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External costs benchmark too low

Market distortion is being created as the full costs of fossil fuel generation are still not being fully accounted for. Experts claim the cap set by the European Commission of EUR 0.05/kWh for the external costs of coal generation should be removed as costs are substantially more than that. The European Wind Energy Association wants the taxpayer and electricity consumer treated as one customer with the price reflecting fairly the cost of electricity generation and the avoided cost.

The full costs of fossil fuel generation are still not being fully accounted for even though the European Commission has set a benchmark of EUR 0.05/kWh for the external costs of coal generation. "This cap definitely needs to be removed," argues Olav Hohmeyer from Flensburg university in Germany, a leading expert on the external, or social, costs of electricity generation.

"All external costs are substantially more than the EU cap. There is no justification given for it." Even Germany's renewable energy feed-in tariff -- which sets one of the highest prices for wind power in the world -- is still less than the true cost to society of electricity from coal fired plant, he says. A wind plant on a good site in Germany will be receiving less for its output by 2006 than the "least cost estimate" for external costs, once the "avoided cost" to utilities of not having to supply other generation -- EUR 0.03/kWh -- is included, Hohmeyer says. He argues that there is no reason for the German tariff to be reduced by 1.5% a year for all wind plant. According to Hohmeyer the external costs of fossil fuel generation are in the range of EUR 0.059-0.231/kWh.

Vicky Pollard of the European Wind Energy Association (EWEA) points out that the external costs estimate of EUR 0.05/kWh is included in the EU's new guidelines on the granting of "state aid" (government subsidies) to industry by member countries. External costs, however, would not have been included in the guidelines at all had it not been for lobbying pressure applied by German non-government organisations and EWEA. The guidelines, which came into being earlier this year, are in place for five years. As well as questioning the validity of the EUR 0.05/kWh cap, Pollard asks if it is fair that the state aid rules are not also applied to nuclear and fossil fuel aid.

"For the time being the customer is cheated because he is paying twice," EWEA president Klaus Rave explains. The customer pays once for electricity as a consumer and once as a taxpayer to subsidise the nuclear and coal industries, he adds. EWEA wants the taxpayer and electricity consumer treated as one customer with the price reflecting fairly the cost of electricity generation and the avoided cost, he continues. "The pricing is wrong and giving the wrong signals. That is distorting markets, and as long as that is taking place all over Europe and globally, we need to intervene in the market. There is no such thing as a perfect market."

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