Environment European Eur. Env. 14, 219234 (2004) Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/eet.357
THE PROMOTION OF GREEN ELECTRICITY IN EUROPE: PRESENT AND FUTURE
Pablo del Ro1* and Miguel Gual2 Facultad de Ciencias Jurdicas y Sociales de Toledo, Universidad de Castilla-La Mancha, Spain 2 Universidad Pablo de Olavide, Sevilla, Spain
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Public support schemes for electricity from renewable energy sources (RES-E) are undergoing a period of change. Two interrelated processes can be discerned at both the EU and member state (MS) levels. On the one hand, the RES-E Directive sets targets for consumption of renewable electricity for the year 2010 and opens the possibility that the European Commission sets a community support framework for RES-E promotion in the future. On the other hand, different types of support scheme have been and are used by countries in order to promote the deployment of renewable electricity. A move from tendering/bidding systems and feed-in tariffs to tradable green certificates can be observed in some MSs. This move may take place in the future in
* Correspondence to: Dr. Pablo del Ro, Department of Economics and Business, Facultad de Ciencias Jurdicas y Sociales de Toledo, Universidad de Castilla-La Mancha, C/Cobertizo de S. Pedro Mrtir s/n, Toledo-45071, Spain. E-mail: [e-mail]
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some other MSs while others will certainly continue to rely on their current scheme. This paper provides an overview and assessment of the instruments currently used to promote renewable electricity in Europe and considers some possible trends in the choice of support schemes in the future. Copyright 2004 John Wiley & Sons, Ltd and ERP Environment.
INTRODUCTION
E
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lectricity from renewable energy sources (RES-E) has traditionally been supported financially by the governments of the member states (MSs).1 At the EU level, promotion of renewable electricity has also been a policy goal not only in the most obvious fields of energy and environmental policy but also in
According to the RES-E Directive, `renewable energy sources' shall mean renewable non-fossil energy sources (wind, solar, geothermal, wave, tidal, hydropower, biomass, landfill gas, sewage treatment plant gas and biogases). This paper focuses on renewable electricity instead of renewable energy in general.
P. DEL RO AND M. GUAL other policy fields such as regional and rural development policy or employment policy as well. Justification for granting support to renewable electricity at both EU and MS levels has been, at least, twofold. On the one hand, the benefits from renewable energy are taken into account. RES-E pollutes much less than conventional electricity and, therefore, avoids its negative environmental externalities. More specifically, RES-E contributes to the achievement of the climate change mitigation goals of the Kyoto Protocol (KP). RES-E promotion is still an expensive way to reduce CO2 emissions (i.e., there are most cost efficient ways to attain this target). However, climate change mitigation is only one of the possible benefits from RES-E deployment. Emissions of local pollutants are reduced as well. Apart from the environmental benefits RES-E provides other socioeconomic advantages such as development, employment and investment opportunities. Finally, by having renewable potential in its territory, Europe can also reduce its fossil fuel dependency and mitigate the risks related to the security of energy supply, which is certainly a major policy concern nowadays. However, those benefits stemming from renewable electricity would not be enough by themselves to justify the implementation of policy support schemes, because if the market valued such advantages (positive externalities) then RES-E would penetrate the market without any need for public support. Unfortunately, this is not the case, since renewable electricity competes on an unequal playing field with thermal-based conventional electricity. Although, in general, private generation costs are higher for renewable than for conventional electricity, the former provides benefits that are not valued by the market. Those benefits translate into a generally lower social cost (inclusive of private costs plus negative external costs minus positive externalities) for renewable energy, but market operators (investors, generators, suppliers and consumers) are guided by the incentives provided by the market, where decisions are taken on
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the basis of private and not social costs (unless, of course, policy measures internalize these externalities). Public support to renewable energy levels the playing field with respect to conventional electricity, internalizes the positive externalities of renewable energy in the decisions taken by economic actors and allows renewable energy to penetrate the electricity market.2 Of course, this support may come at a high social cost.3 This relevance of support schemes, which allow the penetration of renewable energy into the electricity market, has been acknowledged by the 1997 White Paper and by the recently approved RES-E Directive (Directive 2001/77/EC). They set targets for the deployment of renewable energy and renewable electricity, respectively. By 2010, 12% of gross inland consumption of energy will have to come from renewable energy sources (RES). In turn, the directive translates this into a percentage share of electricity consumption being provided by RES-E: 22% (12.5% if large hydro is excluded). There are also differentiated indicative targets per MS. In order to comply with these targets, RESE is currently promoted by the MSs through a wide array of support schemes. The type of system and the level of support may have a major impact on the deployment of RES-E, but the stability of support schemes is also very important in this regard. Uncertainty about future support levels or doubts that the current
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Also, when a dynamic approach is considered, promoting renewable energy is even more justified. In a situation of technology competition such as the one featuring the electricity market, the dominant technology (conventional electricity) has been able, through learning effects, to reduce its costs and to be better known by economic actors. This creates a feedback effect: this technology is more and more adopted because it has been technically improved and it is cheaper. Emerging RES-E technologies do not even have a chance in this situation unless, of course, they are initially supported. 3 If all the benefits for the country from RES-E could be valued in monetary terms, then an analysis could be made comparing the national marginal benefits of RES-E (environmental, socioeconomic and otherwise) with the marginal cost of RES-E for all countries. The intersection of the marginal benefit and marginal cost curves would provide the optimal level of RES-E support. In reality, however, it has proved very difficult to obtain accurate estimates of the marginal benefit curve. Eur. Env. 14, 219234 (2004)
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PROMOTION OF GREEN ELECTRICITY IN EUROPE support system will continue may hurt future RES-E investments. This adds to the `normal' risks investors face. Therefore, clarification on the future of RES-E support schemes is needed. The problem is that prospects on the evolution of support schemes in the near and medium terms are quite uncertain. There is a perception of being in a period of change and in a transition stage stemming from expected policy developments that are either taking place or will take place at both the EU and MS levels. The recently approved RES-E Directive opens the possibility that the European Commission will set a community support framework for RES-E promotion. This decision on harmonization will be taken in 2005 but it is already having an impact on investment decisions taken today. In turn, some MSs have recently changed their support scheme, moving from a tendering/bidding system or a feed-in tariff scheme to tradable green certificates, and other MSs may follow. This paper provides an overview and assessment of the instruments currently used to promote renewable electricity in Europe and gives insight into the foreseeable trends in the choice of support schemes in the future. It further argues that harmonization of these support schemes at the EU level based on a single promotion instrument is unlikely. Data sources include official documents and statistics as well as interviews with RES-E investors and energy experts in all EU countries and at EU level. Accordingly, the paper is organized as follows. The following section provides a critical overview and analysis of promotion schemes currently being applied in the MSs. The main features of the RES-E Directive and, particularly, the possibility that a common support framework is implemented in Europe are discussed in the next section. The fourth section considers the expected trends in policy support schemes. The paper closes with some conclusions.
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ELECTRICITY FROM RENEWABLE ENERGY SOURCES: PROMOTION SCHEMES IN EU COUNTRIES
The power sector is affected by policy developments concerning RES-E, taking place at the EU and national levels. This section will provide a synthesis of how RES-E is being promoted by MSs, while policy developments taking place at the EU level will be analysed in the following section. A wide array of support schemes are currently being applied by the MSs in order to promote RES-E. Some of these investments are applied simultaneously. Not all the support measures have the same relevance for the promotion of RES-E, however. Promotion has traditionally been based on three main (primary) mechanisms: feed-in tariffs, tradable green certificates (TGCs) and bidding/tendering systems. These have been supplemented by other complementary instruments (investment subsidies, fiscal and financial incentives and green pricing). Countries usually apply one (or, at most, two) of the schemes in the first group. This is complemented by a combination of measures pertaining to the second group. Instruments may be differentiated per technology. Figure 1 provides a classification of support schemes according to two criteria: whether they affect the demand or the supply of RES-E and whether they are targeted at generation or capacity.4 A critical overview of these instruments currently applied in the EU-15 follows.5
Other classifications are possible and have sometimes been used (i.e. differentiating between voluntary and mandatory mechanisms, between direct and indirect support mechanisms or between price and quantity based mechanisms). Reference to these categories is implicit in our description of support schemes (i.e. feed-in tariff being a price-based mechanism versus quota with TGC schemes, which is quantity based). We thank an anonymous referee for this remark. 5 Other instruments that may have an indirect impact on RES-E promotion are not considered here. For example, CO2 quotas and CO2 emission trading may positively affect RES-E deployment. An analysis of the interactions between RES-E promotion schemes and CO2 targets is provided by Jensen and Skytte (2003) and Morthorst (2003). Eur. Env. 14, 219234 (2004)
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Generation based (kWh) Feed-in Fiscal incentives Tendering Supply side Investment subsidies Fiscal incentives Quota obligations (TGC) Green pricing Fiscal incentives Quota obligations (TGC) Demand side
Capacity-based (kW)
Figure 1. Classifying RES-E support schemes in Europe (Source: Uyterlinde et al., 2003)
(i) Feed-in tariffs. These are subsidies on output (i.e. per kW h generated) paid in the form of guaranteed premium prices and combined with a purchase obligation by the utilities. The costs are usually borne either by consumers or by the public budget. Although, in theory, setting a price for RES-E and allowing the market to set the quantity produced would not guarantee the deployment of a certain quantity of RES-E (because this depends on how investors and generators respond to the output subsidy), feed-in tariffs have been quite effective in promoting renewable electricity (i.e. Germany, Spain and Denmark). One of the major reasons is that, by guaranteeing the flow of revenue, they provide a great deal of certainty and security for the investor. However, only by chance would feed-in tariffs be a cost efficient instrument for the deployment of RES-E. This would only occur when the feed-in tariff is set at the optimal level (the price at which the marginal cost curve of RES-E generation intersects the target level). Although, in theory, feed-in tariffs could be set at a higher or lower level, they have usually been set at a high level in the past and have also proven highly effective. Currently, generation of renewable electricity in one MS cannot benefit from the
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feed-in tariffs granted by a different MS. This could be avoided if a common support framework using feed-in tariffs were implemented in the EU. The problem would then be that this would result in different support levels between MSs and this would lead to distortions in RES-E deployment decisions and in the EU-wide trade of renewable electricity. Another problem with feed-in tariffs may be a consequence of their success. The increased diffusion of renewable technologies encouraged by the support granted tends to reduce the costs of the technology. If the level of the feed-in tariff remains unchanged, this would involve a higher than expected revenue for the generator or the investor. This, however, can be dealt with by implementing a stepped feed-in tariff per technology (or technology band), which adapts the level of the feed-in tariff to present and future cost reductions.6 This system is currently applied in Germany. With some differences in their design, feed-in tariffs are currently being applied in all MSs except in Ireland, Finland and the UK. Not all renewable electricity technologies benefit from feed-in tariffs in the other MSs.7 (ii) Quota systems with Tradable Green Certificates (TGCs). TGCs are certificates that can be sold in the market, allowing RES-E generators to obtain revenue. This is additional to the revenue from the sales of the electricity that they produce and feed into the grid. Therefore, RES-E generators benefit from two streams of revenue from two different markets: the market price of electricity plus the market price of TGCs multiplied by the number of kW h of
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Within one technology, feed-in tariffs could also be differentiated by the size of the plant, as in Austria. We thank an anonymous referee for this remark. 7 Given that the expected low price of TGCs in Sweden may not be a sufficient incentive for wind energy promotion, a transitional feed-in tariff (in addition to the TGC) applies to this technology during the 20032007 period. Eur. Env. 14, 219234 (2004)
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PROMOTION OF GREEN ELECTRICITY IN EUROPE renewable electricity fed into the grid. The issuing (supply) of TGCs takes place for every specified amount of RES-E (i.e. kW h or MW h), while their demand originates from an obligation, from voluntary demand or even from fiscal incentives (i.e. an ecotax exemption, as in the Netherlands). An obligatory quota means that distribution companies must buy a previously specified number of TGCs as a share of their annual consumption. If these companies do not comply with their obligation, they will have to pay a penalty. The TGC price is the result of the interaction of supply and demand and depends, among other factors, on the level of the target and the marginal costs of generation. The expected TGC price is a signal helping generators and investors to plan their production and investments. However, predictions of the TGC price are more or less uncertain. This is so because, in contrast to feed-in tariffs, TGC schemes are a quantity instrument. The target (quota) is fixed beforehand and the market sets the price of the TGCs.8 Compared with feed-in tariffs, but similarly to bidding systems, a well functioning TGC scheme is, in theory, a cost efficient instrument to deploy a certain amount of RES-E. The instrument ensures that investments will be made in the cheapest renewable technologies, leading to a low-cost deployment of these technologies and, therefore, to the achievement of the quota at the lowest possible costs (cost-effectiveness). This is especially true if the market for green certificates closely resembles one of perfect competition (many buyers and sellers, low
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`Quota obligation' is the expression used in the European context. Renewable Portfolio Standards (RPSs) is the term used in the US. The quota (or RPS) should not be confused with the TGC scheme. The former defines the annual amount of RES-E that obligated actors should feed into the grid. The later represents a more flexible (and less costly) way to achieve such obligation, by allowing obligated actors to trade quotas between them. Copyright 2004 John Wiley & Sons, Ltd and ERP Environment
transaction costs, lack of market power, sufficient liquidity) and other features are included in their design (allowing banking of TGCs, forward markets, . . .) (Morthorst, 2000). It encourages competition between RES-E generators which is expected to lead to technological innovation (dynamic efficiency) and a further reduction in the final electricity price paid by the consumer. One of the main advantages of TGC schemes is that they facilitate the trade of renewable electricity between distribution companies (producers and importers in the Italian case) and between countries with different RES-E Directive targets and distinct marginal generation costs. This has led some experts to propose that a common support framework in Europe be based on a TGC scheme. However, as they currently stand, TGC schemes are very different in the MSs where this instrument has been implemented and this does not facilitate trade at all (see below). In spite of its theoretical advantages, lack of experience with this system makes its practical functioning still uncertain. The `good functioning' conditions referred above may not be satisfied. One major problem is that of thin markets, which may lead to low liquidity levels and a too high or too low TGC price. A too low price for TGCs (compared with the one which would result from the intersection of the marginal cost curve for RES-E generation and the quota level) would not be attractive for RES-E investors and, therefore, would not lead to additional investments in renewable electricity. A high price for TGCs means that targets would be met at a very high cost. The interaction of these schemes on a EU level and their possible design features are also sources of uncertainty. In general, TGCs could create more insecurity for the investor than well implemented bidding systems and feed-in tariffs.
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P. DEL RO AND M. GUAL The Netherlands was the pioneering country in the implementation of TGCs based on voluntary demand (the 1998 Green Label system). Other countries have recently applied this support scheme, although in all of them demand stems from an obligation. These are the cases of Belgium (two regional TGC systems, in Flanders and Wallonia), Austria (only for small hydro),9 Italy, Sweden and the UK.10 Although there is a basic structure of TGC systems, important differences in relation to certain design features (i.e. penalty levels and quotas) exist. The obligation is generally put on the electricity supplier on behalf of the consumer, except in the Italian scheme, where it is put on the producer and the importer. In the Netherlands, the current system is quite sophisticated. On the production side there is a combination of a TGC scheme with a technology-specific feed-in tariff (MEP). This MEP is financed through a levy on distribution network operators. Demand for TGCs is stimulated through an ecotax exemption (REB) on energy consumption (see below). (iii) Tendering/bidding systems. The government invites RES-E generators to compete for either a certain financial budget or a certain capacity of RES-E generation. Within each technology band the cheapest bids per kW h are awarded contracts and receive the subsidy (Schaeffer et al., 2000). The operator pays the bid price per kW h. A fund financed by a levy on electricity consumers covers the difference between this bid price and the market price of electricity. Once bids are awarded, they give certainty to the generators/investors, as they work like a guaranteed feed-in system. This system encourages competition between RES-E producers.
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However, this scheme has recently been removed. Some non-European countries have also implemented quota obligations with TGC schemes. These are the cases of Australia and 14 states in the US.
10
However, the high administrative costs and the complexity of the tendering procedures are important drawbacks of this system (Faber et al., 2001; Uyterlinde et al., 2003), which has proved ineffective. This is also related to the high uncertainty they create for the investors. Tendering/ bidding systems are or have been applied in the UK, Ireland, Denmark and France. The UK NFFO system was abandoned some time ago. In Ireland, AER still applies, although the system is being questioned and it might be substituted in the future. France no longer promotes wind-onshore electricity through the bidding system (the EOLE 2005 programme was also abandoned). (iv) Investment subsidies. These subsidies can be calculated as a percentage either of the renewable energy output or of the installed capacity, although the latter version is more common. Sometimes subsidies are awarded not on a percentage basis but for /kW h. Their use is widespread in all countries (except, apparently, in Italy and Ireland). The currently less competitive technologies (i.e. PV) usually receive relatively higher levels of subsidy while technologies closer to the market are awarded lower amounts. A problem with investment subsidies is that the generator does not have the incentive to operate the plant as efficiently as possible (Faber et al., 2001). Furthermore, subsidy programmes may lead to further delays in investments, as they usually require the applicant to wait for the approval of the subsidy before plant installation. Finally, and apart from the problem of `windfall gains', an investment subsidy does not prevent the subsidized generator from stopping production in the near future (Uyterlinde et al., 2003). Subsidies should be removed if the costs of the technologies benefiting from them closely approach those of
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PROMOTION OF GREEN ELECTRICITY IN EUROPE conventional electricity technologies and become widespread. This instrument usually complements other support measures. (v) Fiscal and financial incentives. Fiscal incentives work via the tax system. They can be exemptions or rebates on (energy, corporate or income) taxes, tax refunds, lower VAT rates or attractive depreciation schemes. They might affect old and recent installations (generation-based incentives) or only the new ones (capacity-based incentives) (Uyterlinde et al., 2003). Their use is widespread in the MS. In Finland, electricity producers pay an annual electricity tax and they generally pass this charge on to their customers. Electricity taxes are then returned back as a tax refund to renewable electricity producers at the end of the year. Financial incentives in the form of reduced interest rates are applied in Austria, Germany, Luxembourg and Spain. (vi) Green pricing/Green Funds. Under this system, electricity consumers pay a surplus on their electricity bill for the promotion of electricity from RES. Therefore, this system is voluntary and based on a willingness to pay (WTP) for green electricity on the part of consumers (Uyterlinde et al., 2003). The extra costs of RES-E generation are covered by the surplus, which is received by the generator. An independent organization guarantees that the electricity for which consumers pay a price has a renewable origin. The incentive provided by these schemes is small and uncertain, however, because it depends on the value consumers allocate to green electricity. There are currently green pricing schemes in Finland, Germany (i.e. the RWE Umwelttarif), the Netherlands, Sweden and the UK. Table 1 summarizes the instruments applied per country and technology. In Table 2 a
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description of the main features of TGC schemes in Europe is provided. Although the above comments may give the impression of uniformity in the schemes being applied, the fact is that the same generic scheme may show different design features in each country. Of course, the effective promotion depends not only on the type of instrument being used but also on the support provided by the scheme, on its design characteristics and on its continuity or stability. A brief assessment of the promotion schemes in EU-15 is worth undertaking. Several criteria for comparison can be considered: effectiveness (reaching the RES-E Directive targets), cost effectiveness (doing so at the minimum cost), dynamic efficiency (incentive for continuous innovation), equity, investor's security, transparency, transaction costs and administrative capacity and market conformity (see van Dijk et al., 2003). In this paper the emphasis is put on the effectiveness and cost-effectiveness in reaching the RES-E Directive targets. Therefore this, together with investors' security (which has a direct impact on effectiveness), will be the main criterion used to assess the support mechanisms. Since only one country still uses tendering as the primary support scheme and this instrument has not been effective in the promotion of RES-E, we will concentrate on the other two (TGCs and feed-in tariffs). The two instruments have very different conceptual bases. A quota obligation with a TGC scheme is a quantity instrument setting the amount of RES-E that will be generated, while allowing the market to set the price of the TGC depending on the marginal generation cost curves of RES-E producers and the ambition of the quota. Feed-in tariffs are a price instrument in the sense that the amount of output subsidy per kW h is set from the start. The market decides the quantity of RES-E produced, depending on the attractiveness of the feed-in for the investor (which, in turn, depends on the
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Table 1. Renewable electricity support schemes in Europe MS AU BEL D FIN FR GER GR IRE IT LUX N P SP SW UK B, PV, WON ALL REN W, SH, G, B, PV WON, SH, B, PV, ST, G, T WON*** ALL REN WOFF B, SH, G, PV, WON ALL REN ALL REN ALL REN ALL REN PV, ST, WON, B PV, WOFF WON, B, SH, ST, G, PV PV, ST ALL REN ALL REN WOFF B, WON, SH B, WOFF ALL REN ALL REN B, T, SH, PV, G, WON Feed-in PV, B****, G, WON ALL REN WOFF B, PV, WON, T WON, B, SH, PV WON, PV, B, SH WON, B, SH, PV, ST WON, G, ST, PV, SH, B WON, B, SH PV TGCs Tendering Investment subsidies B, G, ST, PV, WON, SH WON*, B*, SH*, PV** Fiscal incentives B ALL REN Financial incentives ALL REN Green pricing
ALL REN ALL REN
SH, PV, WON
WON, PV, SH, ST, B
Source: own elaboration from ADMIREREBUS policy database.1 Abbreviations: B, biomass; PV, solar photovoltaics; ST, solar thermal; G, geothermal; W, wind; WON, wind onshore; WOFF, wind offshore; SH, small hydro; T, tidal; ALL REN, all renewables. * Support scheme implemented in both Flanders and the Walloon regions. ** Only implemented in Flanders. *** Transitional feed-in tariff. **** `Biomass' refers to any technology band using biomass resources. Table 2. TGC schemes in Europe. Main features Start year Quota percentage Actors obligated Penalty price (cents/kW h) 12.5 10 8.42 2.17 4.784.93
Belgium (Flanders) Belgium (Wallonia) Italy Netherlands Sweden UK Source: own elaboration.
1
2002 2003 2003 2003 2003 2003
26% (200210) 312% (200310) 2% (per year) 6.4015.30% (200310) 310.40% (200210)
Suppliers Suppliers Producers and importers Voluntary Suppliers Suppliers
This database was produced by authors the in the context of the ADMIREREBUS project funded by the European Commission (Altener Programme). (See Uyterlinde et al., 2003.) Eur. Env. 14, 219234 (2004)
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PROMOTION OF GREEN ELECTRICITY IN EUROPE marginal costs and the level of support provided).11 A major criterion to assess these instruments is effectiveness in achieving the RES-E Directive targets. Feed-in tariffs have proven to be very effective to realize renewable electricity potentials. For example, those countries where wind electricity deployment has increased the most (Denmark, Spain and Germany) are also those using this instrument. Although it is still too early to conclude on the effectiveness of TGC schemes in Europe given their recent implementation, the instrument is theoretically effective since a quota is set from the start and provided that the TGC scheme has been designed and implemented accurately (i.e. if the good functioning conditions referred to above apply).12 There is empirical evidence suggesting that the use of this instrument seems to have been quite effective in Texas (Langniss and Wiser, 2003). The following tables (Tables 3 and 4) show the situation and the recent evolution of RES-E generation in the MS and the contribution of individual RES-E technologies. Hydro still accounts for a high share of total renewable electricity generation but the growth in wind deployment is responsible for most of the increase in RES-E in the 19952001 period. This is due to a set of factors (stability of support schemes, level of support provided and technological progress). Other renewable technologies do not show the same positive trend. According to some simulation models, the RES-E Directive targets will be achieved with the contribution of only two technologies (wind and biomass).13 This means
11 This parallels the distinction between tradable permits (quantity instrument) and taxes (price instrument) used to control CO2 emissions. 12 If these conditions do not apply then a lack of liquidity or market power may result, leading to a very high TGC price and questioning the cost-effectiveness of the instrument (the penalty for non-compliance would play the role of a `maximum price'). High TGC prices may also result from a very ambitious quota, which should be set an accurate level (see Morthorst, 2000, in this regard). Therefore, there are certainly trade-offs at stake, which should be taken into account for an accurate implementation of the instrument. 13 These models are: PRETIR, ReCert, REBUS, Elgreen and ADMIREREBUS.
that these technologies would be the ones which would be most favoured by the implementation of (national or EU-wide) TGC schemes, since they are the most competitive within the set of RES-E technologies. The problem is that TGCs are not an accurate instrument to promote other currently less competitive technologies, such as PV, because this instrument promotes the deployment of the most competitive technologies at the expense of the least competitive ones. Support for the later is necessary in a long-term transition to a more sustainable energy future. Lack of support for these technologies would impede them from advancing along their experience curve, reducing their costs. Therefore, other mechanisms have to be implemented to promote these less mature technologies, such as R&D support, investment subsidies and feed-in tariffs.14 A temporary coexistence of different support schemes for individual technologies with different cost and maturity levels is feasible and necessary. Up to now, the major policy priority at MS level has been to encourage a significant increase in RES-E deployment in order to reach the directive targets (see below). However, the increasing costs of support policies in a budget constrained context is making some countries reconsider these policies, either by moving to allegedly cheaper systems or by reducing support levels within current support schemes. If cost-efficiency is considered, it might be that the generous amounts of subsidies provided by feed-in tariffs (which, together with the certainty for investors, is the major reason for its success) have been above the socially optimal level. This has been a particular concern in some major countries. For example, it has been the main reason for the reform of
14
Another option would be to create a TGC scheme for each individual technology (i.e. a TGC scheme for PV, another for solar thermal etc.), but this would not make much sense because the TGC market would be too thin and it would not function properly (i.e., lack of liquidity or market dominance would probably result). Eur. Env. 14, 219234 (2004)
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Table 3. Share of electricity production from renewable sources by country (%). Evolution in the 19952001 period Incl. hydro RES-E 1995 (%) Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EU 70.5 1.3 5.5 30.9 15.4 5.1 8.6 4.1 17.5 29 1.6 28.3 14.9 47.6 2.1 14.0 RES-E 2001 (%) 70.1 1.4 16.4 29.1 14.4 6.2 5.5 4.2 20.1 44 3.5 34.6 21.9 51.3 2.5 15.5 Excl. hydro RES-E 1995 (%) 3.3 0.8 5.4 10.5 0.6 1 0.1 0.1 1.6 10.9 1.5 3.2 0.9 1.7 0.6 1.4 RES-E 2001 (%) 3.1 0.8 16.3 11.4 0.8 2.7 1.6 1.7 2.9 17.3 3.3 4.2 4.4 2.4 1.4 2.7
Source: own elaboration from IEAOECD (2003).
Table 4. Contribution of individual technologies to RES-E generation in 2001 (% share over total RES-E generation) Hydro Geoth.* Solar PV 0.01 0.00 0.00 0.00 0.00 0.42 0.00 0.00 0.03 0.46 0.43 0.01 0.05 0.00 0.02 0.05 Tide* Wind MSWR* Solid biomass Biogas
Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EU
95.60 41.02 0.47 60.89 94.57 56.86 71.52 58.03 85.53 60.73 3.60 87.73 79.95 95.39 42.20 82.65
0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 8.23 0.00 0.00 0.66 0.00 0.00 0.00 1.13
0.00 0.00 0.00 0.00 0.69 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.13
0.39 3.44 69.46 0.32 0.16 29.75 25.78 32.52 2.15 11.87 25.40 1.60 13.58 0.58 10.04 6.64
0.07 27.63 17.26 0.92 1.91 5.68 0.00 0.00 2.30 23.29 40.67 3.19 1.23 0.32 9.86 2.47
3.49 16.09 9.24 37.76 1.91 1.78 0.00 0.00 0.50 0.00 20.63 6.79 4.54 3.68 8.01 5.08
0.44 11.81 3.57 0.10 0.76 5.52 2.69 9.44 1.25 3.65 9.27 0.02 0.64 0.03 29.86 1.84
Source: own elaboration from IEAOECD (2003). Geoth. = geothermal; Tide = tide/wave/ocean; MSWR = municipal solid waste residues. * Renewables do not include industrial waste, non-renewable municipal solid waste or pumped storage production.
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PROMOTION OF GREEN ELECTRICITY IN EUROPE the German system.15 In Spain, concerns about the high costs of the system have led government to reduce the fixed price for certain technologies in 2003 (wind and biomass).16 Tendering procedures have not been expensive but, as mentioned above, they have not been effective either, among other reasons because the level of support has not been attractive for potential investors. Finally, data on the costefficiency of TGC schemes is not available yet, although they are supposed to be cost efficient in theory and this seems to be the case with the experience in non-EU countries (i.e. Texas) (Langniss and Wiser, 2003). Of utmost relevance for the success of the instrument is the time stability of the support instrument being used. If it changes continuously, this will lead to further risks and uncertainties for the investor and it will delay or even prevent additional investments in RES-E. Some countries have recently replaced their support scheme and in other countries changes are expected in the short and medium terms, an issue to which we will return below.
Table 5. RES-E indicative targets (2010) per MS, including large hydro RES-E 1997 (TW h) Austria Belgium Denmark Finland France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Spain Sweden UK EU 39.05 0.86 3.21 19.03 66.0 24.91 3.94 0.84 46.46 0.14 3.45 14.30 37.15 72.03 7.04 338.41 RES-E 1997 (%) 70 1.1 8.7 24.7 15 4.5 8.6 3.6 16 2.1 3.5 38.5 19.9 49.1 1.7 13.9 Target 2010 (%) 78.1 6 29 31.3 21 12.5 20.1 13.2 25 5.7 9 39 29.4 60 10 22
Source: European Commission (2001). Figures include large hydro.
SUPPORT OF RES-E AT THE EU LEVEL. THE RES-E DIRECTIVE
The RES-E Directive is a crucial legislative development affecting renewable electricity support at the EU level. Its three main elements in the context of this paper are the following. Indicative Targets for RES-E An indicative, non-mandatory target for the deployment of RES-E in Europe is specified in the Renewable Electricity Directive, which also
German RES-E producers received feed-in tariffs amounting to 2.2 billion in 2002. This is expected to increase to 5 billion in 2010 (Schiffer, 2003). 16 The Spanish feed-in tariff system has been able to deliver effective results. RES-E generators within the special regime received premiums under this scheme in 2001 that totalled 335 million, which represented around 2.4% of the total electricity supply revenues (APPA, 2003). Copyright 2004 John Wiley & Sons, Ltd and ERP Environment
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sets indicative targets per MS (see Table 5). Mandatory targets might be imposed in the future. National Support Schemes and EU Community Framework The coexistence of different support schemes in the MSs and the lack of a common framework for the promotion of RES-E in Europe have certain disadvantages. First, a common support framework would favour the attainment of the RES-E Directive targets in a cost efficient way by encouraging the deployment of RES-E in the best locations. Trade of renewable electricity would be facilitated and competitive distortions would be mitigated. Taking into account the wide diversity of promotion schemes between MSs and after the pressure of certain stakeholders benefiting from national support schemes,
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P. DEL RO AND M. GUAL the Commission delayed the implementation of a harmonized framework. The directive states that it is too early to set a Communitywide framework regarding support schemes. By 27 October 2005 the Commission should present a report on the experience gained with the application and coexistence of different support schemes in the MSs. This report may be accompanied by a proposal for a Community framework for RES support schemes (Article 4.2). The directive also stipulates that such a proposal for a harmonized support framework should allow a transition period of at least seven years (thereafter) in order to maintain investors' confidence and avoid stranded costs. Thereby, the directive sets a minimum framework for RES-E policy but it does not prejudge what RES-E policy scheme should be used in the future or even whether a common RES-E promotion scheme should be implemented. It allows each MS to choose the support scheme that `corresponds best to its particular situation' (Subsidiarity Principle). Therefore, at least in the short/medium term, national RES-E support schemes will continue to be used by MSs. In the future, some sort of combination of a community framework (harmonization) and continuation of MS policies can be expected. Mandatory Guarantees of Origin (GOs) By 27 October 2003 at the latest MSs shall ensure that the origin of RES-E can be guaranteed as such according to objective, transparent and non-discriminatory criteria laid down by each MS. They will issue a GO containing data about the energy source from which the electricity was produced (including dates and places of production). The explicit aim is to enable producers of RES-E to demonstrate that the electricity they sell is produced from RESs. GOs, which should be mutually recognized by MSs, could favour the trade in renewable electricity, although they should not be confused with TGCs.
Copyright 2004 John Wiley & Sons, Ltd and ERP Environment
FUTURE TRENDS IN RENEWABLE ELECTRICITY PROMOTION IN EUROPE
Policy support frameworks for renewable energy are fundamental to the risk and financing of RES-E projects. Obviously, project developers and investors prefer stable long-term policy conditions. However, the current situation in Europe is one of uncertainty concerning support schemes due to policy developments at both the EU and MS levels. The MS Levels Investments today depend on their expected profitability for the investor. In turn, revenues are affected by both the expectation of support levels in the future and the time-stability of support schemes. Since trends in renewable energy investments crucially depend on the expected evolution of support schemes in Europe, a survey of policy trends in all EU-15 countries has been undertaken.17 Questionnaires on expected RES-E policy evolution were sent to renewable energy experts in each MS, asking them to provide their insights on RES-E policy trends in their respective country. Results from this survey follow. We have grouped countries in three categories: those experiencing a recent change in RES-E support schemes, those where substitution of the support schemes has taken place (or a change is unlikely in the near future) and, finally, those where a change in support schemes is expected.18 (i) Recent major changes. Five MSs have recently experienced a major change in RES-E support schemes (i.e. in the last two years): UK, Belgium, Sweden and Italy. They all have moved to a TGC scheme. A TGC scheme has also been present in the
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This was done by the authors in the course of the ADMIREREBUS project. Only changes in support schemes have been considered here and not changes in the level of support within existing schemes. Eur. Env. 14, 219234 (2004)
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PROMOTION OF GREEN ELECTRICITY IN EUROPE Netherlands since 1998, although there have been two reforms of the system since. The latest came into force on July 2003 and led to the implementation of a rather complex system combining TGCs with feed-in tariffs on the supply side and an ecotax exemption to stimulate demand for TGCs. In this system, the generator would obtain income from three different sources: the market price of electricity, the TGC price and the feed-in. The total level of support under the MEP is determined by the sum of the feed-in tariff and the value of the ecotax exemption.19 In September 2003 the government announced the abolition of the fiscal incentive in favour of a complete feed-in tariff system in 20042005 (Uyterlinde et al., 2003). (ii) No major changes taking place or expected. In other countries, there has not been a major policy change recently and a continuation of the present support scheme is expected in the future. These are the cases of Austria, Finland, France, Germany, Greece, Luxembourg, Portugal and Spain. This does not mean that minor changes in the support of RES-E have not taken place at all recently. For example, in Austria there is a harmonization of promotion strategies from provincial to national level. In Spain, the feed-in tariff system is not questioned, but there is an ongoing debate on the costs of the system, leading to reductions in price-support levels for certain renewable technologies (i.e. wind). Also, the regional and municipal levels are increasingly active in the promotion of renewable electricity (mainly through investment subsidies). In Germany, a new proposal (amendment) for the new Renewable Energy Law envisages a
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differentiation in tariffs; some will be lower and some will be higher than in the current law. (iii) Major changes expected. In other countries changes are expected in the short/medium term. Current schemes might be replaced in Denmark and Ireland in the medium term. The introduction of a TGC system has been postponed several times in Denmark, and large uncertainty still exists on its planned introduction in 2004. The introduction of a TGC scheme is also expected in the Brussels region of Belgium (together with the TGC systems of Flanders and Wallonia). In general, a move from feed-in tariffs and bidding systems to TGCs can be observed in some countries. However, the proven effectiveness of feed-in tariffs in some countries and the resistance of powerful beneficiaries of this system make it unlikely that other countries will follow this same trend. It is hard to predict what will be the trend of policy support schemes in the future, but it is clear that they will continue to have a crucial role in RES-E deployment. Table 6 provides an overview of the expectations regarding national RES-E policies. However, this would give an incomplete picture of the uncertainties facing investors (concerning the instability of the policy framework), if not complemented by perceptions on the trend towards harmonization at the EU level. This is done in the next subsection.
The EU Level A main source of uncertainty for investors is the prospect for harmonization of support schemes in Europe envisaged by the RES-E Directive (Article...