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Rethinking Renewables

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Christoph Riechmann (Frontier Economics) presents on renewables at the Vienna Forum on European Energy Law, 2014

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Rethinking Renewables

  1. 1. Rethinking renewables 2nd Vienna Forum on European Energy Law, Energy Community Secretariat 14 March 2014
  2. 2. 2 Frontier Economics Key questions ● Do we need renewables? ● Do we need renewable targets? ● Are there reasons why we should consider supporting (subsidise) renewables? ● If we support renewables, then how? 1 2 3 4
  3. 3. 3 Frontier Economics -1.000 0 1.000 2.000 3.000 4.000 5.000 2011 2020 2030 2040 2050 2011 2020 2030 2040 2050 2011 2020 2030 2040 2050 TWh Ern Exp Imp And Pum Pum Öl GuD Gas Stei Bra Ker BAUEffizienz Positiv Realistisch Do we need renewables? Guided by ETS targets met at least cost by an increasing amount of electricity and energy production from renewable energies (even absent explicit renewable support) We need renewables … RES-E: Annual power generation in Europe Nuclear 1 Source: Frontier/r2b * to reduce overall EU domestic greenhouse gas emissions compared to 1990 Ambitious GHG reduction Targets in EU* ETS as mechanism to reach target ● By 2030: -40 % ● By 2050: -80% to – 95% Scenario: EU ETS as the sole driver for climate policy Coal (incl. CCS)
  4. 4. 4 Frontier Economics Do we need renewable targets? … but we need NO target (provided we have climate policy measures (ETS) in place we can leave to the market when, which and how much) 2 -1.000 0 1.000 2.000 3.000 4.000 5.000 2011 2020 2030 2040 2050 2011 2020 2030 2040 2050 2011 2020 2030 2040 2050 TWh Erneuerbare Energien Exporte Importe Andere Pumpspeicherverbrauch Pumpspeichererzeugung Öl GuD Gas Turbine Steinkohle Braunkohle Kernenergie BAUEffizienz Positiv Realistisch The risk is that we employ subsidies to reach the RES target, when market dynamics imply that the GHG target is best (i.e. at lowest cost) reached by a generation mix with a different share and mix of RES Scenario: EU ETS as the sole driver for climate policy Scenario: Strong RES-E policy* RES-E: Annual power generation in Europe 2020 2030 2040 22 bn EUR /a 40 bn EUR /a 26 bn EUR /a Incremental costs with strong RES-E policy Hard targets and overly ambitious targets cost extra * National RES targets and national support policies, 60% RES by 2050 Source: Frontier/r2b
  5. 5. 5 Frontier Economics So what is the logic of the new 2030 „target“2 “Renewable energy will play a key role in the transition towards a competitive, secure and sustainable energy system. The Commission proposes an objective of increasing the share of renewable energy to at least 27% of the EU's energy consumption by 2030.” An interpretation ● Political consensus requires speaking of a RES „target“ ● The target number is consistent with the EC‘s projection of achieving the -40% GHG target at least cost. In other words: 27% is what the EC expects the market with tightened ETS and without RES support will deliver ● If RES manage to lower their cost faster than currently projected the target is redundant (if cost drops slower it becomes binding and increases cost)
  6. 6. 6 Frontier Economics Should we subsidise renewables? … support infant technologies, but not mature ones 3 Many arguments have been used But few are compelling ● Internalise environmental cost ● Save resources ● Technology learning spill-over ● Industrial policy ● Fuel independence ● Incomplete capital market ● ETS better suited ● Already reflected in price ● No longer for deployed techno ● For infant technologies ● Doubtful given experience ● But true of other fuels as well ● May require steadying of income but not a subsidy ? ? ? Economists will ask for market failures as justification
  7. 7. 7 Frontier Economics If we (still) support renewables, then how?3 … the EC establishes some economic principles, but are these comprehensive enough? ● International integration of support ● Technology neutrality ● Competitive process to determine support ● Consistency with wider energy market design If, then how Practical implications ● Direct marketing obligation ● Balancing responsibility ● Premium, quota or auction“Deployed technologies” Draft State Aid Guidelines for RES* * Full guidelines also extend to „less deployed technologies“ and „small technologies“
  8. 8. 8 Frontier Economics Is the Commission really rethinking renewables? Issues of principle Issues of clarity ● Eligibility o How to define deployed? o How small is small? ● Why support beyond infant technologies (when ETS is strengthened)? ● Why allow existing non- conforming schemes to continue for prospective investment? ● What is the timing for transition to new regimes? 3 ● How to define investment aid vs operating aid (when RES cost are largely CAPEX)? …difficult to say as long as many important details are not clear
  9. 9. 9 Frontier Economics Key questions ● Do we need renewables? Yes, and the market is able to deliver with ETS ● Do we need renewable targets? No, because the market (with ETS) will guide us to a low cost solution ● Are there reasons why we should consider supporting (subsidise) renewables? There may be further arguments (e.g. energy independence), but proponents have not provided a clear reasoning or a willingness to pay ● If we support renewables, then how? - Focus on infant technologies, and consider R&D support rather than operating support - In case support also extended to mature technology: Support scheme with competitive selection and market risks (and be clear about the behavioural incentives of design details) - Make sure capacity incentives in the conventional market are not undermined 1 2 3 4
  10. 10. 10 Frontier Economics Frontier Economics Limited in Europe is a member of the Frontier Economics network, which consists of separate companies based in Europe (Brussels, Cologne, London and Madrid) and Australia (Melbourne & Sydney). The companies are independently owned, and legal commitments entered into by any one company do not impose any obligations on other companies in the network. All views expressed in this document are the views of Frontier Economics Limited.
  11. 11. 11 Frontier Economics FRONTIER ECONOMICS EUROPE LTD. BRUSSELS | COLOGNE | LONDON | MADRID Frontier Economics Ltd, 71 High Holborn, London, WC1V 6DA Tel. +44 (0)20 7031 7000 Fax. +44 (0)20 7031 7001 www.frontier-economics.com

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