Cost-effectiveness of renewable energy support schemes in the European Union

Transcription

1 Cost-effectiveness of renewable energy support schemes in the European Union Arjun Mahalingam, Dr. David Reiner, Prof. David Newbery, EPRG, University of Cambridge IAEE Conference, New York, 16 June 2014

2 CONTENTS Overview of subsidy regimes in the EU Choice of countries for comparison UK Electricity Market Reform (EMR) Feed-in-Tariffs (FiTs) in Germany Risk Allocation & Cost of Capital Auctions Balance between Deployment & Research Support Conclusions

3 Background EU Renewable directive targets by 2020: 20% RES share 20% reduction in GHG emissions (from 1990 levels) 20% energy efficiency Not binding Indicative targets needed from April 2013 Country specific targets To each his own! Based on resource availability and starting point

4 Background Policy Framework for Climate and Energy : 40% reduction in GHG emissions (from 1990 levels) EU-wide RE target of 27% No national level enforced targets Yet to be finalized (Oct 2014)

5 Background New State Aid Energy and environment guidelines for : Sets out conditions under which state aid measures may be declared compatible with internal markets Aid is to be granted in a competitive bidding process Aid is granted as a premiumin addition to the market price (where the generators sell their electricity directly in the market) Beneficiaries are subject to standard balancing responsibilities Measures in place to ensure that generators have no incentiveto generate electricity under negative prices

6 Overview of subsidy regimes in EU FORMS OF RENEWABLE SUPPORT: SUPPORT FEATURES RISKS COUNTRIES Feed-in Tariff (FiT) Guaranteed price to eligible RES-E producer Fixed payment/mwh for a promised duration Investment (G) low Volume (G) Balancing (SO) Most except NL, ES, PL Feed-in Premium (FIP) Guaranteed payment/mwh + revenue from selling electricity to wholesale market Price (G) Balancing (G) NL, FI, UK (CfD), DE, IT Quota Obligations Investment Grants Fiscal Incentives Minimum share of RES-E to be produced/consumed by agents Penalty for falling short Maybe combined with tradable ROCs and TGCs; serves as a proof of compliance Provided upfront at start of project Calculated as % of expected RE output [or] total investment cost Reduce cost of investment Stimulate market diffusion of less mature technologies Financial (G/C) Price (G/C) Investment (G) - low UK, IT, BE, etc Most except DE, ES, IT, Tax incentives/ exemptions; tax rebate are FR, IT, PL, SE, UK, etc most common Complementary to other schemes G: Generator; C: Consumer; SO: System Operator;

7 Overview of subsidy regimes in EU

8 Overview of subsidy regimes in EU

9 Overview of subsidy regimes in EU UK France Italy FiT FIP Quotas Grants Fiscal Incentives Depends on tech; Wind - ct 5-25/kWh For 20 yrs Depends on tech; Wind - ct 8.2/kWh For 20 yrs Depends on tech; Wind - ct 15-29/kWh For 20 yrs Depends on tech; CfD srike price wind - 120/MWh 20.6% (GB)/9.7% (NI) of electricity sold for Depends on tech; wind /MWh CPF rate of ct 0.2/kWh to 1/GJ CCL exemption of ct 0.6/kWh 8000/individual up to 3 kw p ; Reduced VAT of 7% VAT reduction to 10% from 20% Spain Suspended/P.O. Suspended/P.O. Suspended/P.O. Suspended/P.O. Suspended/P.O. Germany Depends on tech; Wind - ct 5-9/kWh For 20 yrs [FiT Avg. stock market price] For 10 yrs Sweden - - Finland - Czech Rep. Depends on tech; Wind ct 7/kWh for 20 yrs Target price = 83.5/MWh (for 12 yrs) Poland % electricity sold for 2014 Same as FiT % of total electricity sold for 2014 (+1% p.a.) 23.2 million (for ) 30-40% of the overall project cost 18k -3.6 Million per project - Loan of 25 million per project at 1% p.a. up to 20 yrs Reduced tax at 0.5% of value of RES plant - - Consumption tax waiver of 4.86/MWh

10 Choice of countries for comparison United Kingdom: Offers insight into problems faced by liberalized electricity markets (forerunner in reform, 2001) in meeting climate change targets Most explicit reform of electricity market to date to meet the requirements of TEM Germany: Very successful with on-shore wind in terms of installed capacity and investment Similar wind potential and population density to UK, facilitates comparison in terms of cost-effectiveness of support schemes

11 UK Electricity Market Reform As a part of reforms to meet requirements for the 3 rd Energy Package and TEM Carried out in 4 stages until after 2020s Need to support a larger share of renewables in electricity Energy Act 2013: policies to meet climate change targets Carbon Price Support (CPS) Contracts for Difference (CfD) Emissions Performance Standard (EPS) Capacity Market

12 UK Electricity Market Reform UK CfD: Premium = [strike price reference price] per MWh

13 UK Electricity Market Reform Key features: ROC bands were reformed (On-shore wind reduced from 1 ROC/MWh to 0.9 ROC/MWh irrespective of wind levels) CfD strike prices were set at generous rates in comparison to WACC so as to discourage ROCs (phased out by 2017) CPS rates are capped at 18/ton from until Strike prices to be reduced after 2017

14 FiTs in Germany Successful in achieving high rates of on-shore wind investment in Germany than UK Rapid growth primarily due to higher earlier FiTs with degression at 1% p.a. Despite, UK having favorable wind resource than Germany and similar population density German FiT for on-shore wind (2015) ~ 74.1/MWh First 5 years for windy locations and 20 years for less windy locations Subsequent rates are 40.5/MWh

15 FiTs in Germany Installed capacity of UK in 2011 Germany in 2000

16 FiTs in Germany German support system in more cost-effective: FiT not indexed to price level unlike GB CfD Wind farms effectively subsidized only for first 5 years CfD for GB: 90/MWh; index eq. in Germany: 49-65/MWh (nett. of transmission charges) Germany: Extracts infra-marginal rent from windier sites by making contract length depend on first 3 years output UK: All wind farms have same length of contract at same strike price or ROC (passed on as additional cost to consumers as developer extracts rent)

17 Risk allocation and cost of capital Components of costs and its features: Capital costs largest component for RES-E due to low c.f. for renewables Cost of risk(c) α1/n odepends on its correlation with other risks the participant bears (Eg. Vertical integration results in negative correlation in risks of wholesale price, could make it riskless) oreduces if transferred to entity who is best place to bear them (usually SO for weather forecasting, marketing & balancing) Transaction cost(c t ) αn Efficient location cost -cost of strengthening the transmission grid to deliver from that location, as well as incremental transmission losses

18 Auctions Guidelines advocate them to establish least cost way of supporting RES-E; stresses them to be transparent Competition and clarity in what is being auctioned could reduce WACC Multi-dimensional auctions where bidders specify a range of different packages of characteristics (rent transfer to consumers): Payments contingent of different aspects of contract Achieved c.f. over first three years Type of subsidy (capital grant or per unit output) Work is needed in designing suitable auctions that could achieve the desired outcomes

19 Balance between Research and Deployment MSs provide massive subsidies for deployment whereas SET plan for trebling R&D lacks support UK caps subsidies at 7.5 billion/year (excludes transmission investment costs, 73% of which are borne by consumers) Deployment support for different RE technologies counteract cost minimization objective Reform of RES Research, Development, Demonstration and Deployment (RDD&D) support needed: Replace RES target with equivalent financial target Cost of meeting RES target + extra low-carbon R&D R&D: (i) immature technologies (ii) deployment for near-market technologies

20 Conclusions Main cost for RES is financing generation and transmission investments Efficient contract design with S.O. bearing risk is best Site-specific fixed payment (per MW available or MWh) to RES-E can result in least transfer of rent to developers Multi-dimensional auctions meet state aid guidelines Contract credibility key to reducing WACC and support costs Liberalization exacerbated mismatch b/w RES subsidies and low-carbon R&D => both should access same MS support subject to efficient allocation