EREC's position on the future of RES Electricity support mechanisms

European Renewable Energy Council

Executive SummaryFuture RES-E support mechanismsEREC’s Position Paper on the future ofsupport systems for the promotion ofelectricity from renewable energy sourcesEREC and its members, the European renewable energyindustry, trade and research associationsAEBIOM (European Biomass Association),EGEC (European Geothermal Energy Council),EPIA (European Photovoltaic Industry Association),ESHA (European Small Hydropower Association),ESTIF (European Solar Thermal Industry Federation),EUBIA (European Biomass Industry Association),EUREC Agency (European RenewableEnergy Centres Agency) andEWEA (European Wind Energy Association)representing a European industry sector with an annualturnover of more than € 15 billion, consider that theDirective on the promotion of electricity from renewableenergy sources, adopted in 2001, will be subject toevaluation and to possible amendments by the Europeaninstitutions in 2005 and therefore present their opinionto this important debate.As part of the debate where the Commission may presenta report at the latest by 27 th October 2005, EREC providesits analysis and comes to the following conclusions:Effective competition in the conventionalpower market is a precondition forharmonising support mechanisms forpower from renewable energy sources:EREC welcomes the idea of harmonising supportmechanisms to avoid further market distortionsin the European power market. But such harmonisationmust be well prepared to avoid disturbingexisting markets. The first step towards harmonisationfor renewables electricity must be a wellfunctioning,undistorted Internal Electricity Marketand a truly level playing field.95% of the European Internal Electricity Market isbased on conventional power sources and 5% isbased on renewables (without large hydro). Thereare numerous distortions in the 95% conventionalelectricity market, and competition is far from beingeffective.Too early to harmonise supportmechanisms for renewable electricityA harmonised Community-wide support mechanismfor renewables at this early stage would bepremature, since there is not yet enough experienceas to which system would be the most effectiveon the EU level to guarantee market developmentof all the renewable power technologies.There is no practical evidence yet of effectivenessbeyond feed-in and fixed-premium systems. Quotabased mechanisms have not yet proven their abilityto provide investor security, attract investment andprovide considerable deployment. These must begiven time to develop further in order to providereal experience rather than theoretical hypothesis.2Photo credits: ÖkoFen, BP Solar, Oliver Joswig, Österreichischer Verein für Kleinkraftwerke, EHN,O.Ö. Energiesparverband, GE Energy

Any national support mechanism should guaranteean adequate return on investment toensure attractiveness of investments adaptedto the level of costs of all RES-E technologies.Setting mandatory RES-E targets:Setting of mandatory national targets for2010 would be appropriate and lead to moreefforts in all Member States.Removal of administrative barriers:Administrative barriers in the Member Statesshould be removed more effectively, both, byimposing stronger regulation on the EU leveland by better application of the already existinglegislation at the national level.Give priority grid access torenewable energies:New ambitious, mandatory, national targetsfor 2020 would show the EU´s commitmentand would significantly enhance investor confidence.2020 targets would also dramaticallyincrease the Community’s chance of meetingthe existing 2010 targets.The rules on grid access for and transmissionof renewables electricity should be furtherharmonised and strengthened in favour ofrenewable energy technologies. Member Statetrans<strong>position</strong> of existing legislation on gridaccess must be ensured.Reaching technological diversity within therenewable energy sector is crucial and theaim of any support mechanism should be toencourage and strengthen this diversity.Indicative targets for the share of the differentrenewable energy technologies in 2020should be set at the overall EU level in a processsimilar to the one that established theoverall EU 2010 White Paper targets. Thatwould strengthen the aim of reaching technologicaldiversity in the renewable energysector and enable each of the different technologiesto realise its competitive potential.Recommendations from the Commissionshould be made for national promotion mechanisms,that include long-term stability,technological diversity and effectiveness inreaching the national mandatory targets.Ensure technological diversityand raise public awareness:A broad diversification and support of allexisting RES-E technologies is crucial for thefurther development of a truly sustainableenergy system.A greater focus at the European, nationaland regional level should be placed on raisingpublic awareness of the benefits of renewableenergy technologies.Future RES-Esupportmechanisms3

EREC’s recommendationsFuture RES-E support mechanismsBackgroundDuring the White Paper discussions, the European Parliamentcalled for a European-wide harmonised system forthe promotion of electricity from renewables, based ona feed-in system. But the most successful model in termsof market penetration and growth rates for renewables,the feed-in system with fixed prices, did not have a majorityin the Council at that time, and the European Parliamentwithdrew its demand. It must be recognised that due tothe current political reality it is doubtful whether such asystem could be introduced in an effective way at theEuropean level at this stage in time.Effective competition in the conventionalpower market is a precondition for harmonisingsupport mechanisms for power from RESEREC welcomes the idea of harmonising support mechanismsto avoid further market distortions in the Europeanpower market. But such harmonisation must bewell prepared to avoid disturbing existing markets. Thefirst step towards harmonisation for renewables must be awell-functioning, undistorted Internal Electricity Marketand a true level playing field.95% of the European power supply is based on conventionalpower sources, including large hydro, and 5% isbased on renewables (without large hydro). There arenumerous distortions in the 95% conventional electricitymarket, and competition is far from being effective.While some stakeholders in the conventional Europeanpower sector ask for competition amongst renewablepower producers, it should be recalled that effectivecompetition in more than 95% of the market that isbased on conventional electricity is a far cry from realityas pointed out in the European Commission´s four benchmarkingreports on the Internal Electricity Market.It seems premature to call for competition in the renewablespower segment at a time of non-competition inconventional power. Renewable energy technologiescould already be competitive if they had received thesame attention in terms of R&D funding, subsidies, andif external costs were reflected in power prices. Removingsubsidies to fossil fuels and nuclear power and applyingthe ‘polluter pays’ principle - established in Article 174 ofthe Treaty - to the electricity market, would go a longway to level the current non-level playing field andreduce the need for renewables support drastically.As long as no true internalisation of external costs via afair taxation mechanism is introduced in Europe, therewill be no level-playing field. And as long as this is nothappening, support mechanisms for renewable energypower are not only necessary, but also have to be judgedas fair and compensational for the avoided externalcosts and subsidies and other support given to conventionalenergy.Too early to harmonise supportmechanisms for renewables electricityUnless the numerous current distortions in the emergingInternal Electricity Market are overcome, there will be noeffective Internal Renewable Electricity Market for renewablesto compete in given the many interactions betweenthe conventional power markets and renewable electricitymarkets.A harmonised Community-wide support mechanism forrenewables at this early stage would be premature, sincethere is not yet enough experience as to which systemwould be the most effective on the EU level to guaranteemarket development of all the renewable energytechnologies.4

As a result of the adoption of the RES-E Directivein 2001, several national support mechanismshave been introduced during the past years andmany are still in the implementation stage. Sofar experience clearly shows that only feed-insystems and fixed-premium mechanisms haveproven their ability to be effective in attractinginvestments, creating investor confidence, reachingthe national targets and creating a technologicaldiversity.Introducing any harmonised, Community-widesystem at this stage would lead to serious marketinstability and threaten the technological developmentas well as the world’s largest marketsfor renewable electricity technology. An initiationof discussion on how concretely sucha system could be designed and adapted atthe European level alone could lead to seriousinvestor insecurity, threaten Europe’s global leadership<strong>position</strong> in renewable energy technologyand undermine developing and already functioningnational markets.Harmonising support systems now would seriouslythreaten the development of the Europeanrenewable electricity industry, especiallyif an untested mechanism is pursued. It shouldalso be stressed that even systems that haveproven successful at national level are not easilyadapted to multilateral cross-border trade. Furthermore,many examples have shown that evensmall adjustments to a framework can have aprofound negative effect on the markets forrenewables. More fundamental changes willhave an even greater effect on the markets. Adramatic shift in all Member States’ frameworkswould jeopardise national renewable targetsand undermine investor confidence.Consequently EREC proposes to improve theEuropean framework and to prepare for a Community-widemechanism without harmonisingthe support mechanism at this stage. At a laterstage, when more experience has been gainedwith the full range of policy options and whenthe serious market distortions in the conventionalpower markets have been overcome, harmonisationmight be considered.At this stage it seems clear that it is too early tointroduce a harmonised support mechanismfor renewable electricity. Instead the EU shouldintroduce detailed recommendations for theMember States and improve its legislation onthe European level where necessary. Such recommendationswould limit the variety of systemsand could lead to bilateral cross-borderagreements between Member States havingsimilar systems. With a proof of being successful,certain Member States with the same design ofsupport mechanisms could start clustering theirsystems and by that seek to create and testcross-border mechanisms. In this way more experiencewould be gained about the full paletteof options and a decision on future harmonisationcan be based on more evident knowledge.Future RES-Esupportmechanisms5

Future RES-E support mechanismsFinally, it must be stressed that successful frameworksrequire not just a good payment mechanism and theencouragement of public support, but also effective policiesto remove the numerous barriers to grid access andtransmission and barriers in the form of administrativeprocedures and non-transparency.Setting mandatory RES-E targetsTo ensure investor confidence it is important that theinvestor can rely on the long-term stability of any existingsupport mechanism. It is secondary which system exists.Creating stop-and-go markets by changing the level andnature of support frequently must be avoided. The EUshould ensure that a minimum of 10 years be guaranteedfor any national support mechanism in the MemberStates. A first step to reach long-term stability and createinvestor confidence would be to change the existingindicative targets into mandatory targets for 2010. Theearly setting of new mandatory targets for the period after2010 would reduce uncertainty among investors and offerstable market conditions. The EU should set new bindingtargets for 2020 that aim at reaching at least a 33% shareof renewables electricity by 2020 and brake this down intonational mandatory targets, in a process similar to the onethat established the overall EU 2010 White Paper targets.The experiences at the national level show that, if theappropriate support mechanism has been chosen, it ispossible to reach the given national targets. Any systemto be adopted at the national level should be focussedon being effective in meeting the targets.Removal of administrative barriersseem to be either too weak or not properly transposedinto national law. These rules should be strengthened infavour of renewables. A clear timetable for approving RESprojects should be set for all administrations on all levels.Priority to RES projects should be given.The Commission should propose more detailed proceduralguidelines to strengthen the existing legislation on theEU level, and at the same time to encourage the effortsat the national level to implement current EU legislation.Give grid access priority to renewablesRules on grid access, transmission and cost sharing arenot sufficient at the European level. Article 7 of Directive2001/77 (Directive of the European Parliament and ofthe Council on the promotion of electricity from RES)is not clear enough on all aspects, especially concerningcost distribution and transmission fees. As already demandedby the European Parliament during the negotiationsof the Directive, these rules should be set outmuch more favourably for renewables and the implementationof the EU rules into national law should becontrolled and enforced more strictly by the Commission.Where necessary, grid extension or reinforcement costsshould be born by the grid operators and shared betweenall consumers, because the environmental benefits ofrenewables are a public good and systems operation isa natural monopoly. Strict legal and ownership unbundlingand strong regulation should be implemented in this field.Ensure technological diversityand raise public awarenessComplex licensing procedures for renewable projectsconstitute one of the most difficult obstacles renewablesprojects have to face. The existing European rules (Art. 6)For the benefit of encouraging technological diversityamongst the different renewable energy technologies,the EU should set overall indicative targets at the EU level6

for the different renewable energy technologiessimilar to the process pursued with the existingWhite Paper targets. In return not only the mostmature and cheapest available technologies willdevelop, but also less developed ones.Any support mechanism at the national levelshould take into account the diversity of renewableenergy technologies. All Member Statesshould be encouraged to support a wide rangeof renewable energy technologies with respect togeographical possibilities and variations of scale.Different renewable energy technologies workin different market segments and may require differentapproaches in order to reach their competitivepotential as soon as possible.Encouraging Local and RegionalBenefits and Public AcceptanceThe development of renewable energy technologiescan have a significant impact on local andregional areas, both due to installation and manufacturing.Some support schemes include publicinvolvements that hinder or facilitate the acceptanceof renewable energy technologies. Asupport scheme’s ability to encourage local/regional development, employment and incomegeneration should be investigated. It shouldalso be assessed whether a certain supportscheme is able to sustain public acceptance ofrenewables or not, including positive impactor increased stakeholder involvement.In the long run, a truly sustainable energy systemwill have to be based on a mixture of renewableenergy technologies, each with differentstrengths and abilities to complement eachother. Supporting only the renewable energytechnologies with the lowest cost underminesthe existing industrial structures of less competitivetechnologies and ignores the potentialof alternative future renewable champions. Onlyby developing a wide range of technologiesand by creating stable market conditions for alltechnologies in their own market segments nowwill broad European market leadership in renewablesbe sustained and strengthened.Future RES-Esupportmechanisms7

European Renewable Energy CouncilEREC - the European Renewable Energy Council - is anumbrella organisation of the leading European renewableenergy industry, trade and research associations activein the sectors of photovoltaic, wind, small hydropower,biomass, geothermal and solar thermal.EREC’s membersPrinted on ecologically friendly paper (chlorine-free paper) Design ACG BrusselsEuropean Biomass Association, European Geothermal EnergyCouncil, European Photovoltaic Industry Association, EuropeanSmall Hydropower Association, European Solar Thermal IndustryFederation, European Biomass Industry Association, EuropeanRenewable Energy Centres Agency and European Wind EnergyAssociationThe Renewable Energy HouseEREC shares its office with its member associations in theRenewable Energy House in Brussels, the central meetingpoint for renewable energy actors in the capital of Europe.European Renewable Energy CouncilRenewable Energy House26, rue du Trône - 1000 BrusselsT : +32 2 546 1933F : +32 2 546 1934E : erec@erec-renewables.orgI : www.erec-renewables.org