Feed-in tariffs: The legislative challenges for promoting sustainable investment in RES

Feed-in tariffs: The legislativechallenges for promoting sustainable

investment in renewable energy

Atanas GeorgievAssistant Professor, Sofia University

Chief Editor, Publics.bg & Utilities Magazine

Contents

1. EU energy policy, legislation and recent changes (~5 min)

2. RES legislation development in Bulgaria (~10 min)

3. Feed-in tariffs vs. Green Certificates (~3 min)

4. Q&A (~2 min)

“Assumptions”

to regulate – “to control an activity, process, or industry officially by using rules”

a regulator – “a person or organization whose job is to be certain that companies, systems, etc. act fairly and follow rules”

to overregulate - to make too many laws and rules that control an activity, especially a type of business or industry

(Source: Macmillan Dictionary)

European legislation & recent changes (1/6)

• 2009/28/ЕС – RES Directive (20/20/20)– “The main purpose of mandatory national

targets is to provide certainty for investors”– “‘support scheme’ means any instrument,

scheme or mechanism applied by a Member State or a group of Member States, that promotes the use of energy from renewable sources by reducing the cost of that energy, increasing the price at which it can be sold, or increasing, by means of a renewable energy obligation or otherwise, the volume of such energy purchased.”

European legislation & recent changes (2/6)

• 2009/72/ЕС – Electricity Market Directive (3rd Package)– “A well-functioning internal market in electricity should provide

producers with the appropriate incentives for investing in new power generation, including in electricity from renewable energy sources”

– “A Member State may require the distribution system operator, when dispatching generating installations, to give priority to generating installations using renewable energy sources or waste or producing combined heat and power…”

European legislation & recent changes (3/6)

• COM(2010) 639 – “Energy 2020. A strategy for competitive, sustainable and secure energy” (November 10, 2010)– “…The move towards renewable energy use and greater energy

efficiency in transport is happening too slowly…”– “…The optimum energy mix,

including the swift developmentof renewables, needs acontinental market at least…”

European legislation & recent changes (4/6)

• COM(2011) 885 – “Energy Roadmap 2050 ” (December 15, 2011)– “Most scenarios suggest that electricity

prices will rise to 2030, but fall thereafter”– “The biggest share of energy supply

technologies in 2050 comes from renewables”

– “The challenge for Europe is to enable market actors to drive down the costs of renewable energy through improved research, industrialisation of the supply chain and more efficient policies and support schemes. This could require greater convergence in support schemes and greater responsibilities for system costs among producers.”

European legislation & recent changes (5/6)

• COM(2011) 885 – “Energy Roadmap 2050 ” (continued)– “Renewables will move to the centre of the energy mix in

Europe…”– “This changing nature of renewables requires changes in policy

parallel to their further development.”– “Incentives in the future, with increasing shares of renewables,

have to become more efficient, create economies of scale, lead to more market integration and as a consequence to a more European approach.”

European legislation & recent changes (6/6)

• COM(2012) 271 – “Renewable Energy: a major player in the European energy market”– “The EC will prepare guidelines to facilitate trade in RES”– “More convergence, including common joint support schemes,

would ensure more cost-effective exploitation of renewable energy as well as a more single market-compatible approach”

– Are we going to see a new, EU-wide support scheme with tradable certificates? What would be the effects for investors?

Feed-in TariffsPremiumQuota Oblig.Investm. grantsTax ReductionsFinancial incent.

Bulgarian legislation & recent changes (1/4)

• Energy Strategy of Bulgaria– Previous version – voted by Parliament in 2002– New Energy Strategy for the period until 2020– Perfect example of the “Rock-paper-scissors” game– Partisan vs. Consensual document

• 5 main priorities:– Security of supply– Reaching the 2020 target for RES– Improving energy efficiency– Developing competitive energy market– Strengthen social protection (energy poverty)

?

Bulgarian legislation & recent changes (2/4)

• National RES Action Plan (published in mid-2010)– Followed the Energy Strategy, but

preceded the RES law

– Defines distribution of RES types in the coming 10 years, according to the national target – 16% in 2020

– Smart Grids and Electric Vehicles support schemes envisaged

– Downside: non-consensual document, based on one-by-one talks and comments

– Environmental impact consultations are being conducted now

– Review by the European Commission

What is missing

“an overview of necessary grid expansion measures in the German power grid”

Source:Germany’s

RES Action Plan

Bulgarian legislation & recent changes (3/4)

• Bulgarian Law for Renewable Energy– Available grid capacities will be

announced by transmission and distribution grids each year

– Application procedure for new RES capacities, managed by the regulator with participation from grid companies

– Approved RES investors will have to pay a fixed price for connection of 25 thousand EUR per MW of installed capacity (for over 5 MW capacity)

transmission grid

distribution grids

regulator

gridcapacity

info

aggregatedgrid capacity

info

RES investors

selectionprocedure

Bulgarian legislation & recent changes (4/4)

• Bulgarian Law for Renewable Energy– Approved RES investors will receive a fixed feed-in tariff which

will not be diminished during the period of the long-term contract– Wind capacities – with a 12-year PPA– Hydro (<10 MW) & other RES – with a 15-year PPA– Solar, geothermal & biomass capacities – with a 20-year PPA– A new Agency for Sustainable Energy Development issues RES

certificates (up to now issued by energy regulator); the agency inherited the former Energy Efficiency Agency

– The regulator sets annual RES FiTs without limits for the price-decreases

Current status of capacity & production (2011)

The TSO’s analyses show, that a total of 2400 MW wind+solar could be connected to the national grid.

At end’2011 the following RES capacities are connected:- Wind – 607 MW- Solar – 254 MW- Total – 861 MW

Additional new capacities expected to be connected according to the law:- Wind – 2113 MW- Solar – 1599 MW- Total – 3712 MW (!)

The grid is “short” with ~2120 MW

Current inst. generation is ~12000 MWCurrent min. consumption is ~2579 MWCurrent max. consumption is ~7444 MW

FiT, proposed by Bulgarian regulator for 2012/3

• Feed-in tariffs are proposed according to projected costs• Would be active for the new capacities, which enter the market in

the period July 1, 2012 – June 30, 2013

2012/2013 2011/2012 ChangeType of capacity EUR/MWh EUR/MWh %Wind (up to 2250 h/p.a.) 76.03 97.66 -22.14%Wind (over to 2250 h/p.a.) 67.85 88.48 -23.32%Solar (up to 30 kW on rooftops) 169.71 309.45 -45.16%Solar (30-200 kW on rooftops) 153.54 304.99 -49.66%Solar (200-1000 kW on rooftops) 145.46 298.48 -51.27%Solar (up to 30 kW) 137.37 294.76 -53.39%Solar (30-200 kW) 133.33 290.11 -54.04%Solar (200-10000 kW) 121.20 248.28 -51.18%Solar (over 10 MW) 120.80 248.28 -51.35%

NEW

Current status of Bulgarian RES market

• Old over-regulations created over-supply and over-expectations• The radical change in legislation will lead to uncertainty and will

diminish investment (with possibility for legal procedures – BITs)• The national grid is not ready to accommodate all current RES

projects and is practically closed for new ones. The TSO may also refuse taking part of the energy of some capacities in order to protect security of the grid

• The national support scheme (FiT) should be gradually merged with the support schemes in SEE (in order to implement market coupling)

• Price implications may be severe, as deregulation and liberalization of the market for households and SMEs is currently on the way (in 2012/2013) + carbon quotas + stopped project for nuclear base-load

• Still no national discussion on the Energy Roadmap to 2050• Investors are not willing to develop new projects

An alternative to over-regulation

• Current Feed-in Tariffs formed by:– A fixed base price (80% of average end price in “Year-1”)– A fixed green component, depending on the RES technology

• Alternative RES support schemes:– Base price formed by market price of electricity– Green component, based on market price of green certificates

Market Platformdefines PRICES

producer supplier

GreenCertificates

Market

ElectricityMarketenergy energy

green

certificates

greencertificates

Feed-in Tariffs vs. Green Certificates

Positive features:• Promoting efficient use of capital• Reaching 20/20/20 by setting

targets for suppliers• Defining the real price of

consumers’ “green energy” demand

Negative features:• Green certificates markets are

complicated• No GC market is possible without

an electricity market (power market exchange)

• Still no single EU-wide scheme for trading GC is present

Positive features:• Long-term guarantees diminish

investment risks and financing costs• Most of the EU countries use FiT and

their effect is well known• Economic efficiency if prices are set

wisely

Negative features

• Long-term contracts

• Uncontrolled growth of RES and high costs for society

• Risk of over-regulation - too much administratively-set prices

Green Certificates Feed-in Tariffs

Case Study: Green Certificates in Romania

• National target for RES (2020) – 38%

• Green Certificates since 2005

• Market operator: OPCOM

• Participants: 73 suppliers and 44 producers

• Electricity is traded separately from Green Certificates

• Quota requirements for suppliers – up to 20% in 2020

• Price floor & ceiling: 27-55 EUR (updated with inflation)

• Fine tuning instruments:– Number of GCs per MWh

– Quotas

– Price floor & ceiling

Prioritizing RES (GC per MWh)- Wind 1-2- Biomass/Biogas 3-4- Photovoltaic 6 (up from 4)

Towards common RES regulation

“…guaranteed payments have become more or less harmonised in the different jurisdictions without regulative interference from the EU…”

Source: the study “Comparative study on the main renewable energy support mechanisms in European jurisdictions” conducted by CMS Cameron McKenna LLP (http://bit.ly/RES-support).

_______________

• An additional incentive for common EU RES support schemes – transfer of RES obligations from “leaders” to “followers” (and the 90 EUR/MWh fine for non-compliance)

The Bulgarian road to grid parity

• Improve legislation on a systematic basis, considering separate documents (strategies, plans, laws, ordinances, etc.) simultaneously;

• Coordinate institutional actions (ministries, regulator, other agencies);

• Improve infrastructure – through public review of the 10-year transmission & distribution grid development plans;

• Introduce market principles to both electricity and RES markets in order to achieve better efficiency.

Thank you for your kind attention!

Atanas Georgiev

Assistant Professor at the Faculty of Economicsand Business Administration, Sofia University

Managing Editor of publics.bg

email: [email protected]

mobile: +359 888 466 450