A fourth way

The three support systems for wind operating in Europe, or about to be introduced-fixed price tariffs, auctions of power purchase contracts for new capacity, and an obligation on consumers to buy clean power (Renewable Portfolio Standard) facilitated by tradable credits -- are all ways of creating a protected market, separate from the open electricity market where wind would be subjected to unfair competition. A problem of protected markets is the risk of creating "renewable energy ghettos" which become difficult to dismantle, though auctions and tradable credit models are aimed at reducing cost so that support is no longer needed and the "ghetto" dissolves of its own volition.

If the environmental costs of conventional power were included in their market price, renewables would not need protecting. But efforts to launch a European energy tax have consistently foundered. An alternative to a carbon tax -- which would also make renewables competitive on the open market -- is a renewables price premium, awarded in recognition of the external (pollution) costs of conventional generation. Indeed, a price premium is the only one of the four support systems to recognise "environmental" costs in the price mechanism, and not just the "additonal" cost of renewables generation.

The idea of "fixed price premiums" was aired by the European Commission in a working paper presented to EU energy ministers in May (Windpower Monthly, May 1999). It would be paid for out of a levy on all electricity consumers. In the notes accompanying its most recent proposal for a renewables directive, however, (page 18) the Commission dismisses the premium concept as just a "variant" of fixed price tariffs.

A price premium's advantage is that it allows renewables to penetrate the market very quickly if their costs drop below the electricity-price-plus-premium. And provided the premium is set at the "right" level, it allows renewables to compete with conventionals, without the need for politicians to set quotas. From an economist's point of view, it is less important whether markets are controlled through prices or through quantities, as long as the control is achieved in a rational manner. Putting a price on pollution is a rational approach.

In practice, however, the mechanism is probably unworkable. Far reaching studies of the external costs of power generation by groups of experts in both Europe and America have illustrated the huge complexity of establishing the cost of pollution. How do we account for lost homes on Pacific islands if the icecap melts, or put a price on deteriorating health?

A price premium would have to be an arbitrary figure. As such it would be nigh on impossible to reach a political agreement on the size of the premium among all Europe's states and the amount would be constantly under review. It would not provide wind with the stable long term market vital if its full potential is to be realised.