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Time for coherence on policy in Europe

Disputes over whether market mechanisms or government subsidies provide the best support for renewables continue to dominate wind industry policy forums, but at a business conference for renewables held by the Financial Times last month, the majority seemed to believe that movement towards a free market economy was inevitable and possibly desirable.

The trend towards liberalisation and deregulation of energy markets set the context for the Financial Times' ambitiously titled World Renewables Conference in Brussels. At the business summit on October 4 and 5, policy analysts and members of the financial and business communities chewed over the implications of changes to the policy and the financial climate in which renewables are increasingly expected to compete.

Liberalisation of energy markets presents opportunities for renewables, argued Patrick Lambert from the European Commission's energy directorate DGXVII. Competition requires a level playing field for all forms of energy, he said, which means removal of administrative and technical barriers, the need for prices to reflect costs to avoid distortions in competition, removal of subsidies and greater choice for consumers in energy services and green electricity.

Time and again, speakers noted the importance of creating a policy framework in which renewables can thrive. On the EU's policy agenda is the long awaited proposal for a renewables Directive being prepared by DGXVII. This will increase the use of electricity from renewable sources within the framework of the internal energy market, said Lambert. The proposal -- the third draft drawn up so far -- is to be presented to Europe's energy ministers at December's Energy Council. Lambert remained tight lipped over the contents of the proposed Directive, but he assured that a key element will be subsidiarity to take full account of different situations in member states.

The previous drafts have advocated that each European country set a minimum standard, or a specific quota, for the amount of renewables in the supply mix, with a system of trading green power, in the form of green "certificates," "tickets," "labels" or "credits," to allow areas with excess renewables generation to sell to areas which cannot otherwise meet their quotas. The proposals attracted fierce opposition from the wind lobbies in countries with fixed premium prices for wind power who fear the consequences of a market based on competitive trade instead of government subsidies.

Also on the table for some time has been an EU proposal to harmonise taxation of energy products. It is proving difficult for member states to reach agreement, Lambert reported. "But once that agreement has been reached, among other things, it should favour renewable energy supplies, and this would be a first step towards internalisation of costs and benefits."

A policy void

Europe can ill afford to trip up over its policies, warned Karl Mallon of Greenpeace. He questioned why the Commission appeared to be "plotting a course for a policy void on renewables" by taking up proceedings against policies which are working today, such as the German support system for renewables, the Renewable Energy Feed In Tariff (REFIT), before the new renewables Directive is in place.

His fears were shared by Christopher Flavin of the Worldwatch Institute who pointed out that Europe's dominant position in world renewable energy markets is due to far sighted policies in four countries: Germany, Denmark, Netherlands and Spain. "It is very much up in the air whether the policy system that has allowed this market to flourish is going to continue," he said. Flavin observed that many other parts of the world -- particularly the US and Asia -- would be happy to take the market lead from Europe if it stumbles in its next set of policy choices.

Catherine Mitchell from SPRU -- the Science and Technology Policy Research Unit at Sussex University -- believed that Germany, Denmark and Spain have achieved high rates of renewables implementation thanks to the menu of options they offer to renewable energy developers. The framework in these countries is complementary to renewables; this is as important, if not more so, than the system of support. "If you put renewables in a regulatory system which is essentially a series of barriers, it doesn't matter what support mechanism you put in place, renewables simply won't develop."

Trade is important

Although Mitchell firmly believed in competition within electricity systems and supported the move towards single energy markets, she doubted that competition based support for renewables is a good thing at the moment. "An enormous amount is asked of renewables; they are being asked to compete with technologies that have been supported for a very long time." But the important future facilitator of renewables is tradable green certificates, she claimed. "We must move towards them."

The issue of which support mechanism is best provoked strong feelings. Some believed that mechanisms must demonstrate that the industry is moving towards a free market economy. Mark Woodall from Impax Capital echoed Mitchell's demand for governments to build frameworks that are sustainable through listening to the needs of industry, investors and financiers -- not just to their own government economists. Meantime, transitional arrangements would have to be put in place to allow the move from primarily a support mechanism to a market mechanism. But Corin Millais from Greenpeace pointed out that too much emphasis is placed on the need for renewables to be cost competitive. "The oil industry is still getting billions of dollars of tax breaks; the whole sector is subsidised to the hilt," he said.

His view was shared by Hermann Scheer, President of Eurosolar. As a German, Scheer has experienced a lifetime of utilities wielding monopoly power over the electricity market. In his view, there is not -- and probably will never be -- a true market situation: political, national and big power company interests are too strong and too many hidden barriers exist. Scheer illustrated this by pointing out that draft legislation in Germany for cancelling all administrative barriers against renewable energy involves changes to 25 different laws from the building sector to the agricultural sector.

The distributed potential

Risks and uncertainties from liberalisation do not only affect renewables, maintained Walter Patterson from the Royal Institution of International Affairs (RIIA). Changes in the electricity infrastructure affect large and small generators alike. "Risks associated with a commitment to a very large generator over a time period of 25 to 30 years are also very scary for investors. It may well turn out that a portfolio of small technologies is a less risky investment than a single big one," he said of the potential future market for renewables.

Gerald Kotas from the US Department of Energy claimed that the impact of initiatives and mechanisms to jump start renewables in developed countries pales in comparison to opportunities in other parts of the world where renewables are already competitive. Eighty per cent of the renewables market is in developing countries where infrastructure is not an issue: transmission and distribution systems are not in place and off grid renewables can be more cost effective. "That is where we are seeing population growth, requirements for power and increased interest in investing. The next generation of power is distributed power and renewable energy is key to that," he claimed.

Taking a wider and longer term view, Flavin claimed renewable energy is now where the computing industry was in the early 1980s, ready to be propelled forward through an array of powerful technological, economic and social forces. A key driver is climate change and the Kyoto Protocol, optimistically dubbed by Flavin as "the beginning of an extended process that will conclude with the end of the fossil fuel based economy." Predicting the rise of a hydrogen-based economy, Flavin dubbed the fuel cell "the silicon chip of the hydrogen age". He pointed out that turning renewable energy into hydrogen fuel will allow renewables to supply not only electricity, but primary energy as well. Major companies around the world are already investing billions of dollars in the technology.

A long way to go

But Michael Grubb from the RIIA warned of many policy battles still waiting to be fought before the Kyoto Protocol can be successfully implemented. Some key countries are failing to match their actions to words on reducing carbon dioxide. And he warned Europe against making ratification of the Kyoto agreement conditional upon the United States ratifying. It would destroy the agreement, he said. On emissions trading, he pointed out that national incentives to reduce greenhouse gases could be undermined by huge surplus emissions allowances traded by Russia, Ukraine and even Kazakhstan.

Turning to economic instruments for helping individual countries achieve their emissions reduction commitments, Grubb maintained that energy taxation alone would not help renewable energy and would, indeed, be marginal for achieving the Kyoto goals. More effective would be incentives for fuel switching in the electricity sector. "That is going to require a judicious mix of tax and emissions trading."

He castigated the renewable energy industry for not showing coherent force in lobbying during the many Kyoto negotiations. "Obviously, there are divergences between the different renewables, but the fact is they are quite small alongside the major fossil fuel players. Unless the renewable energy industry can hang together, it will hang separately."

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