Creating market conditions for accelerated penetration of renewables

1. Creating market conditions for accelerated penetration of renewables Arturo LorenzoniIEFE, Bocconi University, MilanMadrid, Fundaciòn Ramon ArecesJune 17th, 2008

2. The history of renewables in EU • Since the beginning of ’80 some EU countries have put in place policies to promote RES • The approaches were often peculiar to the national context (Denmark, Italy, …) • There are necessarily strong interactions with other policies: taxes, environment, agriculture, water, … • At the end of the ’90 the attitude towards RES of EU Member States was very diverse • The path towards a common policy was very long and difficult. Directive 2001/77/EC on the promotion of electricity produced from renewable energy sources in the internal electricity market is the result of an effort for a common direction • Moving to a single market means giving common rules, i.e. goals and instruments . Which is not so easy, as the discussion about the new RES Directive shows … • Giving a single target to 27 MS with 27 different ideas of RES deployment is a real challenge

3. Long term energy scenarios in EU: priority to renewables and energy efficiency Source: Primes 2006

4. The average per capita CO2 emission to reach the stabilisation of temperature at +2oC Fonte: C. Carraro

5. A distorted market … • By externalities • By subsidies

6. External costs of electricity generation, EU15 (source EEA)

7. Estimates of total energy subsidies, 2001 (source EEA)

8. Goals and instruments of a policy for RES GOALS • Environmental benefits • Provide secure, diverse, sustainable energy supply • Maximisation of RES production to meet targets • Involvement of local resources and growth of new skills • Maturation of young technologies • Development of a competitive international industry • Growth of local human resources • Decentralisation INSTRUMENTS • Feed in tariff • Quota (or portfolio) • Tendering • Mixed approaches • The choice of instruments depends on goals

9. Different support approaches • Feed-in tariffs exist in most of the Member States. These systems are characterised by a specific price, normally set for a period of around several years, that must be paid by electricity companies, usually distributors, to domestic producers of green electricity. The additional costs of these schemes are paid by consumers. A variant of the feed-in tariff scheme is the fixed-premium mechanism currently implemented in Denmark and partially in Spain. Under this system, the government sets a fixed premium or an environmental bonus, paid above the normal or spot electricity price to renewable electricity generators. • Under the green certificate system, currently existing in five Member States, renewable electricity is sold at conventional power-market prices. In order to finance the additional cost of producing green electricity all consumers (or in some countries producers) are obliged to purchase a certain number of green certificates from renewable electricity producers according to a fixed quota of their total electricity consumption/production. • Pure tendering procedures existed in two Member States (Ireland and France). However, France has recently changed its system to a feed-in tariff combined with tendering system in some cases and Ireland has announced a similar move. Under a tendering procedure, the state places a series of tenders for the supply of renewable electricity, which is then supplied on a contract basis at the price resulting from the tender. • Systems based only on tax incentives are applied in Malta and Finland. In most cases (e.g. Cyprus, UK and the Czech Republic), however, this instrument is used as an additional policy tool.

10. Effectiveness vs profits in wind power support, 2006 Source: EC, 2008

11. The choice of competition in EU energy policy • The challenge for EU and national policy makers is to conciliate competition with an effective support • a public intervention can be justified in terms of social welfare in order to correct the externalities affecting the sector • the sector of renewable energy has some distinguished features: • Young technologies, • High investment costs, • Positive external costs

12. The challenges for competition • Competition at which level? • in the market (with other energy sources), • for the market (with other technologies), • for the technology supply • Short vs long run • High capital costs • National vs international • Integration of New Accession Countries • Coherence of national approaches to RES policy in the frame of EU competition law • Efficiency vs equity • Creating a fair playing field

13. The disparities in the framework for RES development in each MS • Availability of renewable energy sources • Different domestic energy prices and different factors which impact on changes in these prices • Different past levels of development and deployment of renewables • Differences in planning policy • Differences in research effort • Differences in regulatory regimes • Differences in network constraints • Differences in definitions of RES • Different international obligations and commitments • Differences in additional RES support systems, such as tax benefits • Sub-national variation in RES support schemes

14. The role of research: R&D expenditure for RES Source: REDS research project

15. The market has different growth rates(IEA 2004)

16. Estimated RES direct support (source: Eurelectric)

17. Towards a convergence of support systems. Harmonisation is hard… • Various barriers to the harmonisation process have been identified. These barriers are categorised as follows: • Range of policy goals • Range of policy mechanisms • Disparities between Member States in the framework conditions that RES develop within • Practical concerns of a converged policy • A substantial opposition is given to the forced convergence of policy instruments. Difficult to see harmonisation around quota mechanism • Governments KNOW how much it costs annually if bounded within country, NOT if cross-EU • The link to local values and resources is one of the dividends of RES, that could be lost with a joint approach • The international trade of GOs can put substantial problems of income redistribution: consumers in Spain pay a subsidy to a plant fulfilling the obligation of France?

18. …but harmonisation remains a target • The multitude of support schemes raises a concern from the perspective of the single market. Investors are confronted with different criteria for and levels of support as well as administrative procedures and grid access conditions, all of which could influence their production site location decisions. The harmonisation of support schemes could simplify the regulatory environment, allow industrial growth and boost economies of scale, and provide a clearer framework for the efficient exploitation of renewable energy across the Union. • However the Commission's report of December 2005 considered that harmonisation of support schemes would be premature, as (…) there has not been sufficient experience accumulated to determine the best choice of support scheme. Instead the Commission recommended that Member States cooperate more and improve ("optimise") their existing support schemes. • The Commission considers that it is currently inappropriate to harmonise European support schemes for four reasons: • The experience with quantity-based and price-based instruments does not allow picking a "winner", as both kinds of instruments have the same economic efficiency • The introduction of one harmonised system would create a lot of uncertainty and disruption in the market for renewables, as it would abolish well-established national support schemes. • In a harmonised system, it might be difficult to differentiate between different costs for different technologies in different countries. • National support schemes are often designed so that they also promote regional development. Harmonisation might oblige Member States to find other ways to promote regional development. From the COMMISSION STAFF WORKING DOCUMENT SEC(2008) 57

19. Competition vs growth? • Nevertheless, under the tight constraints introduced by the 20-20-20 policy, the reconciliation of growth and market seems to be challenging • Countries that experienced Green Certificate Markets have lower growth rates for RES • How far can competition be pushed under such strong environmental constraints? Achieving the 2020 target in Italy requires that all the incremental energy demand is satisfied by non fossil fuels • Maintaining investor confidence and encouraging substantial investments in green electricity is crucial for RES growth • Investors are not keen to risks, especially with high investment costs and young technologies • Prudent market strategies for most certificate buyers and sellers relies heavily on long-term bilateral deals in order to minimize exposure to potentially volatile certificate spot markets. • The value of certificate banking and borrowing arises from allowing markets to clear over time horizons relevant for economic decision-making.  These factors have to be taken into account in market design

20. Physical bilateral contracts • The reconciliation of investment security and competition suggests that feed in tariffs could be substituted by long term (15 years) bilateral contract between an obligated operator (fossil producers or suppliers) and RES-e producers. • Instead of an annual obligation like under green certificates, a path of quotas could be designed in the long term, requiring a coverage with long term bilateral contracts • These contracts could be freely traded on the market, but they should be yearly redeemed to fulfil the obligation • These contracts could give the stability and long term security for financing new schemes, but would leave the market to set the premium over conventional electricity • They could be a more efficient promotion scheme, minimising the costs for consumers

21. Equity vs efficiency • The EU decided to split the overall 20% target for RES among Member States adopting a income redistribution criterion: every Member State has to contribute an additional 5.5% of renewables to its energy mix, and the remaining gap to the overall 20% target is shared proportionately to the GDP of the Member States with minor additional adjustments. • This is acceptable, but makes trading among countries necessary to exploit the lowest available potential • The question of Guarantee of Origin trading has thus become of high political priority: should the companies be allowed to trade internationally? Or only the States with bilateral agreements?

22. RES target and GDP under the EU 2020 policy Source: K. Neuhoff

23. Guarantees of Origin for Renewables: a EU panacea? The EC is going to create a “new good”: GO, to be traded independently from the RES electricity There is a lot of concern about the proposal for a new RES Directive of last January, with rather different views from utilities and renewable generators. A large EU market could dilute the effort single MS Source: Ecofys

24. Room for trading? RES penetration if all MS realise 60% of their potential Source: K. Neuhoff

25. An accelerated growth means a more competitive industry • Exploiting the learning curves of young technologies brings important results on the industrial level • Spain is a good example of stable policy that has given industrial results (Gamesa was the second world producer of wind turbines in 2006) • Anticipating the competitors gives industrial return • The domestic dividend is bigger when the support is both on demand and supply side

26. Conclusions • Long term stability is the key question • Addressing both competition and the environment is a paramount complication, but needs to be addressed! • Europe is called to decide on its priorities in relation to the 2020 target. The required flexibility of mechanisms should not reduce the determination in achieving the goal • It is essential to bring to the local level the benefits of the investments, otherwise they will not be accepted • Stop and go policies can be fatal to young technologies • The most important return comes from the industrial development: betting on RES imports is a loosing strategy

27. Creating market conditions for accelerated penetration of renewables arturo.lorenzoni@unibocconi.itMadrid, Fundaciòn ArecesJune 17th, 2008