Renewable Energy

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Renewable Energy: support mechanisms analysis FSR Summer School on Regulation of Energy Utilities Florence, 28 June 2012 Leonardo Meeus (Florence School of Regulation, European University Institute) THINK (http://think.eui.eu)

Florence School of Regulation

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Acknowledgements & references

• European Commission – COM (2008) 19: Support of electricity from RES; COM (2009) 192: Renewable Energy Progress Report; DIRECTIVE

2009/28/EC on the promotion of the use of energy from renewable sources; COM (2011) 31: Renewable Energy Progress Report; COM (2012) 271: Renewable energy, a major player in the European energy market

• European Energy Regulators – CEER Public Consultation Document, Implications of Non-harmonised Renewable Support Schemes; CEER Report on

Renewable Energy Support in Europe

• International Energy Agency – Interactions of Policies for Renewable Energy and Climate. 2011 Working paper; Deploying Renewables - Principles

for Effective Policies. 2008 report.

• EU Funded Research Projects – Re-shaping ,2010; THINK 2011 (Topic 1); Smart Power Market Project 2011

• Academic literature – Nemet, G.F., 2006. Beyond the Learning Curve: Factors Influencing Cost Reductions in Photovoltaics. Energy Policy;

34: 3218-3232. – Verhaegen, K., Meeus, L., Belmans, R., 2009. Towards an international tradable green certificate system – The

challenging example of Belgium. Renewable and Sustainable Energy Reviews, 13(1), pp. 208-215. – Hiroux, C., Saguan, M., 2010. Large-scale wind power in European electricity markets: Time for revisiting support

schemes and market designs? Energy Policy; 38(2010): 3135–3145. – Breyer, C. and A. Gerlach, 2010. Global Overview on Grid-Parity Event Dynamics, Q-Cells, Germany. – Batlle, C., Perez-Arriaga, I. J., Zambrano-Barragan, P., 2012. Regulatory design for RES-E support mechanisms:

Learning curves, market structure, and burden-sharing. Energy Policy; 41(2012): 212–220.

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1. What is Renewable Energy? 2. Why support Renewable Energy? 3. Which mechanism to support Renewable Energy?

Presentation outline

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What is Renewable Energy? George W. Bush Labor Day Speech (2006)

• “Problem is, we get oil from some parts of the world and they simply don’t like us,”

• … • “Nuclear power is safe and nuclear

power is clean and nuclear power is renewable,” the president said.

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What is Renewable Energy? Popular definition

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What is Renewable Energy? Characteristics

• Unlimited supply – As opposed to fuels with limited reserves, like fossil fuels

• Green – As opposed carbon emitting (and polluting)

• Indigenous – As opposed to fuels that have to be imported from

dominant supplier

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What is Renewable Energy? EU definition (2009 Directive)

• Wind energy • Solar energy • Aero-, geo-, and hydro-

thermal energy • Ocean energy

• Hydropower • Biomass • Landfill gas, sewage

treatment plant gas, biogases

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1. What is Renewable Energy? 2. Why support Renewable Energy? 3. Which mechanism to support Renewable Energy?

Presentation outline

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(IEA, 2011) (COM, 2012)

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Why support Renewable Energy? Con 1: the interaction argument

• Total emissions are not reduced – RE support reduces the carbon price of the EU Emission

Trading Scheme (ETS)

• Potential investors in coal plants – Are still confronted with a negative outlook – But less negative because less switching from coal to gas

• Hence, the criticism: “Green serves the dirtiest” – Valid as long as the quantitative cap of the EU-ETS is

insensitive to the carbon price

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Why support Renewable Energy? Con 2: the cost-effectiveness argument

• RE support displaces GHG reductions that the ETS would achieve at a lower cost

• This additional cost can be difficult to evaluate, especially for electricity generation

• But, this does not make the point less valid

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Why support Renewable Energy? Pro 1: need for a longer-term perspective argument

• This argument assumes that the EU-ETS does not give a long-term perspective

• Supporting the early deployment of RE technologies is then argued to be a cost-effective measure for long-term climate change mitigation

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Why support Renewable Energy? Pro 2: the other motives argument

• Other benefits that need to be valued – Reduced dependence from imported fossil – Reduction of other pollutants arising from the use of other

energy sources – Local employment, export of technology

• But, options displaced by RE provide similar benefits – Especially the case for energy efficiency improvements – But also partly for switching from coal to gas, nuclear, or

carbon capture and storage

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Why support Renewable Energy? Pro 3: knowledge spillover argument

• Lessons from the past reveal that costs of technologies decrease with their deployment – Learning by doing and learning by using – Progress ratio considered to be constant, i.e. reduction of cost as a

consequence of the doubling of cumulative installed technology

• But, private firms will not invest enough in early deployment because they cannot appropriate all the benefits – Knowledge spillover problem

• Legitimizes RE support independently of climate policy – To reach a socially optimal level of (early) deployment, i.e. market pull – To reach socially optimal level of R&DD, i.e. technology push

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Why support Renewable Energy? Photovoltaic (PV) learning curve (IEA, 2011; Nemet, 2006)

• 1975 to 2001 – Factor 20 cost reduction

• 1980 to 2001 – Manufacturing plant size – Module efficiency – Silicon cost

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Breyer and Gerlach, 2010

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Why support Renewable Energy? Photovoltaic (PV) learning curve (IEA, 2011; Nemet, 2006)

• 2001 – 2008 – Start large programs in

Japan and Germany for grid-connected PV modules

– Shortage appropriate purified silicon and supply market bottleneck

• Since 2008 – Price have fallen drastically

and are back inline with learning-curve theory

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Why support Renewable Energy? European Energy Review, May 2012

• Energy Commissioner is open to the idea of 2030 RE targets

• EU-ETS is not sufficient to promote RE on its own

• Four instruments may be too much, i.e. targets for GHG, RE and EE + ETS

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1. What is Renewable Energy? 2. Why support Renewable Energy? 3. Which mechanism to support Renewable Energy?

Presentation outline

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(CEER, 2011) (CEER, 2012) (COM, 2008-2011)

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Mechanisms to support Renewable Energy Total expenditure for RES support (CEER, 2011)

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Mechanisms to support Renewable Energy Financing RES support (CEER, 2011)

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Mechanisms to support Renewable Energy Support scheme design elements (CEER, 2012)

1. Type of support 2. Level of support 3. Support provision structure 4. History of support 5. Support scheme stability

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Mechanisms to support Renewable Energy 1. Type of support

• Feed-in tariffs (FIT) – Provide a defined payment to generators for the amount of KWh generated

over a certain number of years (10 up to 30 years) – Limited administrative burden on regulators, but can be difficult to define

tariff due to info asymmetry regulator and generators • Feed-in premiums (FIP)

– Provide a fixed or variable premium payment above the wholesale market electricity price

– Generators have incentives to adjust their production to price signals, but this also implies higher risk premiums

• Tradable green certificates (TGC) – Quota system that obliges suppliers to source an increasing volume of their

electricity from renewable sources – Generators now also face the TGC market risk

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Mechanisms to support Renewable Energy 1. Type of support (COM 08)

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Mechanisms to support Renewable Energy 1. Type of support (CEER, 2012)

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Mechanisms to support Renewable Energy 1. Type of support

(Re-shaping 2010)

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Mechanisms to support Renewable Energy 1. Type of support (COM, 2012)

• Focusing on electricity: – FIT 21/27; Premium 6/27; Quota obligation 6/27; Investment grants 10/27; Tax

exemption 10/27; Fiscal incentive 7/27 – Nr instruments: one 6/27; two 9/27; 3 or more 12/27

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Mechanisms to support Renewable Energy 1. Type of support (IEA 2008; Batlle et al, 2012)

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Mechanisms to support Renewable Energy 2. Level of support (CEER, 2012)

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Mechanisms to support Renewable Energy 3. Support provision structure (CEER, 2012)

• Support periods set ex-ante – Push a specific technology for a limited amount of time – An example is the UK Renewable Obligation Certificates (ROCs)

scheme with 2 ROCs per MWh for offshore before March 2014, and 1,5 ROCs after

• Periodic review of support scheme levels – Reduce risk to over-support a technology, while maintaining investor

confidence – An example is the German tariff degression based on expected

technological progress

• Rate varied for the same project over time – An example is the German FIT rate for offshore wind installations

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Mechanisms to support Renewable Energy 3. Support provision structure (COM 09)

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Mechanisms to support Renewable Energy 4. History of support (CEER, 2012)

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Mechanisms to support Renewable Energy 5. Support scheme stability (CEER, 2012)

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Mechanisms to support Renewable Energy Other relevant factors (CEER, 2012)

• Local terrain – Resource availability – Cost of project development and connection

• Connection and charging rules – Level of the charges – Time required to connect: “invest then connect” versus

“connect and manage” approach – Compensation rules in place

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Mechanisms to support Renewable Energy Other relevant factors (CEER, 2012)

• Electricity market arrangements – Balancing charges that (not) apply to RE generators – Gate closure time

• Ancillary services – Grid code requirements

• Social acceptance, planning and permitting – EU citizens have wide ranging perceptions of RE technologies

• Subsidies for other technologies – Coal subsidies in Spain and Germany – UK carbon floor

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Mechanisms to support Renewable Energy Potential impacts of non-harmonization (CEER, 2012)

• Impact on investments – Additional complexity for investors – Suboptimal investments

• In Germany 10 GW PV, while 1 KW only produces 1050 kWh south of Germany compared to 1500 kWh in Spain and Italy

• Concentration of RE in a few MS that provide more support can also require more grid reinforcements

• Impact on the internal market – The possibility of negative prices

• In Denmark, it has been decided to tackle the potential issue of negative prices by setting the subsidy provided to renewable generation to zero when the market price becomes negative

– Transferring imbalances across borders

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Mechanisms to support Renewable Energy Potential benefits of non-harmonization (CEER, 2012)

• Different schemes for different ambitions – Many countries have developed schemes that differentiate by

technology – A harmonized scheme could differentiate, but would encourage the

same technologies to the same degree in the whole of Europe

• Investor confidence – Harmonization reduces complexity, but at least in short terms disrupts

support scheme stability

• Existence of other non-harmonized factors – Connection charging rules, electricity market arrangements, ancillary

services, social acceptance, planning and permitting, subsidies for other technologies

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Mechanisms to support Renewable Energy Cooperation between MS (CEER, 2012)

1. Statistical transfer (Art. 6)

2. Joint projects (Art. 7)

3. Joint support schemes (Art. 11)

Renewables Directive to facilitate a joint and efficient approach towards achieving the EU RE targets

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Mechanisms to support Renewable Energy 1. Statistical transfer

• Allows MS that surpass their RE targets to sell the excess renewable generation to another MS

• A country with low cost RE potential can fully exploit its resources

• Should allow RE to be developed where it is most cost-efficient

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Mechanisms to support Renewable Energy 2. Joint projects

• Member States may jointly finance an RES project – Being investigated in the North Seas

• Also with third countries – Italy expects to import 13.6 TWh to meet its 2020

renewable energy target – This may include imports from Switzerland, Albania,

Tunisia and Montenegro – Generation does need to connect into the EU

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Mechanisms to support Renewable Energy 3. Joint support schemes

• Member States may decide to join or partly coordinate their national support schemes

• Norway and Sweden 1 January 2012 – TGC scheme without differentiation between technology types – Designed to stimulate the development of 26.4 TWh of renewable

generation in the period between 2012 to 2020, shared equally between the two countries.

– Half of this capacity is expected to come from onshore wind developments which the countries expect to be shared equally

– The remainder is expected to be developed through additional hydro power in Norway and biomass power in Sweden

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Mechanisms to support Renewable Energy COM, June 2012

Commission is taking four main actions following this Communication. It will: 1. continue to drive forward the integration of renewable energies into the

internal energy market and address power generation investment incentives in the market

2. prepare guidance on best practices and experience gained on support schemes to encourage greater predictability, cost-effectiveness, avoid over compensation when proven and develop greater consistency across Member States

3. promote and guide the increased use of the cooperation mechanisms, allowing Member States to achieve their national binding targets by trading renewable energy and so lowering their costs

4. ensure improvements to the regulatory framework for energy cooperation in the Mediterranean, noting that an integrated regional market in the Maghreb would facilitate large-scale investments in the region and enable Europe to import additional renewable electricity

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Thank you very much for your attention [email protected]

Florence School of Regulation