Fixed prices and quotas both justified

The discussion in Windpower Monthly on Renewable Energy Feed-in Tariffs (REFITs) versus percentage quotas backed by tradable renewable energy credits is interesting. Looking back over the history of wind development, it is possible to evaluate which have been the most effective market incentives and which have been less effective. This exercise is quickly done. A clear picture emerges that fixed and fair prices are the most effective measure for promotion of local development of wind power. But we have no experience within the field of renewable energy of tradable C02 quotas relevant to the production of electricity. Our experience to date is limited to the following models.

¥ Direct subsidy of the capital cost of wind plants

¥ Subsidised price (REFIT)

¥ Tax credits in various forms

¥ Competitive bidding system (NFFO)

All these policy models have been seen in varying degrees from country to country. The unconditionally most successful model has been the legally fixed price for wind power, as operating in Germany and Denmark. But there is an important difference between the two countries in the way the extra costs are met. In Germany they are met by electricity consumers in the supply area served by the relevant wind plant; in Denmark they are effectively part of the broad tax burden.

I do not believe the bidding system in the UK is given full justice in the rough comparison here of the effectiveness of the different policy models. The UK wind market's slower rate of development, despite the huge interest in bidding for contracts, can largely be put down to a lack of national environment and planning guidelines. As a result, the NFFO process has been a barrier to development. It rules out, for example, the dynamism created in Denmark and Germany by the participation of hundreds of small private players who install single wind turbines or small wind plants through co-operative investment.

Finally, there is "green pricing," which is making progress in the United States in the vacuum left by lack of political goals for renewables. Green pricing can be an excellent instrument for helping to start some projects, but it smacks of charity and I see this as a sign of political bankruptcy in the countries where it has become the only possibility. This is said, with all respect for the people who are willing to pay more for renewable energy, for themselves -- and for other citizens.

REFITs & quotas

It is important to make clear that the environment cannot look after itself in a totally liberalised market. It must be accompanied by direct government regulation, or rules regarding the extent of the environmental impact of electricity generation and use. If limits are placed on allowable environmental impact, in the form of C02 taxes or C02 quotas, then a liberalised market could absolutely be used to promote renewables -- and with great effect if it was done right. Liberalisation is on the way, while discussion of C02 quotas continues.

The EU's December 1996 Directive on the Internal Energy Market, which becomes law from February 1999 and starts by opening 22% of the market, has been devised with the aim of creating competition. The environment has not been thought about much. The clause in the Directive regarding Public Service Obligation (PSO) gives member states the opportunity to push any extra cost of wind power and other renewables onto all electricity users and grants renewables priority access to the grid.

There is nothing new in this. All countries could have followed this route before the Directive was drafted. Regulations in Denmark and Germany prove the point and they have never been disallowed by either the European Commission or the European Court. The Directive changes nothing. All it says, in clear language, is that competition can be short circuited, in a limited fashion, by the use of the PSO clause.

Kyoto and liberalisation

At the same time as working on the Directive, the EU is taking part in the UN's climate change negotiations to be held in Kyoto in December. Member states have agreed on a negotiating position: reduction of C02 in Europe by 15% by 2010. If this goal is agreed on internationally (unlikely this time around), or even another binding target within the next three years, the combined reduction quota will be shared by all member countries according to a politically decided distribution formula.

All countries will then have to meet a more closely defined quotas. These quotas, in turn, will be passed on to all electricity consumers in eachcountry. It can be done directly or indirectly, dependent on which political regulation model is used. The result, whatever the means, will be a massive demand for CO2 free electricity and the creation of an independent market for CO2 free electricity. Wind power and hydro power will be the dominant players in this market. They are the two sources which today supply the cheapest method of CO2 reduction (cost/ton CO2 avoided).

Legislation outlined

Creation of such a market will require a change to the EU's Internal Energy Market Directive. It will need to integrate an environmental goal. No longer would it just be a "competition instrument," but an "Environment and Competition Instrument."

If, or when, a binding target for CO2 reduction is agreed in Europe, tradable quotas will be the best instrument for the large scale penetration of wind energy in Europe's electricity supply system. In such a future market, REFIT models will require continuous price regulation, individually and from country to country as goals are neared. Tradable quotas will promote the use of wind energy where it is optimal, with regard to resource and infrastructure.

Some member states will become exporters of CO2 free electricity; others will be importers. All will have to fulfil their own binding targets. A prerequisite, of course, will be national environment policies to regulate quotas to current need and technological progress, with the long term aim of ensuring that a major proportion of our electricity comes from renewable sources.

Taking a lead

As an aside, it is worth pointing out that there is no reason why Europe should not agree binding CO2 reduction targets before the rest of the world does so. The economic and competitive advantages of being first with the development of tomorrow's technology will in the long run outweigh any immediate loss of competitive ability. My basis for that claim can be seen in the very industries already mentioned here: wind power and hydro power. Installed under the right conditions, they will not impose any extra cost on the citizens of the EU or its companies.

The companies in the EU which have benefited greatly from a very low (subsidised by other users) price for electricity will still not have many chances in future international competition. The effect of liberalisation, among other things, will be a levelling of the so called ordinary consumer price and the price industry pays for its electricity.

For this reason, I mainly agree with Michael Grubb's evaluation of wind energy's future development in the long term using tradable quotas. But I do not agree that the REFIT model used in Germany and Denmark has suppressed competitive improvements. On the contrary, competition has been razor sharp and led to cheaper kilowatt hours. Lack of efficiency because of a fixed price system would result in a situation with a considerable imbalance between supply and demand, as we saw in the United States in 1983-85. This has not been the situation in Europe, where supply capacity has typically been around 50-100% of demand.

Transitory only

I am not denigrating the effect of existing REFIT models in Europe, but they are a transitory phenomena for wind power. REFITs will still be needed to bring new and weaker technologies to the market, just as investment subsidies will be needed for demonstration of new renewable energy technology and renewable systems. We are not talking about either/or, but both/and. Each new renewable technology will, in time, need a REFIT system, followed by a competitive system.

It is also absolutely essential that the carpet is not pulled from under wind plant which have been established on the basis of a fixed tariff, a REFIT. The price must be retained for the life of the financing contract, even after the introduction of tradable CO2-free electricity quotas. Those countries in the EU which have yet to introduce legislation for catalysing a wind market, should be mandated to introduce a REFIT. It has proved itself the best model for getting a wind market started.

The European Wind Energy Association is lobbying for wind to meet 10-14% of electricity demand in 2030. To reach such levels we have to take the realities of liberalisation into consideration. Failure to do so will result in wind power landing the role of the cripple of the electricity system, only able to hold itself upright with the help of the crutch of "competition protection." Wind power deserves better than that with all its benefits for the environment, for the economy and for making countries self-reliant in electricity supply.

Without agreement in Europe for binding EU CO2 reduction quotas, tradable credits have no meaning. Green pricing is a "beautiful" thought, but it is morally unacceptable and an expression of political impotence.