Green credit market without a cap -- Sweden announces permanent renewables mandate

In a radical change to its renewable energy policy, Sweden is introducing a permanent market for green power certificates. The government announced on November 1 that instead of just extending the country's renewables mandate beyond its current 2010 horizon -- the option chosen by the British government for its Renewables Obligation -- the time limit in Sweden will be scrapped altogether. The news was greeted enthusiastically by the wind power industry, which has seen no activity in Sweden for the past several months.

The decision was made after it became clear that the Swedish green certificate market, introduced in May 2003, was too short-term to spur investment in construction of new wind plant. Expiration of the mandate in 2010 meant there was no security that green certificates would have any value after that date.

three options

In a 100 page document, the Swedish energy agency (STEM) lays out three broad scenarios for renewables' growth, with low, medium and high targets. The lowest target is for 10 TWh and the highest for 25 TWh, or for renewables to provide between about 7% and 17% of total electricity consumption.

The government's preferred option, described by STEM as the most realistic, is for 19 TWh by 2015. "This is a feasible target and the one we strongly support," says Gunnar Fredriksson from the Swedish wind power association. Wind power producers believe that 19 TWh can be reached with some 6500 MW of wind power generating capacity, assuming most of it would be built offshore. But it is unlikely that more than about half the 19 TWh would be provided by wind alone. Sweden has about 420 MW of wind power today. National electricity consumption is estimated to rise slightly from today's levels, but if it stayed the same, 19 TWh will equate to some 12.6% of Swedish power demand.

"The first indications are very good," says Fredriksson. "They have done a good job overall, although we feel that some of the figures in the report need to be changed for us to be able to meet our goals. We are now hopeful that we will see a period of increased activity and more new applications to build plants."

Details of how the new market will be structured are still in short supply, with no indication of which technologies are to contribute how much. "We feel the potential is there for 19 TWh, principally from wind, biomass and hydro, but it will not be easy," says STEM's Mathias Normand. "The key was to set quotas and reach a level of ambition to give confidence to investors." In future, the mandate will be placed directly on electricity retailers rather than customers, in the expectation that competitive bidding for the available certificates will keep prices down.

In January, the proposals for a permanent green certificates market will go out to public consultation, making final ratification of them unlikely before January 1, 2006. "In the meantime, we can start working," says Fredriksson, confident that the government is on the right path to structuring a stable long term market. Since the announcement, utility Vattenfall has already made a major commitment to the sector, publishing plans to develop its own offshore site in the Kalmar Sound as well as to buy the 48 turbine Lillgrund offshore project developed by Eurowind, which although fully permitted has not started construction.

Under pressure

The government has been under pressure to amend the market for several months. Not only has wind power development ground to a halt in Sweden, such was the extent of uncertainty over future income that electricity retailers have been choosing to pay penalties for not meeting the 7.4% renewables mandate for this year rather than invest in construction of wind plant. Revenues from the penalties -- set at SEK 240 for each megawatt hour a company defaults on -- have been piling up in the government's pockets, instead of being recycled into further renewables investment.

To attract investors in wind projects, cash flows need to be stable for around 15 years, not just six years to 2010, says Fredriksson. Paying the penalty may be more expensive than buying green certificates, but the risk involved in basing a project's finances on a cash flow that falls off the edge of a cliff has been too great for investors to accept. The result has been a market awash with certificates.

Since May 2003, SEK 165 million (EUR 18 million) in penalties has gone to the treasury. Meantime, only around half of the SEK 1.3 billion (EUR 143 million) raised from sales of green certificates to consumers has gone to the electricity producers. Instead, electricity retailers have assumed SEK 220 million (EUR 24.5 million) for administrative costs, with the government claiming SEK 225 million in sales tax. Green certificates currently on the market are provided by existing renewable energy operators, including wind turbine owners.

Eyes on Sweden

With the Netherlands having dropped its green certificates system for being too successful (Windpower Monthly, April 2004) and Britain struggling with flaws in its Renewables Obligation, which have pushed up the price of wind power to be about the most expensive in the world (Windpower Monthly, January 2004), the rest of Europe has been watching and waiting for Sweden to get its system right. Norway, in particular, is closely following developments. It is hoping that Sweden's trailblazing will open the way for a Nordic green certificate trading exchange.

"Failure is simply not an option," says Mikael Jakobsson of Swedish wind project developer Airicole, which has been forced to delay installation plans for the new Utgrunden II offshore plant while it waited for government to sort out the mess.

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