Fixed prices vital in real world markets

There is no reason why the Renewable Energy Feed-In Tariffs (REFIT) model could not be translated into a wider European context. Statutorily granted REFITs are the decisive factor for private investment in wind power. Quotas are the best way for utilities to get rid of private competition and to monopolise the renewable energy market. A European REFIT system is fully compatible within the new EU Electricity Directive.

Today the renewable energy industry, with wind as its flagship, is at a crossroads in Europe. This decade has seen a tenfold increase in wind power capacity, with Denmark and Germany uniting more than two-thirds of the 4500 MW to be installed by the end of the year. The European Commission, in its Green Paper for Renewable Energies, soon to become a White Paper, has given a clear signal that it is committed to a massive market introduction of renewables. The question arising now -- with liberalisation of European electricity markets aheadÐis this: can wind energy's success story be translated into the future? Or is it becoming increasingly endangered by liberalisation?

The October issue of Windpower Monthly has seen the beginning of a debate about the future framework for renewable energies in Europe. National energy markets are being liberalised. Some EU countries will see this happen sooner and some later; some will see more liberalisation and some less. Many people are confused and uncertain about the future, especially in the renewable energy business. Many are looking at ways of how to sustain or even accelerate market growth of renewables.

Some of them even see renewable energies at the forefront of liberalisation. These advocates of the economic school of neo-liberalism argue that if wind power, the cheapest and most advanced of all renewable energy technologies, wants to compete successfully on the free markets of the future, it must be aggressively offered to electricity customers. Then it would automatically find its market share. Thygge Weller presented this theory in Windpower Monthly last month.

Of course there is a tremendous market potential for renewables in the future. However, there is one decisive market restriction: today's energy markets are highly distorted markets. In the foreseeable future there will not be a really free electricity market giving the same chance to all market players. For this reason, the theory will remain a nice academic assumption, which is not based at all on existing reality.

An even race

The present situation of renewable energies in electricity markets can be compared with a 100 metre race. The starting shot is fired at a time when some competitors (any fossil/nuclear producer) are already 80 metres ahead, while others (renewables, energy efficiency) have not even arrived at the starting blocks. Waxing lyrical about fair competition under these circumstances might be nice in theory, but it will only serve the conventional power sector.

This is exactly the situation renewable energy producers are facing today. One example from the real world illustrates this observation: according to the UN, worldwide direct subsidies for conventional (nuclear and fossil) energies amount to $300 billion every year. For renewables there are not even figures available, but it is clear that their share would be only a small percent of that, or just a fraction of a percent. To return to our sports metaphor, some runners have officially taken drugs to improve their results, distributed by the authorities in many cases, while others are not allowed to do so. Therefore, mechanisms must be developed to ensure that all competitors can start from the same starting place and under the same rules and conditions.

Implementation counts

The EU and its member states have experimented with various policies for getting everybody to the starting blocks at the same time, under the same conditions. Undoubtedly, the most successful examples have been the Electricity Feed Law (EFL) in Germany and the Windmill Law in Denmark. These two countries have experienced a real success story in wind development because of their national legislation. With approximately 3000 MW at the end of 1997, German and Danish installed capacity will almost reach the tota installed wind capacity in Europe of a year ago. By 2010, Europe could see 60,000 MW of wind, assuming that a similar piece of legislation was introduced soon at European level. This figure is based on a calculation by BTM Consult in Denmark.

The driving force behind the wind power boom in Germany and Denmark has been, to borrow a phrase used by Windpower Monthly last month, a concept of "shining simplicity." The one-page text of the EFL is one of the shortest and simplest among all laws ever adopted in Germany. All private producers of electricity from renewable energy are statutorily granted a fixed price which utilities are obliged to pay. The so-called Renewable Energy Feed in Tariff (REFIT) is calculated on the basis of electricity rates paid by the final consumer. In Germany, the EFL has allowed wind power development to expand in lower wind speed areas. This development has taken away pressure from the best available sites and has thus avoided massive potential conflict with other interests.

Ultimately, the REFIT approach has led to a much greater acceptance of wind power in these two countries. This is even more remarkable when keeping in mind that -- compared with the UK, for example -- Denmark and Germany have a much higher capacity per capita of installed wind power. Local conflicts about wind power seem to be much more common in the UK than in the other two countries. The decisive factor which contributes to public acceptance is local involvement. German and Danish legislation has given room for local people to invest and own wind turbines, whether they be farmers, landowning individuals, or groups of green minded citizens who have formed co-operatives for wind turbine ownership. There seems to be a strong correlation between the share of wind power development in a country and the degree of private ownership.

There is no reason why the REFIT model could not be translated into a wider European context. A number of member states have established similar REFIT schemes: Italy, Greece, Spain and Portugal. Even the supposedly competitive British Non Fossil Fuel Obligation, the Irish Alternative Energy Requirement, or the French " Eole 2005" acknowledge the fact that fixed kWh payments are necessary for wind power and other renewables to make sure they can survive on the market.

However, these systems are highly bureaucratic, limit the rate of development and make local involvement almost impossible because of severe price pressure. The low rate of selection and even a lower rate of implementation leads to a lot of wasted and expensive effort. This means that these models are simply not as efficient as often claimed. Without steady market development, the fact that the price of wind has been driven down is beside the point. The competitive nature of bidding systems does not allow for the development of a national wind energy industry in these countries and only a very few new jobs have been created. The industry simply does not have a stable and growing domestic market which it needs to be economically successful.

Wishful Thinking

Last month in Windpower Monthly, Michael Grubb argued for the introduction of tradable renewable energy credits, a concept presented as a model of " shining simplicity for long term implementation." He argues that fixed payments for renewables, a REFIT system, would not be viable in a future liberalised European electricity market. This is not true. There is an easy way of translating the REFIT model into a European context. Compared with the existing successful fixed payments that German and Danish utilities are obliged to pay to private producers, the renewable energy credit concept is highly bureaucratic. Furthermore, Michael Grubb's model contains one principle problem and many additional ones.

The concept of renewable energy credits is similar to the model of tradable permits (emission trading). It is based on the idea that most environmental objectives are quantitative. Therefore, the concept of emission trading (theoretically applicable for CO2, SO2, NOx) is used to limit emissions. This is done by introducing ceilings for the use of fossil fuels or other resources polluting the environment.

The model of renewable energy credits turns this into the opposite. It intends to use an approach originally designed for cutting environmentally damaging substances and transform it into an instrument for increasing the share of environmentally friendly energies. This cannot work efficiently. It is obvious such a quota system for renewable energies -- effectively the introduction of upper limits -- would not create a dynamic market comparable to those in Germany or Denmark. This is especially true, when renewable energy credits are meant to replace fixed payments for renewables, even though the latter have proven to be the most efficient way for a rapid market penetration.

Furthermore, under such a system, who will finally decide about the share of renewables? And what will be the share of the various technologies? These are all political decisions which in the end tend to be at the lowest common ground. Furthermore, what is the difference between politically fixed prices and politically fixed quotas for renewables? Only this: statutorily granted REFITs are the decisive factor for private investment in wind power. Quotas are the best way for utilities to get rid of private competition and to monopolise the renewable energy market.

Monopoly danger

The task would be quite easy for them. As soon as there is a market for renewables restricted by an upper limit, the big power companies will lay claim to the entire quota to secure their turnover and their profits. There is only one condition they have to fulfil: offering wind power slightly below the prices of small private developers. It is no big surprise that a PreussenElektra representative, the dominating utility in Northern Germany, announced at a parliamentary evening organised by the German Wind Energy Association in Brussels: " We are not against quotas. We just do not like the Electricity Feed Law."

Michael Grubb's other denigration of the German and Danish fixed payment concept is that it would create little downward pressure on wind energy costs. The opposite is true. First, REFITs have been falling slowly but steadily because of lower electricity rates. Second, there is no adjustment for inflation built into REFITs. Most importantly, Danish and German manufacturers have been able to invest in new technologies and to increase production primarily because of the growing domestic markets which were created by REFITs. This has brought down turbine costs dramatically. Technology has improved substantially and machine size has increased by a factor of five compared with the early 1990s. All these factors have made wind power more competitive. In the UK, Denmark, and even in Germany, wind power is becoming increasingly competitive with conventional power production, including gas.

A European REFIT system

As a representative from the European Commission reported at the European Wind Energy Conference in Dublin, the White Paper on Renewable Energies might contain a proposal for a European system of REFITs. Such a proposal should be based on the success stories of Denmark and Germany.

The Directive governing the European Union's emerging Internal Electricity Market allows for the imposition of "public service obligations" on utilities. Such obligations can be for protection of the environment, or for legislation allowing renewables priority access to the grid. But for renewables to need priority access there has to be a market for clean power: a guaranteed price, or. REFIT. With unbundling -- the separation of electricity production, transmission and distribution -- the additional cost of a REFIT could be distributed among all market participants. A European REFIT system is therefore fully compatible with the new EU Electricity Directive.

In practice, for example, a grid operator could add a small surcharge on its transmission fee, which would then be used to finance the additional costs involved. The basis for calculating these additional costs must be the price a distributor is paying to his conventional electricity suppliers. Such a cost calculation model will avoid any market distortion or unfair competition. All market players will be treated equally. The final consumer will not even feel the slightly higher electricity bills he is paying. But at the same time, such a concept would ensure a future dynamic market growth of wind power and other renewables all over Europe.

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