The way ahead

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Crunch time is nearing in Europe. It is one thing for the 27 countries of the EU to commit to a common goal for 20% renewables by 2020, but quite another to agree on who will contribute how much to achieving it. Next month the European Commission, the EU's executive body, will propose legislation detailing the renewable energy target that each country will be legally required to meet. That legislation will include a broad market mechanism for enabling those targets to be reached by all, including poorer member states and those with limited renewables resources of their own. The proposed mechanism has drawn sharp fire from the renewable energy industry, the European Wind Energy Association (EWEA) included.

Exactly what the Commission will present for consideration by heads of national governments and the European Parliament has yet to be decided. But it has been revealing its thinking over past weeks in selected forums, including this magazine (pages 51-54). With its bird's eye view, the Commission sees that a common approach to raising the renewables' contribution from today's 8.5% to 20% will cost the consumer less than if countries work individually towards the same goal.

The Commission's approach is for all countries to first increase their use of renewables by a flat rate. Beyond that it suggests allocating national targets based on a country's gross domestic product (page 26). But there is no way governments will agree to translating those proposals into legislation unless the means are provided for all countries to reach their targets. The Commission's selected tool is for countries to open their borders to exchange of "Guarantees of Origin" of energy from new renewables generation, certificates EU countries are already required to issue. This would give energy suppliers unable to meet their renewables mandates from domestic resources the opportunity to go shopping abroad. In an ideal world it would be physical energy being exchanged, but Europe's energy infrastructure is not developed enough for that to happen, hence the need for what some disparagingly refer to as "virtual trade."

Energy producers selling green certificates would need to be required to opt out of any other price subsidy arrangement in their own countries. If not, producers receiving a high purchase price for electricity in one country could afford to sell certificates for less than producers in a country with a relatively low price, putting market forces out of action in setting certificate prices. Opting out, however, requires that producers can opt in to a functioning wholesale market on which to sell the physical electricity. Such markets do not yet exist, argues EWEA. It fears the Commission's plan could destabilise the subsidy systems now working in national wind power markets and brake wind development instead of speeding it up.

In Sweden, experience of a market driven by green certificates produces a different view (page 52). There the prospect of a larger and more liquid market has appeal, not least in its inherent long term stability. From the perspective of consumers, more liquidity should also bring prices down, a benefit in countries like Britain and Italy where certificate premiums are sky high. In Germany, on the other hand, some generators may discover that selling their output on the electricity exchange -- and their certificates to eager buyers abroad, perhaps in Britain -- brings higher returns than the government's purchase price.

Experience of trading wind power on exchanges in Europe is minimal, but an increasing volume no longer in receipt of price subsidies in Denmark is sold into NordPool. Prices have fluctuated wildly, influenced by forces such as the level of water in hydro reservoirs -- and wind strengths. With no fuel costs, wind's marginal price is so low it becomes a controlling factor. The absurd effect is that the harder the wind blows, the lower the market price and the lower the returns for turbine owners. Partly to deal with that problem, "futures" contracts for wind power are now being offered at a fixed price. The point is, more wind power means cheaper electricity in the long run -- and markets do find solutions to the benefit of all.

By force or by choice

In Europe today, good renewables resources with no access to fair returns for developing them are going to waste. In Switzerland, one electricity retailer is buying virtual wind power from as far distant as an offshore station in the Irish Sea (page 47). Opening up access to renewables resources across the EU and giving countries options for meeting their national targets as cheaply as possible is what the Commission has in mind. In Commission jargon it is called "flexibility." It sees a green certificates market overlaying all existing national support mechanisms, which it categorically states can remain in place.

Since the Commission first revealed its thinking, discussions have been fast and furious. The good news is that the more rational members of the renewables lobby and officials at the European Commission appear to be moving towards one another. It seems likely the Commission will propose a partial opening of borders to trade of Guarantees of Origin. Whether retailers and generators choose to trade is up to them. The big question is: should opening of borders and acceptance of certificates for meeting national targets be mandatory or voluntary? Mandatory makes most sense, to ensure there are sellers as well as buyers of certificates and that certificates will have a value.

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