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Commission proposes compromise on renewables integration

The European Commission's most recent working paper on "Electricity from Renewable Energy Sources and the Internal Electricity Market" is little changed from its earlier draft. In the face of liberalisation, the Commission wishes to see support systems which use the competitive forces of an albeit protected market to encourage cost efficiency and technology innovation. The Commission is clearly in no doubt as to the necessity of creating a single market. The main concern of the working paper is to identify the best approach for doing so.

The tone is softer and the language less dogmatic, but in essence the European Commission's most recent working paper on "Electricity from Renewable Energy Sources and the Internal Electricity Market" is little changed from its earlier draft (Windpower Monthly, April 1999). In the face of liberalisation, the Commission is sticking to its guns on the inevitable phasing out of subsidies for renewable energy in the form of fixed purchase prices, such as in Germany. Instead the EU's executive wishes to see support systems which use the competitive forces of an albeit protected market to encourage cost efficiency and technology innovation.

The finished working paper, to be presented to Europe's energy ministers at an EU Council meeting on May 11, is also clearer in its goals than the earlier draft. After an examination of the current state of play and the options available, the document seeks answers to two questions. Is Community action in the form of a Directive or other initiative necessary to meet the EU's objectives for renewable energy, particularly in light of its Kyoto commitments? If so, what approach is appropriate? "In the light of comments received following the publication of this report, the Commission will further consider which of these basic options should be pursued," states the paper.

The Commission is clearly in no doubt as to the necessity of creating a single market. The main concern of the working paper is to identify the best approach for doing so. In an attempt at compromise between the German wind lobby's intransigence over giving up its fixed price subsidies for wind power, and the liberalisation demands of the EU's Internal Energy Market, the finished working paper offers an alternative to the competitive systems now on the table. These are the "green credit" trading market favoured by Denmark and the Netherlands, and the Non-Fossil Fuel Obligation system of competitive bidding in Britain-both support systems which stimulate a market by requiring specific "quotas," or "percentage obligations" of renewables power in the supply mix, in effect setting a minimum renewable standard which utilities must meet.

A third way

The Commission has dubbed its new found mechanism "fixed premium schemes." Instead of fixing the entire price to be paid for each kilowatt hour, the mechanism requires the renewables generator to negotiate for a power purchase contract on the open electricity market. What makes the renewables power competitive on the market is a fixed price premium paid by the state. The premium is paid to the purchaser of the renewables electricity, making up the difference between the price paid for the power and the selling price to customers. The Commission suggests the premium is funded from a levy on all electricity consumers-and that the justification for such a levy could be the internalisation of external costs or "infant industry" premiums.

The objective, according to the working paper, is to "overcome as much as possible the disadvantages of a fixed price approach whilst nonetheless harnessing its benefits" and to "seek to introduce competition/internal market discipline into the market, without fixing specific "renewables quotas." The Commission admits, however, that it has not yet studied the full ramifications of such a system and whether the aims of competition and cross border trade could be met if some countries settled for quotas and others for price premiums. But if price premium and quota schemes were "functionally compatible" members would be free to choose between the two.

Whatever the support mechanism chosen, it must also be compatible with Community rules on the internal market and state aid; it must provide a stable regulatory environment; it must be efficient at ensuring that renewables electricity is generated at minimum cost while fostering innovation; and it must be effective at increasing the use of renewable energy, says the paper.

Ministers' choice

First, however, energy ministers must decide if legislation to create a single market for renewables is desirable, or whether such a market should just be allowed to evolve over time. That it will evolve-and that fixed price subsidies will disappear-is seen as an inevitable consequence of liberalisation. If ministers decide to take no action on creating a single market for renewables, warns the Commission, the development of such a market "would undoubtedly take much longer, depriving the Community of the benefits that would flow from a single market during this interim period." At the same time the problems of "different and, from a trading viewpoint, probably incompatible schemes, would continue to exist."

If ministers agree on the proactive creation of a single market, however, the Commission envisages the adoption of a Community framework, probably in the form of a Directive. It will require support systems to comply with basic requirements for effective trade and competition. Such a Directive will also include a definition of eligible renewables, stipulate the transition period for the change to a competitive structure, cater for isolated systems and emerging market segments, deal with the stranded costs of early investors, make provision for a pan European system for certifying the origin of the renewables power, and possibly set minimum support levels.

The length of the transition period has been hotly debated in countries like Germany, faced with the task of radically altering their support systems. In its latest working paper, the Commission sidesteps the issue and no longer specifies a period, merely stating "that the length of the transitional period would be sufficiently flexible so as to ensure that member states' environmental goals such as the Kyoto commitments are not jeopardised." The EU's executive is also unsure of the wisdom of setting any defined minimum level of support, be it a minimum percentage of national power supply or minimum "price premium." The document states: "It should be underlined that the Commission has reached no conclusion on the appropriateness or necessity of including any minimum and binding consumption levels or minimum tariff."

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