after Fukushima nuclear accident.
□ Purposes of study
○ The study aims to estimate WTP in order to measure Korea’s social acceptability level for renewable energy.
- This study employs CVM (Contingent Valuation Method), which is the typical research methodology analyzing consumer preference.
- This study also estimates the most reasonable volume of supply of renewable energy in Korea considering the WTP for renewable energy estimated by CVM.
○ The second part of the study suggests measures promoting social acceptance of renewable energy units in Korea.
- The study analyzes the policies of German, Denmark, and Japan, all of which are leading renewable energy markets with high social acceptability. Applying lessons from them, the study draws up measures in Korea’s social context.
Ⅱ. Study Results
□ Contingent valuation method(CVM)
○ CVM is a stated preference method that has potential customers participate in a virtual market of non-market goods and observe their WTP or willingness to accept (WTA).
- The following diagram describes the steps of CVM.
[Figure 2-1] Application of CVM
Determine which goods to be valued A method used to estimate economic values of public goods or non-market goods through interviews with
respondents Strengths of CVM
It has a wider range of options for non-market goods compared to other methods.
It is able to directly estimate many types of non-use values.
It is able to directly estimate
Hicksian welfare with a higher degree of precision.
It is able to test many types of validity and confidence.
Build a scenario that describes the goods↓ to be valued
Thoroughly compose surveys asking↓ methods and principles of payment
Implement surveys and observe↓ respondents’ values for the goods of
interest
Compile and analyze the responses and↓ identify respondents’ values
○ CVM is categorized into single-bounded dichotomous choice (SC) and double-bounded dichotomous choice (DC). This study chose SC.
- DC is more proper in aspect of statistic efficiency, but it has a higher risk of bias.
- As Korea Development Institute (KDI) recommended, the study chose DC, but used SC in statistical analysis.
□ Steps of empirical study
○ As KDI suggested in Guidelines for Pre-Feasibility Study (volume 5, 2008), we employed in-person interviews.
- In-person interview is the most costly and time-consuming, but it is the most effective in reflecting a wide range of input information and
minimizing bias.
○ We extracted 1,000 household samples nationwide except Jeju.
- Because the unit of sample was household, we had surveyed heads of family or housewives between the ages of 20 and 65 to be representatives of the households.
- The survey started in July 2014 and ended in August the same year.
○ The survey contains three CVM questions.
- Additional electricity bill that a customer would be willing to cover to use renewable electricity
- Additional electricity bill that a customer would be willing to cover to use renewable electricity in replacement of nuclear power
- Additional electricity bill that a customer would be willing to cover to use renewable electricity in replacement of coal-fired power
□ Estimating customers’ WTP for renewable energy
○ The result found that Korean people were willing to pay additional 3,456 won/month to use electricity generated by renewable energy.
- This amount was twice the figure identified by the previous studies, which was around 1,500 won/month.
○ Especially, people had WTP of 4,554 won/month to replace nuclear power plants with renewable energy facilities and WTP of 4,005 won/month to replace coal-fired power plants with renewable energy facilities.
- It could be understood that people’s demand for eco-friendly and safer environment increased, largely alarmed by Fukushima nuclear accident and so led the high acceptability of renewable energy.
○ Korean people’s WTP for renewable energy of 3,456 won/month implies that Korean people have the willingness to invest 765,475 million won a year in order to build renewable energy facilities.
- Korean people proved to have a significant value on renewable energy substituting nuclear energy, showing their yearly WTP for renewable energy replacing nuclear at 1,008.7 billion won.
- People attach 887.1 billion won of annual economic value on renewable energy substituting coal-fired power.
Paying Purpose
Estimated Monthly
WTP (won, A)
Number Months of
(B)
Number of Households
(C)
Total annual WTP
(million won, (A×B×C) Renewable Electricity 3,456 12 18,457,628 765,475 Renewable Electricity
Replacing Nuclear Power 4,554 12 18,457,628 1,008,672 Renewable Electricity
Replacing Coal-Fired
Power 4,005 12 18,457,628 887,074
<Table 2-2> Estimated Annual WTP for Renewable Electricity
○ If this amount of money is invested in PV (Photovoltaic) facilities in form of green pricing, the PV capacity can grow by 306MW annually.
- PV installation is assumed to cost 2.5 million won/kW.
- When it comes to replacing nuclear energy with renewables, 403 MW of PV can be installed per annum.
- When it comes to replacing coal-fired power with renewables, 355 MW of PV can be installed per annum.
○ Meanwhile, if this WTP is the level at which people agree to the increase of electricity price, it could be interpreted that Korean people accept the PV capacity of 22GW in the medium and long run.
- In calculating the forecast capacity, we applied PV costs today and expected electricity rate increases reflecting estimated WTP.
- The average generation cost is 91.83 won/kWh now, but customers are willing to pay 103.77 won/kWh if the power was generated from renewable sources.
- If renewable sources are used to replace nuclear power, 23GW of PV capacity can be added in the mid- and long-term.
- If renewable sources are used to replace fossil fuel, 21GW of PV capacity is possible1)
□ Comparison of WTP for renewable energy across countries
○ Before the Fukushima incident in 2011, WTP for renewables was 1,500 won/month. However, after the accident, WTP increased more than
1) WTP for renewables in replacement of nuclear or coal are higher than that for just renewable energy, but PV capacity turns out to be lower in the former case, because the ratio of nuclear and coal, which are at low cost decreases, while relatively expensive renewables’ portion increases.
twice to 3,456 won/month.
- This reflects rising public awareness of environmentally friendly and safe energy and better public acceptance for renewables.
- Geun-dae Lee et al. (2005) calculated 1,610 won/month of average WTP through CVM in 2005.
- Yoo and Kwak (2009) identified 1,681 won/month in 2006.
- Kim et al. (2012) identified 1,562 won/month in 2010.
[Figure 2-1] WTP trends for Renewable Energy in Korea
○ Nevertheless, Korea’s WTP for renewable energy is just 20% of Japan’s, 30% of the US’s and the UK’s, and 50% of Italia’s. So, Korea should
make more efforts to raise the acceptability of renewable energy2)
- Japan’s WTP is the highest at 17.11 dollars/month (survey conducted in 2000), followed by United Kingdom (1997) and U.S. (1999) of 10 dollars/month.
- Korea has made a great leap to 3.37 dollars/month, but still falling behind other advanced countries.
- It is possible that the actual gap in 2014 can be greater because the comparison was made across different time periods.
[Figure 2-3] WTP for Renewable Energy across Countries
○ In comparison of Korea and other countries, Korea’s WTP ranking goes a bit upward, but still lagging far behind the major advanced countries.
2) The comparison was made in 2014 constant USD for consistency through different studies across time and countries.
- When conducting comparison, we took into consideration different power tariffs across countries.
- We divided monthly average WTP by residential power tariff times 100.
- By doing this, countries of higher power tariffs went through reduction of WTP. For example, Japan turned out to be 7.37, which is lower than the U.S. at 8.64.
- Korea ranks the middle at 4.05 because its power tariff is relatively lower than other countries.
- Due to its high power tariff and low WTP for renewables, Spain ranks the bottom.
- Given that Korea has low power tariffs, PA has to double in order to be abreast with Japan’s level.
[Figure 2-3] WTP for Renewable Energy across Countries with Power Tariff Considered
○ Public acceptability of renewable energy can vary along stakeholder and process of renewable energy is brought.
- Public acceptability at the national level is largely influenced by energy technology, regulations and policies built by common people and policy makers. In general, the majority of the population has a favorable attitude toward renewables.
- Public acceptability at the local community level tends to be shaped by procedures evolving around building renewable energy units.
- Locals tend to dislike renewable energy units, because project
implementation often skips or overlooks legitimate procedures that locals would care about the most.
- Public acceptability at the market level is largely affected by economics and sustainability of project models.
- WTP in regions or countries that have a heavy reliance on fossil fuel or nuclear tends to stay low.
[Figure 2-4] PA of Renewable Energy in Different Levels
National Level
Ÿ Technological and political factors Ÿ General public, stakeholders, and policymakers Community Level
Ÿ Legitimate procedures Ÿ Fair distribution of benefits
Ÿ Trust
Market Level Ÿ Consumers
Ÿ Investors Ÿ EPCs
Source: Wüstenhagen et al, 2007; Devine-Wright, 2005; Pasqualetti, 2002; Wolsink, 2005, 2007
○ Confusing national-level PA with community-level PA causes potential problems in designing and implementing renewable energy projects.
- Project developers and policy makers have a tendency to be optimistic about dissemination of renewables, because they only take interest in the reported support of the general public.
- However, this could be misleading because when it comes to actual project implementation, local communities show a significant resistance.
(Se-woong Ahn et al., 2011; Mi-kyung Yum 2008; Sang-hoon Lee, 2013;
Hee-sun Lee, 2010; Hee-sun Lee et al., 2010)
- Bell et al. (2005) defined the difference between national-level PA and community-level PA as “social gap.”
Ⅲ. Policy Implications
□ In order to increase PA, it is necessary to identify different factors that cause problems in different steps and levels of projects.
○ PA issues are normally divided into social gap and individual gap (Bell et al., 2005)
- Social gap is the difference between national-level and community-level PA, of which the former is often higher than the latter. It is primarily caused by lack of information of renewable energy.
- Individual gap refers to a tendency that an individual ends up opposing to renewable energy units in his/her neighborhood, although he/she displayed support for renewables in general. It is often confused with NIMBY.
- Individual gap is observed often when local residents are not compensated properly or their voices are not heard properly by project developers in process of renewable energy projects.
- We suggest that community power unit, enhanced renewable education programs, and power tariff increase could be good solutions for increasing competitiveness of renewable energy.
GAP Source of Problem Solution
Social Gap
Lack of information and
wrong information Renewable energy education programs Power market structure Power tariff reset
incorporating social costs
Individual Gap
Communication among project stakeholders
Community power unit Project structure
Profit-sharing structure
<Table 3-1> Suggested Solutions by Source of Problem
□ It is necessary to attract local residents’ participation in renewable energy power projects.
○ Current leaders in using renewable energy, such as Germany, Denmark, and Japan, encourage local residents to invest in renewable power projects in a bid to increase PA.
- According to German Wind Power Association, residents who have partial ownership of wind power units, are more likely passionate in learning about renewable energy and less resistant (BWE, 2012).
○ It is necessary to have a fair profit-sharing and incentive structure that distribute profits of power plants to all project participants, including residents, developers, finance agencies, suppliers , O&M companies, power companies, and the government.
- Success is possible only with a fair and equitable system of profit sharing.
- It is recommended that the central or local governments provide tax breaks, financial supports, and direct investment (e.g. matching fund).
- Indirect financial support schemes would be also necessary. For example, providing green finance and simplifying permission and licensing process to a community power plant above a certain level of capacity would reduce administrative costs and therefore, provide a better condition where residents can take part in.
[Figure 3-1] Community Renewable Power Plant Structure
Source : Korea Energy Economices Institute, 2014(a)
□ It is necessary to actively raise social and political acceptability of renewables leveraging various channels, including TV, newspapers, study visits, internet, and environmental civic movements.
○ Curriculum of education programs should underline the need of environmental preservation and cost effectiveness of renewable power facilities and the possibilities of negative externalities, like noise and diffuse reflection.
○ In general, there is not a big difference in knowledge of renewable energy across ages. However, older people tend to resist more against renewable power units in their neighborhoods. Education programs should play a role in mitigating the older generation’s opposition.
- Older generation is not only unaware of renewables well but also have a strong belief that renewable energy can never replace fossil fuel.
- It is necessary to promote economic benefits of renewable energy to older generations.
- To younger targets, education should be designed around the theme that sustainability is not guaranteed without renewable energy.
- To the highly educated, it is critical to point out that climate change is aggravating over time and renewable energy could put it to a halt.
Age Education Level
Young Old Low High
Main
Topic Sustainable development
Renewable energy technology
Renewable energy
technology Climate change Main
Message Environmental conservation
Economic efficiency of
power units
Possibility of negative byproducts
like noise and diffuse reflection
Renewable energy as effective response
to climate change Media SNS, Internet TV, Newspaper TV, Newspaper Environmental civic
groups
<Table 3-2> Renewable Energy Educational Focus by Age and Education Level
□ It is required to decide the electricity price considering the social external cost.
○ Because the externality related to power supply is not internalized and the graded pricing system by region has not yet been introduced, under the current Korean electricity market structure, most regional residents try to avoid taking the energy supply facilities.
○ The environmental cost, including regional air pollution and damage to landscape, the cost of the global greenhouse gas emission, the economic loss related to the site of transmission facilities, and the congestion cost of the power system should be reflected in the electricity price.
○ Also, the graded approach, which differentiates retail and wholesale electricity price by region and by reflecting the transmission and distribution cost, may rationalize the electricity pricing system.
- In Korea, demand density is higher than other countries, so transmission costs account for a smaller portion, around 10%, in the total power
supply costs compared to other countries.
- However, the existing transmission infrastructure came to saturation.
Additional build-ups are rarely possible, which is well indicated in Milyang residents’ strong resistance against transmission towers.
- It is expected that electricity transmission costs will rise, as transmission congestion costs are on the rise due to grid constraints.
- It is worth considering differentiating power transmission costs by region, which would eventually lead power plants built in places near consumers.
Ⅳ. Expected Achievements
□ First, the estimated WTP can be helpfully used to assess how the investment in renewable energy creates the social value.
○ For example, the replacement of coal-fired power plant with renewable energy system, which causes the additional cost, can be justified only if the benefit from the replacement is higher than the cost.
○ The WTP that this study has induced can be used as important information to assess economic impact of renewable energy dissemination.
□ The findings of this study are very useful to develop a direction for renewable energy policy.
○ The government budget used to establish and implement renewable
energy promotion programs is still a lot limited. Thus, it is essential to prioritize investment projects and public value of renewable energy is useful to set criteria of allocating priorities within proposed projects.
○ In addition, this study can be used to assess economic value of renewable energy and so is helpful to prepare and improve the framework of renewable energy promotion policy.
○ PA is an indicator of public support for a policy, which will also increase a policy’s legitimacy and solid and objective rationale.
□ Policy makers can leverage these study results in making decision on renewable energy projects based upon their economic values.
○ The study results can work as the basis of cost-benefit analysis of potential renewable energy projects especially when there are controversies over risks that projects involve of damaging environmental assets of project sites.
○ The explicit consideration of the influences on renewable energy in the decision making process can make us assess the contribution to the real national welfare easily.
○ Also, the measurement of the public value of renewable energy may contribute to the preparation of the basis and the direction of the policy on the change of the public perspective on renewable energy development projects.
○ Especially, the study can be used to draw up the plan for improving
public acceptance and work as the basic information of the advertisement.
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1.
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Pay for Renewable Energy and Improvement Plans for Public Acceptance
Printed on February 23, 2015 Issued on February 23, 2015
Author：Chul-Yong Lee Publisher：Joo-Heon Park
Published by Korea Energy Economics Institute,
(Address) 405-11, Jongga-ro, Jung-gu, Ulsan, 44543, Korea, (Phone) +82-52-714-2114, (Fax) +82-52-714-2028 Registered on December 7, 1992
ⓒKorea Energy Economics Institute, 2015
