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Germany

Germany

New push for a guaranteed market

In a working paper, "Towards a single market for electricity from renewable energy sources," the European Commission presents strong arguments for the phasing out of fixed price subsidies in favour of support mechanisms compatible with the EU's Internal Energy Market. Without a proper market framework, says the document, the continued fast development of renewables in Europe is in serious danger. The document says fixed prices do not lead to price cuts and efficiency gains and thus destroy the incentive for renewables to reach their full competitive potential.

No punches are pulled in the European Commission's latest report on the urgent need for political action on renewables. In a working paper, "Towards a single market for electricity from renewable energy sources," the Commission presents strong arguments for the phasing out of fixed price subsidies, such as the feed-in tariff system in Germany, in favour of support mechanisms compatible with the EU's Internal Energy Market. Without a proper market framework, says the document, the continued fast development of renewables in Europe is in serious danger. The EU's goal is for 12% of primary energy consumption to come from renewable sources by 2010.

The 35-page working paper, a more detailed and well thought-out document than any which has previously emanated from Brussels on the subject, appeared in the middle of last month. It argues for a separate, long term and competitive renewable energy market of a guaranteed minimum size, running parallel to the conventional electricity market and providing an "exceptional level of market certainty and predictability."

The working paper, or an amended version, will be presented to the next meeting of EU energy ministers on May 11. On the basis of the comments received from the Council and later from the EU parliament, the Commission "will determine which formal measures, if any, should then be proposed."

The reaction of the European wind lobby to the working paper is mixed. The European Wind Energy Association (EWEA), which attempts to combine the interests of independent wind turbine owners with those of industry, is already badly split over the issue of fixed-tariffs contra competition-based support (page 43). Although EWEA officially supports the Commission, some of its members do not. Just three months ago they caused the derailing of an earlier Commission document with similar aims to those of the new working paper.

From Germany's wind association, Bundesverband Windenergie (BWE), Heinrich Bartelt calls the working paper an "all out assault" on the country's Renewable Energy Feed-In Tariff (REFIT). "It is an attempt to undermine the successful German renewable energy support system, which for us is incomprehensible," he says. According to Bartelt, the market structure favoured by the Commission would make it impossible for investors to secure bank loans for projects.

Nick Goodall of the British Wind Energy Association, like BWE a member of EWEA, is delighted with the working paper, which he says supports the association's aims and ignores several weeks of aggressive lobbying against those aims by the Germans. Indeed, the new document shortens the transition period in which countries like Germany must adapt to a competitive system from a maximum of ten years to a maximum of five years. "The ultimate irony of this exercise is that it has spectacularly backfired on the Germans. As far as I can recall the working paper has nine quite specific reasons why feed-in tariffs are untenable, including a clear possibility that they are illegal," says Goodall. "More sophisticated countries understand that feed-in tariffs cannot go on for ever. This dispute will be seen as a hiccup in history. There will be support for harmonisation across Europe and it is inconceivable it will be based on a feed-in model."

The Commission's working paper acknowledges the opposition to its proposed policy, noting that "a number of criticisms of such systems have been put forward to the Commission, notably by the operators of renewable generating facilities presently operating under fixed price feed-in tariff schemes. The Commission has examined these comments carefully but has concluded that there is no basis in fact to support them."

Need for change

A main concern of the Commission is that the EU law governing the Internal Energy Market contains only one explicit mechanism for renewables support: member states may give priority to power from renewable energy sources (RES) by despatching them to consumers first. But following liberalisation there will no longer be a captive customer base over which to spread the cost of prioritising renewables. Many customers will in all likelihood head for the cheapest supplier and no longer buy their electricity from the System Operator. "If so, the System Operator is only able to pass the cost of the dispatching priority obligation for renewables to a smaller client base. This in turn will require the System Operater to increase prices." And that will further drive customers away, "causing a vicious circle as the rate base for renewables dwindles," states the working paper.

The solution is a single market for renewables providing "two essential elements: a price support mechanism that enables renewables to enter the market and make a reasonable profit, and a stable regulatory environment so that investors can enter the market without concern that the price support mechanism will be modified in a manner to make their investment unprofitable."

The inherent instability of any support system reliant on political whim is one of a series of "significant drawbacks" to "long term maintenance" of fixed feed-in tariffs, states the working paper. Before listing these over two pages, it admits that history in Denmark, Germany and Spain shows that fixed prices have had a "clear advantage" in increasing installed capacity over other systems and that for ensuring a "low level market take-off" they might be appropriate. But this does not outweigh the disadvantages of fixed prices over the long term, or the need for a "secure and predictable regulatory environment."

Against fixed prices

The working paper contends that fixed prices will, by definition, "lead to monopoly profits for more efficient producers" and do not demonstrate "value for money." They therefore jeopardise popular support. The public needs to see that renewable energy is provided at minimum cost and without excessive profits. Schemes that only support renewables generation at domestic level "conflict with free market rules" and will attract generators in countries with lower price competitive mechanisms to export capacity to high priced neighbours. "Dutch RES producers may therefore gain by selling the electricity to a German utility which has an unlimited obligation to purchase the electricity fed in." Furthermore, EU laws on state aid and the internal market "make it difficult to envisage" how fixed price schemes can continue "in the medium term;" investment will be viewed as "progressively more hazardous," says the working paper.

One of the document's strongest objections to fixed prices is that they do not lead to price cuts and efficiency gains and thus destroy the incentive for renewables to reach their full competitive potential. A fixed price system is one with an in-built "stranded cost" fault. Investors who entered the market on the basis of high guaranteed prices become "stranded" in a market where prices fall. "In many cases this may need to be resolved through expensive stranded cost mechanisms to prevent the market exit [bankruptcy] of these generators," says the document. "It is evident that the move from a fixed-price tariff approach towards one based on trade and competition is at some stage inevitable," it continues. Failure to adopt measures now is to create delay and perpetuate the problems of stranded costs. "It is most opportune to take such a step now when such issues arise only to a limited extent and immediate economic, employment and environmental benefits can be guaranteed in the short to medium term."

For competition

The objective of the EU must be to introduce a regulatory framework that is long term (not subject to change) and reduces costs while promoting innovation, states the working paper. A competitive system achieves both these aims -- it fosters technology development and provides "a greater level of security" in contracts where prices are fixed over the life of the plant.

Generation must take place where it is economically most appropriate, continues the document, and producers must be able to sell their power throughout the EU. Thus a system of certifying the "greenness" of electricity has be introduced to prevent fraud. The cost of grid connection must be included in the price of renewables, but the "full costs and benefits" of embedded generation should also be taken into account, "including future benefits to the grid system such as avoided or postponed reinforcement." Furthermore, "There should be rules foreseeing compensation payments if subsequent electricity consumers connecting to the grid benefit from a grid asset." And avoided system losses should be reflected in the market price paid to renewables.

The move towards a competitive market must be "gradual and progressive" to "ensure that no dislocation in market growth resulted from abrupt regulatory change." The document advocates a transition period of at least three to five years, with a clause allowing extensions in specific circumstances of up to three to five years. Wide ranging schemes to rescue "stranded costs" are foreseen at national level. "The market exit of non-obsolete renewable sourced generating facilities cannot be the objective of any potential proposal," says the paper.

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