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Fixed quotas most favoured option

A clear preference for using competitive market mechanisms -- and not subsidies -- to boost the use of renewable energy in Europe is emerging from the European Commission (EC). Last month it took the first step towards a Directive for laying down a common approach to renewables support in a report presented to Europe's energy ministers and the European Parliament.

The report favours a market driven approach, saying this would fit better with liberalisation of the electricity market next year. Furthermore, it says competition will exert downward pressure on prices, making it more likely that renewables will become fully competitive with conventionally produced electricity. The mechanism that seems to find most favour is for fixed quotas of renewable energy in the power supply mix, backed by trade in "green certificates." This system has just started in the Netherlands (Windpower Monthly, March 1998).

The report is the Commission's first step towards harmonising support for renewable energy across Europe and is part of the process started by the 1996 Directive for opening up the internal electricity market from early next year. It also follows on from last year's White Paper on renewable energy, which commits the EU to doubling renewables' share to 12% by 2010. The White Paper, while stressing the need for a harmonised framework for national policies on renewable energy, did not recommend any specific approach (Windpower Monthly, January 1998). This was a sore disappointment for the European Wind Energy Association (EWEA). Fixed quotas and green credit trading had been included in the discussion paper on which the White Paper was based and which EWEA supported.

MARKET DISTORTIONS

The EU market for renewables is today characterised by a variety of support schemes, either in place or proposed. In its report the Commission stresses that without a set of common rules distortions in trade and competition "not related to efficiency" between member states will escalate rapidly with the anticipated doubling in renewables' market share. Indeed, the Commission says national support schemes for renewables which distort the market can only being accepted "as an interm arrangement for the time being."

The new report warns that differing systems of support could favour renewable energy producers from one country at the expense of those in another. A common framework, however, will reduce the effects of such distortion, clarify the room for manoeuvre available to each country and allow them to promote renewables more efficiently.

Although it maintains that the different methods of support need to be analysed more thoroughly, the Commission already indicates a clear preference for schemes that rely on competition. The mechanism that appears to find most favour is a system of "green certificates." Under this system, electricity distributors and large consumers are required to buy a fixed percentage of their electricity needs from renewables. To achieve this, they buy green certificates from renewable energy producers to the value of that percentage. The price of the certificates covers the difference between the additional cost of electricity from renewables and the market price.

A secondary market for trade in green certificates will develop under this system, and more renewable electricity producers will enter the market -- as long as they can generate below the "market price" of the green certificates. "It does appear at this stage that if the system of green certificates works effectively in practice, it is likely to exercise a constant and important downwards effect on the price for renewables," says the report.

Lobby split

The European wind lobby is notoriously split over which market mechanism to campaign for. As the date for liberalisation of Europe's electricity market has drawn closer, discussion of policy options has been intense, with different groups supporting different mechanisms to achieve long term market stability (Windpower Monthly, November 1997). At the end of last year, however, EWEA appeared to have united its members behind a six point strategy based on fixed national quotas, the mechanism now apparently favoured by the Commission (Windpower Monthly, December 1997).

Since then, the powerful German wind lobby has consistently campaigned for not only the retention of its subsidised wind payments, the Renewable Energy Feed in Tariff (REFIT), but also for it to be extended to the rest of Europe. The premium priced REFIT has only survived because of intense behind the scenes efforts to gain political support for it, say the country's wind associations). They have not announced any intention of supporting a mechanism that would allow for more solid market foundations.

Meantime, the Commission plans to launch a series of studies to gain an overview of the efficiency of the different approaches to renewables support in place in Europe. These range from direct subsidised payments for the power produced, such as in Germany and Denmark, through to mechanisms based on quotas and competitive bidding, such as in the UK and France, or quotas and green certificates trading in the Netherlands.

In particular the Commission aims to discover the costs to the consumers, producers and the state for each mechanism, and its effectiveness in reducing CO2 emissions and promoting renewables. Results of these studies will be published in a final report. The Commission expects to present its proposal for a Directive before the end of the year.

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