Supporting renewable energies: The ‘transition’ schemes

LightBulbSolarPanel.jpg

As most renewable energies are still more expensive than fossil fuels, a variety of support schemes have been put in place to accelerate their uptake and meet the EU's goal of sourcing 20% of its energy from renewable sources by 2020.

Background

Germany's Renewable Energy Sources Act, adopted in 2000, established a model for feed-in tariffs that has inspired the development of support schemes for renewable energy in other countries.

In March 2007, EU leaders endorsed plans for a mandatory target to satisfy 20% of Europe's energy demand from renewable sources by 2020. The EU-wide 20% target was later translated into individual targets for each member state, laid down in a new Renewables Directive, adopted in April 2009.

Support schemes remain a national prerogative under the revised directive.

Since the adoption of the first EU directive on renewable electricity in 2001, the European Commission has published regular reports assessing support mechanisms that different member states have put in place to aid renewables.

The Commission's latest progress report, published in January 2011, calls for investment in renewable energy to be doubled from €35 billion to €70 billion to meet the EU's 2020 target (EURACTIV 31/01/11).

But it said it was too early to set an EU-wide tariff, noting that local markets need tailor-made support. Harmonisation, it argued, would be premature and would disrupt the market, a view widely shared by the renewables industry.

However, the Commission added that it does not rule out greater harmonisation in the future. "A convergence of financing, such as feed-in tariffs, will be necessary in the medium or long term, when a truly European market is created," the Commission said. "This can include greater cooperation in setting tariffs, technology bands, tariff lifetimes, etc."

It said convergence could also include completely joining the support schemes, as planned by Norway and Sweden.

Issues

EU support for renewable energies has mainly focused on renewable electricity, but many countries have also implemented financial support schemes to encourage the uptake of renewables in heating and cooling.

For renewable electricity, support schemes can generally be divided into:

  • Price-based instruments that pay a fixed price for renewable energy (e.g. feed-in tariffs), and;
  • quantity-based instruments that set compulsory amounts of renewable electricity to be produced (e.g. renewable portfolio standards).

Feed-in tariffs

Feed-in tariffs (FiTs) are regarded by many as the most successful means of supporting the uptake of renewables. Generally, they oblige grid operators to guarantee priority grid access to renewable energy, and oblige them to buy at government-fixed prices from generators that feed renewable energy onto the grid.

FiT schemes are designed to make sure that renewable energy can compete with conventional energy sources. They are set at a level required to guarantee the security of long-term investment in renewable energy, encouraging long-term contracts that are usually of 10-20 years' duration.

Purchase prices vary according to the type of technology and the amount of energy generated by the producer. Investors are also guaranteed a reasonable rate of return on developing more expensive technologies, such as solar photovoltaics. The schemes also offer an incentive to produce energy more efficiently.

Germany sets the standard

Germany paved the way for feed-in tariffs in Europe with its 1990 electricity feed-in law, which guaranteed free access to the grid for renewable energy for the first time.

The amount of support was originally determined as a percentage of the average price paid by final customers. This meant that solar and wind electricity, for example, got 90% of the retail price, while rates for biomass and hydro ranged from 65% to 80%.

The preferential rates stimulated market development of wind energy in particular, but they were less successful in boosting technologies that were more costly at the time, like solar photovoltaics (PV).

The feed-in law was revamped with the 2000 Renewable Energy Sources Act (EEG), which established the feed-in tariff model that was later taken up as a benchmark by many countries. Instead of percentages of end-user tariffs, the new rates were fixed for 20 years and vary depending on the energy source.

The law was subsequently amended to reflect changes in the market. PV rates, for example, were improved in late 2003, leading to a solar boom in 2004.

The German strategy has produced the world's largest solar market in terms of installed capacity. For wind, it came second only to the US in 2009, with almost 26 gigawatts installed by the end of last year (EURACTIV 04/02/10).

Over 40 countries have since adopted feed-in tariff policies. They have become the primary support mechanism for renewable energy in Europe, and have been used by countries like France, Spain, Italy and the Czech Republic.

However, not all feed-in tariff schemes have been equally successful, as demonstrated by the crash of the Spanish solar market in 2008. Very favourable feed-in tariffs in Spain in 2007 led to a surge in installed capacity, forcing the government to cancel the subsidies.

The market overheated as companies rushed to install as many solar panels as possible before the end of the scheme, driving prices down. The government then revamped the policy in 2009, reducing tariffs and introducing caps on the construction of new capacity.

One of the latest developments is in the UK, which has offered a feed-in tariff for small-scale clean electricity from April 2010.

The government's 'clean energy cashback' scheme will pay households and communities that install small-scale renewable electricity technologies like photovoltaic solar panels or wind turbines of up to five megawatts for the electricity they generate – even if they use it themselves. They will receive further payments for any electricity they feed into the grid.

Green certificates

The British system complements the country's green certificate scheme, which remains the main support mechanism for large-scale renewable production in the UK.

Renewable portfolio standards are the most common quantity-based support scheme. They oblige electricity suppliers to produce a certain percentage of their electricity from renewable sources.

Meeting the quota obligation is usually measured in terms of tradable green certificates, each of which represents one megawatt hour (MWh) of renewable electricity generated. Utilities can then either produce their share themselves or buy the corresponding amount of certificates on the market.

The idea is that the certificate price covers the difference between the cost of producing renewable energy and the market price for that energy.

A handful of EU member states have chosen quota obligations as their main support mechanism for renewables, for example the Renewables Obligation (RO) in the UK.

Fiscal incentives

Fiscal incentives such as tax exemptions and reductions can also be used to make investment in renewable energy more attractive. Renewable electricity producers can be exempted from paying carbon taxes, for example.

It is rare to see countries rely entirely on tax incentives to encourage the use of renewables, but they are often used to complement other measures.

Finland, for example, has successfully used a combination of investment grants and tax rebates to develop solid biomass. This strategy has been less effective for wind, and the country is now mulling the introduction of a feed-in tariff scheme for wind and biogas.

Tendering

Tendering is a technology-specific system whereby the government issues a call for tender to companies interested in supplying renewable electricity at a fixed price. The most competitive bid will then receive the contract.

The extra costs that arise from producing the renewable energy are paid for by consumers.

This mechanism has historically only been used by two EU member states, France and Ireland. Denmark uses tendering to develop offshore wind projects.

Support for renewable heating

Although support schemes for renewable electricity have received the most attention, many countries have also put in place similar schemes to encourage the uptake of renewable energies like biomass, geothermal or solar thermal for heating and cooling.

Currently, most policies to support renewable heat generation are financial incentive schemes.

These include direct grants for renewable heating installations, loans at privileged rates to reduce upfront investment costs, and tax incentives to increase the competitiveness of renewable heating. Moreover, incentives linked to housing subsidies are used by some countries, for example Austria, to encourage the installation of renewable heating equipment when renovating residential buildings or constructing new ones.

Phasing out support schemes

The ultimate goal of renewable energy support schemes is to allow new technologies to compete with fossil fuels without requiring public support. For renewable electricity, this becomes the case when renewables reach 'grid parity', meaning when producing solar or wind energy costs less or the same as conventional grid power.

Grid parity is achieved more cheaply as technology improves and manufacturers benefit from economies of scale. Some experts also point out that carbon regulation contributes to parity by making fossil fuel generation more expensive. 

Feed-in tariff schemes typically have an adjustment mechanism to reduce support by a certain percentage, set for each technology over time as the market develops. The reduction rate is designed to provide an incentive to make technological advances and takes into account falling costs of parts and installation, of solar panels or wind turbines, for example.

Recently, Germany and France have announced cuts in solar tariffs as a result of the rapid growth of the solar photovoltaic market (EURACTIV 21/01/10). Similar announcements are expected in other countries.

Which is the most effective system?

In quota schemes, the target for the amount of renewable energy is set by the government, but the certificate price is determined by the market. Feed-in tariffs, by contrast, do not limit quantity.

Feed-in tariffs have been proven to achieve greater renewable energy penetration in Europe - at a lower cost for consumers - than quota-based systems.

Renewable portfolio standards lack the long-term certainty that is needed to encourage investors, as support ends once the quotas have been reached. They entail more investment risk as the price of electricity certificates is more difficult to forecast.

Moreover, they tend to favour large electricity utilities, while feed-in tariffs offer opportunities for all market participants, including microgeneration by private households.

The effectiveness of tax incentives is more difficult to assess, as these are usually used in conjunction with other policy measures. They are more effective in countries with high energy taxes, such as the Nordic countries, but they are generally not sufficient as the sole means of encouraging renewable energy development.

Consumers pay premium

Support schemes typically lead to small increases in consumers' energy bills as renewable energy remains more expensive than conventional power.

Germany's Environment Ministry estimates that the national feed-in tariff scheme only added 5% to the total price of household electricity in 2008. This means that households paid an additional €2 to €6 per month for the privilege of having renewable energy.

Nevertheless, proponents of renewable energies claim that they bring considerable economic benefits to society at large, by shielding it from rising costs of importing fossil fuels and providing new green-collar jobs.

Positions

The European Commission argued in its 2008 report assessing the performance of renewable support schemes that "well-adapted" feed-in tariff regimes are "generally the most efficient and effective support schemes for promoting renewable electricity".

But it warned that retroactive subsidy cuts in countries like Spain were particularly damaging for investor confidence. "The Commission has already expressed concern about recent developments in certain member states in this respect and will continue monitoring this issue closely with a view to consider further action at EU level if necessary," the EU executive said in a January 2011 report.

Connie Hedegaard, the EU's climate action commissioner, told EURACTIV that EU nations should remember their 2020 renewables targets when taking such decisions. "Take care that you, the member states, are not doing anything retroactively that will just make people fear to invest in this area," she said. "It's in nobody's interests."

"That does not mean that if you've had the feed-in tariff once it can never, ever be changed. But you have to be very cautious and you have to give very, very long warnings," she said.

Georg Zachmann, a research fellow at Bruegel, an economic policy think-tank, said subsidy cuts are understandable from a domestic policy stand-point as they stop the expensive deployment of renewables.

"The national benefits of renewables deployment – security of supply [...] and development of a competitive advantage – might not exceed the national cost of this policy," Zachmann told EURACTIV. "And in times of stretched budgets governments might decide to ignore the global effects of domestic deployment on technology cost reduction."

However, he said that "reductions in per kW subsidies that decrease profits of solar companies while keeping their incentives to conduct R&D are good economic policy" and might indicate that that solar is moving towards grid parity.

In the long run, the main goal of renewables subsidies is to bring down costs and less about supply security, Zachmann stressed. "This is critical, as bringing down the cost of renewable technologies is the most promising approach for getting conventional fuels out of the energy mix and thus reducing greenhouse-gas emissions."

Eleni Despotou, secretary-general of the European Photovoltaic Industry Association (EPIA), said feed-in tariffs are the most efficient support mechanism to kick off a market.

But she said support will also be needed once the solar PV sector reaches grid parity. "We can distinguish three phases: the precompetitive era, which is now, then the grid parity phase, and the post-grid parity era," Despotou told EURACTIV in an interview. "We define ourselves as being between the first and second stage, so we need a feed-in tariff in order to kick off the market, but a feed-in tariff which really has a decreasing rate and follows the markets trends in order to phase it out."

"Let's say, by 2020 we believe that we may phase out financial support mechanism as such. However, we would need some other mechanisms – and for the moment, we are trying to define them – to trigger investments, to trigger installation and probably financial support as well."

Despotou stresses that the biggest challenge for the industry is stop-and-go policies, which spook investors, citing feed-in tariff cuts in France and Spain as examples. "You may have very generous incentives in order to kick off the market and once the incentive is too generous, that of course creates some speculative bubbles. We used to have a leader in 2008 which was Spain and today it is just far behind – it is not a Gigawatt market," said Despotou, criticising Spanish cuts which had a retroactive effect.

Mischa Bechberger, international affairs manager at the Spanish Renewable Energy Association (APPA), pointed out that government promotion of renewables may not automatically be a positive move, as demonstrated by the collapse of the Spanish solar market in 2008, when too high feed-in tariffs caused the market to overheat.

As a result, he said, the government set a cap on annual production, which the industry, convinced that it can reach higher growth rates, is eager to change. "For sure, the industry wants higher figures and they expect also a change of the scheme at the latest in two to three years," Bechberger said. "In any case the transposition of the new Renewables Directive (2009/28/CE) into national law will make it necessary for the Spanish government to adapt its promotion for renewable energy, mainly regarding stronger support measures for renewables in the building and transport sectors."

BusinessEurope, the EU employers' group, argued that EU and national policies promoting the use of renewable energy will have to allow for flexibility and market-based instruments to minimise the high costs of meeting the EU's ambitious 2020 targets. It stressed that public support should aim to establish a market for renewable energies instead of separating them from it by providing extensive, long-term support independent of economic conditions.

"The current multiplicity of uncoordinated subsidy mechanisms in EU member states stands in the way of competition in an internal market for energy and leads to misdirected incentives to build installations at unfavourable locations. Hence, in the long term subsidies for renewable energies should be harmonised Europe-wide for efficient allocation across Europe. In the short term, national approaches for supporting renewables must be monitored and the adoption of best practices encouraged," said Folker Franz, a senior adviser at BusinessEurope.

ExxonMobil stressed the importance of pursuing an integrated set of solutions that help develop new supplies of energy from all sources, accelerate energy efficiency and develop new technologies to curb greenhouse gas emissions. "The most effective policies are those that help create a reliable fiscal and regulatory framework that invites investment, stimulates open competition, and fully capitalises on the creative force of free markets," it said.

A report published by green groups WWF and E3G in November 2009 rated Germany's feed-in tariff high on a list of the most efficient policies for a green new deal to protect the climate and stimulate the economy at the same time. "It ranks second in our list, with very high emissions-reduction potential in the long term. Long-term predictability in terms of the financial conditions affecting renewable energy installations is the key to the success of this measure," the report stated.

Timeline

  • Sept. 2001: EU adopts Directive on the Promotion of Electricity from Renewable Energy Sources.
  • 2000: Germany's Renewable Energy Sources Act introduces feed-in tariffs. Law is revised in 2003.
  • March 2007: EU summit endorses binding target to source 20% of the bloc's energy from renewables by 2020.
  • 23 Apr. 2009: EU adopts Directive on Renewable Energy, setting a target for a 20% share of renewables in its energy mix by 2020.
  • Jan. 2010: France and Germany announce subsidy cuts for solar power due to the rapid take-up of photovoltaic market (EURACTIV 21/01/10).
  • 30 June 2010: Deadline for EU states to present National Renewable Energy Action Plans.
  • 31 Jan. 2011: Commission progress report calls for doubling investments in renewable energy, from €35 billion to €70 billion, to meet the EU's 2020 targets (EURACTIV 31/01/11).
  • 2014: Commission to review Renewable Energy Directive, including support schemes and cooperation mechanisms.
  • 2020: Target date for EU objective to source 20% of its energy needs from renewables.

Further Reading

Subscribe to our newsletters

Subscribe