Renewables for all at reasonable cost

Just as the Kyoto Protocol's flexible mechanisms allow countries to cut their emissions where it is cheapest for them to do so, EU countries should have the same flexibility for meeting their share of the common EU target for 20% renewables by 2020, reasons the European Commission. It advocates opening internal borders for green certificate trade. The renewables lobby does not like the idea of "virtual trade" in green power

Flexibility is to be a key plank of new renewable energy legislation being drafted by the European Commission to enable Europe to achieve its ambitious targets for 2020. But the main instrument for increasing that flexibility -- opening national borders to trade in renewable energy certificates -- is being strongly resisted by some sections of the renewables community, including the European Wind Energy Association (Windpower Monthly, November 2007), who fear that functioning national markets could be at risk.

Earlier this year, Europe's national governments signed up to a binding target for 20% of EU energy to come from renewable energy by 2020. That will require renewables to boost their share of electricity generation from about 19% today to 35% within the next 12 years. The EU Commission, after discussions with the 27 EU member states, is currently finalising its proposals to translate the 20% goal into binding national targets.

It had been expected that the debate leading up to publication of the Commission's proposed legislation, slated for January, would be dominated by the tricky question of how the overall target is to be divvied up between EU countries. The most contentious aspect of the plans, however, has so far proved to be the proposal to create a market for cross border exchanges of renewable certificates -- dubbed by some as "virtual trade" in renewables.

The purpose of introducing certificate trade is to help countries which will find it difficult or expensive to achieve a sufficient increase in indigenous development of renewables to meet their 2020 targets, the Commission reasons. "What we have now is a renewable target that is very ambitious," says Peter Vis, a member of European energy commissioner Andris Piebalgs' cabinet. Because the level of ambition has been ratcheted up and because of the binding nature of the target, Vis says it is essential that some flexibility is built into the manner in which governments can choose to meet their national goals. "We are trying to incorporate alongside national targets the flexibility that is prudent and necessary to ensure that they can be met -- and at reasonable cost."

Kyoto precedent

Vis points to the precedent of the 1997 Kyoto Protocol. Countries were persuaded to sign up to binding targets on the understanding that flexible mechanisms would allow them to meet their commitments through agreements with other countries. There has to be some mechanism that allows member states which are struggling to fulfil their targets to collaborate with others which are able to do more, he says.

The Commission plans to introduce this flexibility by "transforming" the existing registration of Guarantees of Origin (GoO), which confirms the green credentials of any electricity generated from a renewable source of energy.

At present, GoO can only be traded if they are bundled together with the physical power that moves between countries which are linked by cross-border interconnections. The Commission's thinking is to decouple the GoO from the physical delivery of power. Entities in countries as far apart as Latvia and Portugal could buy or sell GoO to one another to meet their renewables commitments, or "virtually" trade green power. Vis points out that under the 2001 directive on electricity from renewable energy sources, member states are already required to verify and register the origin of electricity from renewables. Now, the Commission plans to give that system of GoO an "overhaul," he says. "[That] will make it a much more interesting mechanism." There will be provisions in the new legislation to ensure that there is no double counting of renewables output and there will be a registry system that would track outflows and inflows of GoO between member states. These safeguards to the integrity of the system would have to be recognised and respected by all member states.

Real energy

Commenting on the hype that has escalated around the topic of cross-border flexibility in recent weeks, Vis takes issue with the "virtual" label that has been attached to the concept by some of its opponents, including the European Wind Energy Association (EWEA). It would be wrong to give the negative impression that transferring guarantees of origin across national boundaries is not backed up by real renewable energy produced, he says.

He is also uncomfortable with the term "trade," saying: "I would not call it trade; I would call it flexibility." A country such as the UK, says Vis, with a support mechanism based on a mandated market share for renewables with electricity retailers demonstrating compliance by the acquisition and submission of green certificates, might choose to introduce a fixed price tariff for electricity of foreign origin. "That would not fit into the label of trading, but would fit with flexibility." This flexibility may mean many things in many different countries, he says, just as "trade" means different things to different people -- and is used by some to stigmatise the concept of cross-border exchange of renewables guarantees of origin.

Vis discounts accusations that exchange in GoO could lead to "windfalls" for the cheaper renewables technologies. By the very nature of markets, if "profits" are seen to be made, more players will crowd into the market, thereby bringing prices down, he points out. If the end result is that more renewable energy is produced, that is just what is needed to meet the ambitious targets.

By choice or not

He is tight-lipped about whether opening borders to the exchange of GoO certificates will be mandatory or voluntary. This is, perhaps, the most sensitive aspect of the Commission's proposals. Regardless of whether energy retailers wish to be able to trade in renewables with counterparts in other countries, they can only do so if governments open up borders to make it possible; it is governments that are bound by the EU targets.

Under current legislation, countries can already import renewables if they so wish. The question is, whether renewables producers receiving financial support from consumers within their borders will be allowed to boost their earnings by exporting Guarantees of Origin. The German government, which mandates the premium prices that consumers are required to pay for wind power and other renewables generation, has already made it clear that it does not want to see green electricity traded in the form of certificates across its borders. It is also vehemently opposed to any move that it believes could threaten its system of "feed-in tariffs" (mandated purchase prices) for renewables power, which have driven development of the largest market for wind turbines in the world. By the end of this year, the country will be getting 14% of its electricity from renewable energy, exceeding its 2010 target for 12.5% green power three years early.

The German government estimates that additional costs of introducing mandatory Europe-wide trade in green certificates would be EUR 100 billion up to 2020 for consumers in the EU-27 countries. In Germany alone, the government claims, costs would increase by 40%.

Vis stresses that the Commission is not proposing that member states dismantle their support mechanisms. "Rather, we would envisage that the increased flexibility [from being able to exchange GoO] would be an add-on that would be available," he says.

"We are not going to require any changes to existing support that already fits the bill. We are not going to tell governments what systems to put in place. We are just allowing a bit more flexibility." Neither does the Commission propose to interfere with existing investments in renewables, he says. "We are not going to be moving goalposts or changing what has already been promised. But what we do want are increased investments on a significantly increased scale."

Macro-economic advantage

He notes that some in the renewables community argue that allowing renewables producers to export the environmental value of their generation could make it more expensive for national governments in some countries to meet their own targets. This, however, ignores the benefits that accrue from renewables development, he maintains. "If we consider the macro-economic benefits, I think we are looking at a much more advantageous situation." Renewables development brings investment, jobs and expertise and contributes towards the local economy through taxes and rates. It also helps boost security of energy supply by avoiding imports of fossil fuels and reduces a country's carbon emissions. He emphasises that the carbon dioxide benefits of renewables will not follow the GoO under the Commission's plans. "If there is (renewables) potential in a member state, it makes very good sense to maximise that potential."

On the flip side, for countries that require the GoO to meet their targets, there are benefits in supporting renewables production in other countries where the costs of development, and therefore the cost of meeting their target, are lower. "We should be looking at the end benefits of countries doing things together, rather than doing things on their own." Today, renewables meets around 8.5% of Europe's energy consumption. "To get to 20% we are going to have to do a lot more and a lot faster."

For and against

Whatever the Commission proposes in January, Vis stresses that it will be for the elected members of the European Parliament and representatives of national governments in the European Council to decide what the eventual outcome will be.

Meantime, the Commission is hearing very different messages from all sides of the energy industry. While a number of renewables associations -- particularly those representing small producers -- fear that renewables credit trade would threaten their mandated price systems, the opposite view is expressed by several large producers such as Statkraft and Vattenfall who favour a more market oriented approach.

Another long time proponent of trade in renewables is Eurelectric, the umbrella body representing Europe's electricity associations. It has joined forces with the Dutch-based renewable energy certificates organisation, RECS International, and the European Federation of Energy Traders (EFET) to back the Commission in its efforts to open internal borders to trade in renewable credits.

"We understand that the Commission is under pressure from some member states who are not keen to establish renewable energy trading across borders," explains Juho Lipponen from Eurelectric.

The three associations point out that incentives for renewables must fit within the internal European energy market framework. The 20% target for renewable energy will demand some 35% of overall electricity to come from renewables, they say. With this in mind, the Commission must ensure that over one-third of the European electricity market does not get closed-off to free trade. That would happen if it allowed the current barriers to trade -- differentiated support of renewables in each country -- to continue, argue Eurelectric, RECS and EFET.

Adaptation to market

"Specifically, this means adapting renewable energy support mechanisms to patterns of wholesale power supply and demand." The most obvious way to do this will be to open up internal borders to trade in "instruments" -- or GoO -- that demonstrate that power production is from renewables, they say.

Member states should be entitled to meet part of their national target for power from renewable energy sources (RES) through GoO acquired and redeemed by suppliers of electricity. "Suppliers should be able to trade instruments across borders independently from the purchase of physical electricity. This will help to optimise cost effective RES development, to the benefit of the European customer," they state.

Lipponen concedes that the Commission's proposals are unlikely to go as far as the three organisations would wish. In the long term, they would like to see a harmonised Europe-wide system of incentives based on agreed proportions of renewable energy in the supply mix, using green certificates to demonstrate the quotas are being met. Meantime, the three organisations take the view that opening borders to trade in GoO is a pragmatic first step and will help achieve the 2020 targets. "What happens beyond 2020 is another story," says Lipponen.

He points out that differences of opinion also exist within the Commission on the issue. The environment directorate is more comfortable with trading systems, already having experience of the European Union Emissions Trading Scheme (EU ETS), whereas in the energy directorate he senses more reluctance to embark on a radical change towards a single market structure.

Lipponen expects the final proposal revealed in January will be for a partial opening up of borders to allow 15% or 20% of national renewables targets to be met by submission of GoO. "We would be OK with there not being any limit to trading," he says, pointing out that some states with a limited renewable resource, such as Luxembourg, will find it very difficult to meet their targets.

Sceptical wind lobby

More sceptical about the merits of the Commission's new thinking is EWEA. Whether the trading mechanism will be a bolt-on to existing support that helps countries meet the overall target or whether it will disturb existing support mechanisms in the 27 member states, crucially depends on its design, warns EWEA's Christian Kjaer. "Without seeing the proposal, it is difficult to say that it is not going to disrupt the successful market in Europe, which accounts for 50% of the global wind market."

He notes there are three key elements to the Commission's plans that it has stated so far: that there will be a mechanism based on trade, that existing support systems will be preserved and that this is not an attempt to create a single system of support across Europe. "If the Commission can construct something that fulfils these three conditions, fine," says Kjaer. "The framework must provide stability, predictability and profitability. But it is all in the detail."

He adds: "We have to be careful to make a distinction between physical trade and virtual trade." Physical trade in renewables makes sense and should be actively encouraged, he says, though it requires improvements in infrastructure and interconnectors. Less clear are the benefits of "virtual" trade and what impact it will have on the renewables market since the system is more complicated to design. "That is not to say that there are no benefits; we just do not know what they are at the moment."

Kjaer regrets that plans for a physical renewables trading system between Norway and Sweden fell through. "That would have given us valuable knowledge. It would have given us a practical example and pin-pointed us to the challenges in cross-border trade so that we could have a better basis on which to judge how we are going to harmonise the system at some time in the future." It is too early now to think about moving towards a single market for renewables because Europe's power markets are not functioning properly, he says.

For now, Kjaer and the rest of the renewables community can only wait until January to see the result of the Commission's deliberations. "The litmus test will be whether the Commission can propose something that has a reasonable chance of driving investments in renewables rather than something that just enables consultants to make money," he says.