Mario Ragwitz, Arne Klein, Anne Held Fraunhofer Institute Systems and Innovation Research (Fh-ISI)

Mario Ragwitz, Arne Klein, Anne Held Fraunhofer Institute Systems and Innovation Research (Fh-ISI) Key factors of feed-in tariff systemsbest practices of design options and comparison to other alternatives

Outline • Present status and historical development of RES-E penetration • Dominating support schemes for RES-E • Feed-in tariff design options • Tariff level • Stepped tariffs • Tariff degression • Premium tariffs • Extra premiums for innovative features • Conclusion

Present status and historical development of RES-E in the EU RES-E penetration in the EU-25 Member States excluding large-scale hydro

Present status and historical development of RES-E in the EU Breakdown of RES-E generation in the EU-25 Member States in 2005

Present status and historical development of RES-E in the EU RES-E share in gross electricity consumption in the EU-25 Member States

Dominating support schemes for RES-E • Feed-in tariffs (FIT) • Renewable electricity can be fed into the grid at a guaranteed tariff for a determined period of time • The electricity output depends on the support level  price-based • FITs may also consist of premium tariffs paid in addition to the market price (e.g. in Spain)  stronger market orientation 2. Quota obligation with tradable green certificates (TGC) • Determination of quota target • Renewable electricity is sold at the market electricity price • Additional revenue from selling TGCs • Certificate price depends on predefined quota target and is determined on the market  quantity-based

Dominating support schemes for RES-E • Tender procedures • A predefined target of additional capacity or generation is set • In a bidding round projects with the lowest generation costs can obtain financial support i.e. in form of long-term feed-in tariffs  quantity-based • Fiscal incentives/investment grants • Tax incentive: Reduction or exemption of tax payment  price-based • Investment grants: Reduction of capital costs  price-based Classification of policy measures

Dominating support schemes for RES-E in the EU Feed-in tariff FI Quota / TGC SE Feed-in tariff and Quota / TGC EE LA DK LT IE UK PL NL Tax incentives / Investment grants DE BE BE CZ SK LU AT FR HU SI Other system IT PT ES GR MT CY A clear majority of EU countries uses feed-in tariffs as main instrument

Correlating the average annual profit with the effectiveness indicator The case of wind energy in the year 2004. COM (2005) 627)

Feed-in tariff levels – wind onshore Support level varies significantly among FIT-countries Reason: different resource conditions but also different efficiency of support

Feed-in tariff levels - biomass Large set of different special features existing in the biomass sector!

Feed-in tariff levels – hydro power

Feed-in tariff design options 1) Equal burden sharing with exceptions for consumers with a high demand.

Feed-in tariff design options 2) Each consumer contributes the same amount of money, irrespective of the electricity consumption

Stepped tariff design Electricity generation costs may vary due to: • Local conditions (wind yield, solar radiation) • Power plant size • Fuel type (biomass and biogas) A stepped tariff design takes the different costs into account

Stepped tariffs – Determining the tariff level Example: electricity generation costs for wind energy Tariff level 1 Producer profit 1 Producer profit 2 Tariff level 2 Generation costs Assumptions: Investment: 1067 €, Lifetime: 20 a, Interest rate: 6.6%, O&M costs: 3% of investment

Stepped tariffs – Level depending on local conditions Case study Netherlands Flat tariff Producer profit Stepped tariff Producer profit flat Producer profit stepped Generation costs Support for onshore wind energy in the NL (For plants approved before summer 06): • 7.7 € Cents/kWh plus electricity price for the first 18,000 FLH or for 10 years *

Stepped tariffs – Level depending on local conditions Case study France Flat tariff Producer profit Producer profit flat Stepped tariff Generation costs Producer profit stepped Support for onshore wind energy in FR: • 8.2 € Cents/kWh for 10 years • Between 2.8 and 8.2 € Cents/kWh for the remaining 5 years (depending on the electricity yield during the first 10 years)

Stepped tariffs Tariff level depending on plant size • Electricity generation costs tend to decrease with the capacity of a power plant • Reason: Economies of scale • Different tariffs may be paid according to the plant size Applied in many EU countries by using different tariff levels for different capacity ranges

Stepped tariffs – Level depending on plant size Case study Luxembourg Biomass and biogas Wind and geothermal M: Remuneration per kWh P: Plant capacity Capacity

Stepped tariffs Tariff level depending on fuel type • Electricity generation costs may vary due to the typeof biomass or biogas used • Biomass grown with the purpose of electricity generation hasa higher price than certain wastes or residues • Electricity from landfill and sewage gas is remunerated with a lower tariff in some countries • When waste with a large biogenic fraction is burnt, electricityand heat can be generated Applied for example in Austria, Germany, Spain and Portugal

Stepped tariffs – Level depending on fuel type Support for electricity from biomass in Austria Group 1: Residues from wood where a biological utilization is not preferable or possible Group 2: Other residues from wood (where a biological utilization is preferable or possible) Group 3: Other types of waste with a large biogenic fraction

Stepped tariffs – Level depending on fuel type Support for electricity from biomass in Germany Exceptions: • Combustion of waste wood: 3.78 € Cents/kWh • Combustion of wood (500 kW - 5 MW): Tariff level is increased by 2.5 € Cents/kWh (Premium for untreated biomass is not applicable) • Landfill and sewage gas: 7.44 € Cents/kWh (≤ 500 kW); 6.45 € Cents/kWh ( 500 kW – 5 MW)

Stepped tariffs – Evaluation Advantages: • Differences in power generation costs can be taken into account • Risk of over-compensating very efficient plants is minimized • Costs for consumer of RES-E support are reduced Disadvantages: • May lead to high administrational complexity • Many different tariff levels may reduce transparency • Overall efficiency of the system may be decreased (if tariffs for small plants are significantly higher than for larger plants, it could be profitable to construct two small plants instead of a large one)

Tariff degression Tariff degression: • Annual reduction of the tariff level for new power plants • Ideally cost reductions due to the experience curve effectare reflected • Main reasons for the cost reductions: • Learning process • Economies of scale • Technical progress • Rationalization Applied in Germany (between 1 and 6.5% depending on the technology), France (2% for wind turbines from 2008 on) and Italy (2% for PV devices from 2007 on)

Tariff degression – Case study Germany 1990 2000 1996 2004 Experience curve for onshore wind energy Support for onshore wind energy StrEG Turbine price per electricity yield [€ Cents/(kWh/a)] EEG Cumulative installed capacity [MW] • Reduction of 53% from 1990 – 2004 (5% annually) • High decrease in costs between 1991 and 1996 • Lower decrease since 1997 • Reduction of 23% from 1991 – 2005 • Tariff degression of 2%

Tariff degression – Evaluation Advantages: • Investment security • Incentive for technological improvements • Lower producer profit and lower costs for RES-E support Disadvantages: • A fixed degression rate may reduce the flexibility of a system • Changes in input prices or plant designs are difficult to predict

Premium tariff design Premium tariff: • RES-E is sold directly on the market • Premium is paid on top of the market price • Typically no purchase obligation is provided Applied in Spain, the Czech Republic and Slovenia as an alternative to the fixed tariff design

Premium tariff design RES-E sales and electricity market price in Spain RD 436

Premium tariff design – Case study Spain Share of RES-E sold with the premium option RD 436 In March 2004 a new premium option was introduced by the RD 436

Premium tariff design – Case study Spain Remuneration for premium and fixed option wind energy

Premium tariff design – Evaluation Advantages: • Higher compatibility with the liberalised electricity market • Match between supply and demand may be facilitated • The market price for electricity sets a signal for RES-E dispatching Disadvantages: • Causes typically higher costs for consumers due to additional market risks to be borne by RES-E suppliers • Wind and solar energy can hardly be controlled • Less investment security therefore higher risk premium

Extra premiums for innovative features Additional premiums are paid for: • Technologically innovative power plant design • Energy efficient power plants (FR) • Building integrated PV devices (DE, FR) • Regular production during winter time (hydro power FR) • Premium for methanisation of biogas (FR) • Repowering of wind turbines (DK, DE) • Electricity generation during times of high demand (SI, HU)

Extra premiums for innovative features France: • Extra premiums are paid, if certain conditions are fulfilled

Extra premiums for repowering Repowering: • Old power plants are replaced by modern more efficient ones, usually with a higher capacity • This concept is especially important for wind power • not only important to support new turbines, with increasing capacity repowering is an option to exploit higher potentials

Extra premiums for repowering – Case study Germany Conditions for getting the repowering bonus in Germany: • Old plant has started operating before 31.12.1995 • New plant enlarges the capacity by at least 3 times  The higher starting remuneration is paid for 2 more months for each 0.6% the energy yield does not reach the reference yield

Extra premiums for repowering – Case study Denmark Conditions for getting repowering bonus in Denmark: • Turbines of up to 450 kW may be replaced • New turbines have to be built between 15.12.2004 and 15.12.2009 • An extra premium of 1.6 € Cents/kWh is paid for the first 12,000 FLH of the new plant (Cap of 6.4 € Cents/kWh for premiums and market price)

Extra premiums for demand orientation in Slovenia • RES-E producers can decide to receive different FITs according to the time of day or the season of the year (70 – 140% of normal tariff level) HDT: Mon – Sat, 6:00 – 13:00 and 16:00 – 22:00 o'clock (when winter time is used) Mon – Sat, 7:00 – 14:00 and 17:00 – 23:00 o'clock (when summer time is used) LDT: Mon – Sat, 22:00 – 6:00 and 13:00 – 16:00 o'clock (when winter time is used) Mon – Sat, 23:00 – 7:00 and 14:00 – 17:00 o'clock (when summer time is used)

Extra premiums for demand orientation in Hungary • Different tariffs are paid for electricity from "weather independent" RES-E technologiesaccording to the demand

Extra premiums – Evaluation Advantages: • Possibility to influence RES-E producers in their behaviour • Provides Incentives to use the most advanced and efficient technologies • Provides incentives to feed electricity into the grid in times of peak demand Disadvantages: • Extra premiums cause additional administrative complexity • RES-E generators might not be able to influence the time of electricity generation (solar and wind energy)

Conclusion • Use technology specific tariffs • Apply a stepped tariff scheme (where appropriate) • Tariffs should decrease over time for new installations in order to account for technology learning • Options to participate in liberalised power markets can facilitate the integration into the market • A forecast obligation can facilitate the integration of electricity using fluctuating RES into the grid

Thank you for your attention!!! Mario Ragwitz mario.ragwitz@isi.fhg.de

Mario Ragwitz, Arne Klein, Anne Held Fraunhofer Institute Systems and Innovation Research (Fh-ISI)