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Policies that go beyond national interest

A policy mechanism for a European market for green power must support large and small projects, lead to a stable demand for renewables, be cost efficient, and be able to work with competitive markets. This was one message among several to emerge from an international seminar in London which brought together some widely differing views on future financing mechanisms for renewable energy in Europe. The seminar presented findings from a joint research project into Financing Renewable Energy Systems.

Europe needs to weigh up the cost of the economic risk associated with different types of support mechanism for renewables before deciding whether fixed prices or minimum quotas are the best option in a competitive market. Both political risk and market risk have a strong influence on the cost of finance. Providing subsidies on the one hand but introducing market uncertainty on the other is a self defeating approach.

This was one message among several to emerge from an international seminar in London which brought together some widely differing views on future financing mechanisms for renewable energy in Europe. The seminar, held October 2, presented findings from a joint research project into Financing Renewable Energy Systems (FIRE). Funded in part by the EC through its Joule program, FIRE analysed 64 case studies of renewable energy projects from eight countries.

Policy analyst Catherine Mitchell pointed out that the European Commission is the main force for change in the markets for renewable energy in Europe. The EC is pressing for European countries to set quotas for renewables -- for each European state to secure a minimum percentage of its electricity from renewable energy sources. But meanwhile, she said, it is thanks to the EU Electricity Directive that governments in the member states are becoming aware for the first time that their own national systems of promoting renewables can cause cross-border market distortions linked to unfair competition. Mitchell is with the unit of Science and Technology Policy Research (SPRU) at Sussex University.

According to the FIRE study, the diversity of support mechanisms throughout Europe reflects different countries' cultural characteristics and matches national financial systems. Mitchell points out as an example that the UK's fiercely competitive NFFO system -- a product of the previous Conservative government -- is essentially Thatcherite in character. Most countries' systems of renewables support tend to favour either large or small scale projects. But what is needed if large renewables targets are to be met is a policy mechanism that allows both to come through, she said. The key will be for countries to diversify their support mechanisms into areas that move beyond their national characteristics. This will require a diversity of finance.

She warned that the goals of renewable energy policy are going to become more complex. European countries will want to meet their National and European targets at a reasonable cost, there needs to be enough capital available at reasonable rates to do it, and there has to be public acceptance. All this, in turn, calls for complex promotional mechanisms.

Complex mechanisms will need a "mentor" within each country to push for the sort of market conditions that renewables need, argued Mitchell. In some countries this role is performed by government. Where strong government support is wanting, problems for renewables are manifold unless there is a major company with market power who can blitz the policy impasse, she said.

Ole Langniss from DLR, the German Aerospace Centre, added that the policy instruments used should reflect how far technologies had progressed towards the market. "For example, in Germany, wind power is over subsidised," he pointed out. "We do not need a uniform instrument for all technologies in all countries." The approach used should also depend on a country's goals -- whether it is simply to reduce carbon dioxide emissions or to establish new industries, he added. He compared how widely different support mechanisms have resulted in a flourishing wind industry in Germany whereas there is not a single wind turbine manufacturer left in the UK.

The risk factor

Peter Helby from Lund University in Sweden reminded the seminar that there is a lot of debt finance available to renewable energy developers -- albeit dependent on secure cash flows. Equity, however, is much more expensive. "If we want a quick expansion of renewable energy, the availability of equity can become a limiting factor," he said.

How much equity compared with debt is used to finance a renewable energy project often depends on risk -- not only resource risk and technical risk, but also "socially generated risk" that emanates from the way that society handles renewable energy projects, said Helby. The factors underlying tariff prices -- such as the regulatory philosophy, taxation, and the constitutional and political traditions of a country can all pose risks. "So we are faced with several different types of uncertainty," he explained. "How much debt you can get depends on much more than the subsidy situation."

Helby suggested that market regulators and policy makers should consider some of these factors more closely: "It does not make sense on the one hand to give high subsidies to renewable energy, while at the same time, through another mechanism creating another uncertainty which makes the project more expensive."

Long term contracts

Helby examined two alternative payment regimes. Mandatory long term contracts remove much of the uncertainty, he explained. "It opens up to international finance, which reduces the need for equity and the risk premium on debt." A market for "green" electricity -- as operates in the Netherlands -- reduces political risk, he said. On the other hand it adds a heavy burden of market risk because payments to operators depend on market prices. This could significantly reduce availability of debt finance, he believed, unless it can be combined with the means to raise equity on a large scale, or be combined with long term contracts or with advanced financial instruments.

Arguments in favour of a quota system of support for renewables in Germany, along similar lines to that in the Netherlands, were put forward by Roland Menges from Energy Foundation Schleswig-Holstein (ESH), an independent body attempting to spur progress towards an open market for power supply. ESH has been studying different models for supporting renewables as an alternative to the German REFIT.

The quota model -- setting a minimum level for the amount of renewables in the national electricity supply with the geographical balance achieved by trade in green certificates -- would set incentives for existing energy companies to invest and produce green electricity, as well as independent generators, he pointed out.

Summarising the key issues for any future promotional mechanisms in Europe, Menges maintained that a support mechanism must satisfy five conditions: it should lead to a stable demand for renewables, be cost efficient, it must be able to work with competitive markets, it should be able to lead to a European market for green power and it must be operational before too long in order for the EU to meet its 12% target for renewables by 2010. "This will be hard enough," he said.

Warnings

Andreas Wagner from Fördergesellschaft Windenergie pointed out how Germany's REFIT system of fixed payments for wind power had led to a more impressive growth of the wind industry there than almost any other sector. He warned against too much harmonisation between member states. "It is necessary to create some minimum standards so that we all start at the same line. Then the countries can think about their own national support schemes depending on their own circumstances." Wagner was backed up by Ole Boegelund, the former head Danish wind company Micon: "I do not believe in any kind of harmonisation," he said bluntly.

Menges disagreed with these arguments in favour of maintaining the present status quo; they would restrain renewables in the long run, he claimed. "Who says liberalising our market is not possible and will not work?" he asked. "It will not take a long time for green markets to happen. It will be a normal business."

A note of caution was sounded by Langniss. "How can we ensure that costs [of green pricing] are not just passed on to private consumers?" he asked. It should lead to additional renewable capacity, he said. "But as far as I can see, the cost is just passed on to people who like green electricity." The challenge is to create a mechanism that leads to a genuine increase in renewable capacity. "Otherwise we can forget green pricing."

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