Presentation on renewable energy at the Summer School of the Florence School of Regulation, June 2012, in Florence.

1. Florence School of Regulation
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)
http://think.eui.eu

2. 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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3. Presentation outline
1. What is Renewable Energy?
2. Why support Renewable Energy?
3. Which mechanism to support Renewable Energy?
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4. 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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5. What is Renewable Energy?
Popular definition
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6. 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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7. What is Renewable Energy?
EU definition (2009 Directive)
• Wind energy • Hydropower
• Solar energy • Biomass
• Aero-, geo-, and hydro- • Landfill gas, sewage
thermal energy treatment plant gas,
• Ocean energy biogases
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8. Presentation outline
1. What is Renewable Energy?
2. Why support Renewable Energy?
3. Which mechanism to support Renewable Energy?
(IEA, 2011) (COM, 2012)
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9. 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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10. 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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11. 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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12. 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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13. 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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14. 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
Breyer and Gerlach, 2010
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15. 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 Breyer and Gerlach, 2010
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16. 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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17. Presentation outline
1. What is Renewable Energy?
2. Why support Renewable Energy?
3. Which mechanism to support Renewable Energy?
(CEER, 2011) (CEER, 2012) (COM, 2008-2011)
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18. Mechanisms to support Renewable Energy
Total expenditure for RES support (CEER, 2011)
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19. Mechanisms to support Renewable Energy
Financing RES support (CEER, 2011)
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20. 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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21. 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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22. Mechanisms to support Renewable Energy
1. Type of support (COM 08)
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23. Mechanisms to support Renewable Energy
1. Type of support (CEER, 2012)
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24. Mechanisms to support Renewable Energy
1. Type of support
(Re-shaping 2010)
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25. 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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26. Mechanisms to support Renewable Energy
1. Type of support (IEA 2008; Batlle et al, 2012)
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27. Mechanisms to support Renewable Energy
2. Level of support (CEER, 2012)
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28. 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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29. Mechanisms to support Renewable Energy
3. Support provision structure (COM 09)
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30. Mechanisms to support Renewable Energy
4. History of support (CEER, 2012)
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31. Mechanisms to support Renewable Energy
5. Support scheme stability (CEER, 2012)
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32. 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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33. 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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34. 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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35. 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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36. 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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37. 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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38. 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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39. 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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40. 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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41. Florence School of Regulation
Thank you very much for your attention
leonardo.meeus@eui.eu
http://think.eui.eu