Best practice support schemes for RES-E in a dynamic European electricity market

Transcription

1 Report (D9) of the IEE project OPTRES: Assessment and optimisation of renewable energy support schemes in the European electricity market Best practice support schemes for RES-E in a dynamic European electricity market Authors: Mario Ragwitz, Anne Held, Arne Klein - Fraunhofer - ISI Gustav Resch, Thomas Faber, Reinhard Haas EEG, TU Wien Karlsruhe (Germany) December 2006 Supported by: CONTRACT N : EIE/04/073/S

2

3 Table of Contents 1 Introduction Current policies to support RES-E and historical development of RES-E Best practice support schemes from a historical perspective Effectiveness of RES-E support A technology-specific analysis Evaluation of the level of RES support in relation to the effectiveness Level of support for RES-E in the EU and costs of RES-E generation Conclusions Best practice support schemes for future application Overview on investigated cases Results of the model runs Conclusions Generic best practice design criteria for support schemes Theoretical aspects Technology-specific support scheme versus uniform RES-E support The impacts of setting more or less ambitious targets on RES-deployment Which stakeholder should benefit from the system? Should a competitive system be set up? Distribution of the additional costs (burden) for consumers over time Best practice examples of design criteria for Feed-in systems Stepped tariff design Premium versus fixed tariff design Tariff Degression Forecast obligation for fluctuating RES Page I -

4 6.5 Demand orientation Local acceptance of RES-E Conclusions Best practice design criteria and potential future design criteria for quota obligation with TGCs Determination of quota targets Setting maximum limits for the certificate's price Setting minimum limits for the certificate price Uniform versus technology-specific quotas Differentiation between existing and new capacity Banking and Borrowing of certificates Conclusions Bibliography Page II -

5 Figures Figure 1 Figure 2 Figure 3 Figure 4 Figure 5 Figure 6 Figure 7 Figure 8 Figure 9 Currently dominating support schemes in EU member states...2 Historical development of electricity generation from RES in the European Union from 1990 to 2005 in the EU-15 (left) and EU-10 countries (right)...3 Historical development of electricity generation from new RES-E in the European Union (EU-25) from 1990 to RES-E target achievement at country level: comparison of actual and potential additional RES-E penetration (2004 versus 1997)....4 Evolution of the main policy support scheme in selected EU member states from 1997 until Effectiveness indicator for wind on-shore electricity in the period The relevant policy schemes during this period are shown in different colour codes...9 Effectiveness indicator for wind on-shore electricity in the period The relevant policy schemes during this period are shown in different colour codes...9 Evolution of effectiveness indicator for wind on-shore electricity in the period for EU-15 countries...10 Effectiveness indicator for wind on-shore electricity in the period for Germany, Spain and Ireland...10 Figure 10 Effectiveness indicator for wind on-shore electricity in the period for Austria, the Netherlands and Portugal...11 Figure 11 Effectiveness indicator for solid biomass electricity in the period The relevant policy schemes during this period are shown in different colour codes.12 Figure 12 Effectiveness indicator for solid biomass electricity in the period The relevant policy schemes during this period are shown in different colour codes.12 Figure 13 Effectiveness indicator for biogas electricity in the period The relevant policy schemes during this period are shown in different colour codes.13 Figure 14 Effectiveness indicator for biogas electricity in the period The relevant policy schemes during this period are shown in different colour codes.14 Figure 15 Effectiveness indicator for biogas electricity in the period for Austria.14 Figure 16 Effectiveness indicator for photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes.15 Figure 17 Effectiveness indicator for photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes.15 Figure 18 Comparison of support levels in 2004 for wind power onshore...16 Figure 19 Comparison of present support levels in 2004 normalised by the duration of the instrument (to 15 years support duration) for wind power onshore...17 Figure 20 Historically observed efficiency of support for wind onshore: effectiveness indicator in relation to the annuity of expected profit for the year Page III -

6 Figure 21 Historically observed efficiency of support in the case of biomass electricity: effectiveness indicator in relation to the levelised profit for the year Figure 22 Price ranges (average to maximum support) for direct support of wind onshore in EU-15 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...22 Figure 23 Price ranges (average to maximum support) for direct support of wind onshore in EU-10 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...22 Figure 24 Price ranges (average to maximum support) for direct support of agricultural biogas in EU-15 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...23 Figure 25 Price ranges (average to maximum support) for direct support of agricultural biogas in EU-10 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...24 Figure 26 Price ranges (average to maximum support) for direct support of biomass electricity production from forestry residues in EU-15 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...25 Figure 27 Price ranges (average to maximum support) for direct support of biomass electricity production from forestry residues in EU-10 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...25 Figure 28 Price ranges (average to maximum support) for direct support of small scale hydro in EU-15 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...26 Figure 29 Price ranges (average to maximum support) for direct support of small scale hydro in EU-10 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...26 Figure 30 Price ranges (average to maximum support) for direct support of photovoltaic electricity in EU-15 member states (average tariffs are indicative) compared to the long term marginal generation costs (minimum to average costs)...27 Figure 31 Overview on investigated cases...30 Figure 32 Development of total RES-E generation in the period 2004 to 2020 at EU 25 level in the BAU case (left) & the improved national policies variant (right)...31 Figure 33 Total investment needs in the period within the EU 25 in the BAU case (left) & the improved national policies -variant (right)...32 Figure 34 Development of necessary consumer expenditure on EU 25 level in the BAU case & the improved national policies -variant Page IV -

7 Figure 35 Comparison of financial support (average premium to power price) for new RES- E generation on EU 25 level in the period for the BAU case & the improved national policies variant...34 Figure 36 Technology-specific breakdown of RES-E generation from new plants (installed 2005 to 2020) in the year 2020 for the investigated cases...35 Figure 37 Comparison of financial support (average premium to power price) for new RES- E generation on EU 25 level in the period for the investigated cases36 Figure 38 Comparison of the required consumer expenditure due to promotion of RES-E in the period 2005 to 2020 at EU-25 level for the investigated cases...37 Figure 39 Comparison of necessary cumulated consumer expenditure (in 2020) due to the promotion of RES-E (installed 2005 to 2020) for the investigated cases...38 Figure 40 Possible policy objectives in choosing the appropriate support scheme...41 Figure 41 Effect of a simultaneous promotion of RES-E technologies versus a serial promotion (according to the cost efficiency) with respect to total RES-E deployment...44 Figure 42 Electricity production chain...46 Figure 43 Transfer costs for society applying a instrument with simultaneous support (feedin tariff / FIT) and a mechanism promoting only the currently most cost efficient technologies (TGC scheme)...47 Figure 44 Cost-reducing effect of a stepped tariff design (Huber et al. 2004)...50 Figure 45 Annual support per unit of electricity generation for wind turbines in France compared to the electricity generation costs...51 Figure 46 Producer profit for electricity generation from wind energy in France...52 Figure 47 Annual support for electricity generated from wind energy and electricity generation costs in the Netherlands...54 Figure 48 Producer profit for electricity from wind energy in the Netherlands...54 Figure 49 Remuneration for electricity from hydro power plants in Portugal Figure 50 Remuneration for electricity from RES in Luxembourg...57 Figure 51 Share of electricity sold within the premium option in Spain...62 Figure 52 Remuneration for electricity from wind energy in Spain from January 2004 till April Figure 53 Development of wind turbine prices against cumulative installed capacity in Germany...67 Figure 54 Development of the remuneration of electricity from wind energy...68 Figure 55 Typical electricity load curve...70 Figure 56 Number of ROCs issued in the period April 2002 to March 2005 by technology and country (Note: 1 ROC = 1MWhel). Source: OFGEM (2006) Page V -

8 Figure 57 Costs of promoted RES-E versus costs of "new" RES-E (based on (Held et al. 2006)) Tables Table 1 Table 2 Table 3 Table 4 Table 5 Feed-in tariff design criteria applied in the EU Support range for the feed in tariff paid for electricity from wind energy in France51 Support range of FIT paid for electricity from wind energy in Cyprus (turbine capacity > 30 kw) Source: (Pharconides 2006) and (Ministry of Commerce, Industry and Tourism 2003, pp. 13)...53 Maximum limit of supported electricity in Portugal...55 Remuneration for electricity from biomass and waste with large biogenic fraction in Austria...59 Table 6 Tariff level for electricity from biomass and biogas in Germany in Table 7 Review of the stepped tariff design...61 Table 8 Review of the premium tariff design...66 Table 9 Review of the tariff degression...69 Table 10 Table 11 Table 12 Multiplying factors for the double tariff option in Slovenia...71 Tariff levels for the different RES-E technologies in Hungary from January to August Review of demand orientated tariff levels...72 Table 13 Review of the concepts to increase local acceptance...74 Table 14 Table 15 Table 16 Table 17 Table 18 Design criteria of the quota/tgc systems applied in the EU...77 Quota targets, fulfilment and penalty level in Sweden (Source: Swedish Energy Agency)...80 Quota targets, fulfilment and penalty level in the United Kingdom (England and Wales). Source: OFGEM (2006)...81 Quota targets, fulfilment and penalty level in Belgium - Walloon Source: CWAPE (2006)...82 Quota targets, fulfilment and penalty level in Belgium - Flanders Source: VREG (2006)...82 Table 19 Minimum prices in Flanders in Table 20 Table 21 Minimum guarantees in Sweden from 2004 to 2008 (Minimum prices are guaranteed in addition to the electricity price)...84 Examples of multiplier for certificate allocation to different technology options Source: (Commission Wallonne pour l'énergie [CWAPE] 2006) Page VI -

9 1 Introduction The European Union has the objective to increase the share of electricity generated from renewable energy sources (RES-E) to 21 % of the total electricity consumption in the 25 EU Member States by This is the core element of Directive 2001/77/EC, which requires each Member State to apply appropriate instruments in order to achieve the national target for RES-E. In the past years several instruments to support the electricity generation from renewable energy sources have been implemented in the EU countries. In most EU countries the main instrument used to support the generation of renewable electricity is the system of fixed feed-in tariffs. The system is well known for its success in deploying large amounts of wind, biomass and solar energy in Germany, Denmark and Spain among others. A large variety of implemented design options exist for feed-in tariff systems. This report will give an overview of these design options and will evaluate advantages and disadvantages. A relatively new system is that of renewable obligations, also called quota obligations, where minimum shares of renewables are imposed on consumers, suppliers or producers. The system is typically combined with tradable green certificates. Quota obligations are now used in 5 of the 25 EU states (Belgium, Italy, Sweden, UK and Poland). Quota obligations applied in the EU show a rather large spectrum of market effects and implementation details, which shall be elaborated here. This report is written with the goal to describe and analyse the feed-in tariff and quota system designs applied in the Member States of the European Union. Innovative design options to increase the effectiveness and to reduce the electricity generation costs as well as the costs for society are presented and investigated. Furthermore the questions of distributing the costs of RES-E support and how to improve the integration of RES-E into the electricity grid are covered. Best practice examples are analysed and their consequences for RES-E generators and electricity consumers are described. Before the different feed-in tariff and quota system designs are illustrated the development of RES-E generation in Europe is outlined and an evaluation of the effectiveness and the economic efficiency in the different Member States for the recent past is presented. Furthermore the effectiveness and efficiency of these instruments are analysed based on technoeconomic modelling performing a prospective analysis until Then we analyse best practice design criteria from a theoretical point of view. The last two sections contain the practical evaluation of best practice design options for feed-in systems and quota obligations. This report is not exhaustive, but it intends to show the wide range of different feed-in tariff and quota system designs applied within the European Union. Changes in the legislation of Member States until the end of September 2006 are taken into account in this report. - Page 1 -

10 2 Current policies to support RES-E and historical development of RES-E The current discussion within EU Member States about various renewable promotion schemes focuses on the comparison of two systems, the feed-in tariff system and the quota regulation in combination with a tradable green certificate (TGC) market. The system of fixed feed-in tariffs is currently the dominant instrument used to support the generation of RES-E. It allows electricity generators to sell RES-E at a fixed tariff for a determined period of time. Alternatively, the feed-in tariff can be paid in the form of an additional premium on top of the electricity market price. The quota obligation based on TGCs is a relatively new support scheme and has replaced other policy instruments in Belgium, Italy, Sweden, the UK, Poland and Romania in recent years. In addition Bulgaria is planning to substitute their Feed-in system by a quota obligation in combination with TGCs. The basic element of the system is the obligation for a particular party of the electricity supply-chain (e.g. consumers, suppliers or generators) to provide a specified minimum share in total electricity consumption from renewable energy sources (RES). Besides the quota target, a market for renewable energy certificates is established to financially support RES-E producers by selling certificates in addition to the electricity price. Other policy instruments such as tender schemes, which concede financial support to projects with the lowest generation costs following a bidding round, are no longer used in any European country as the dominating policy scheme. However, there are instruments such as production tax incentives and investment incentives, which are frequently used as supplementary instruments. Only Finland and Malta employ these as their main support scheme. Figure 1 shows the currently dominating support schemes in the EU. FI SE EE DK LA LT IE UK FR NL BE LU DE CZ AT SI PL SK HU RO IT BL PT ES GR MT CY Feed-in tariff Quota / TGC Tax incentives / Investment grants Figure 1 Currently dominating support schemes in EU member states - Page 2 -

11 Electricity produced using renewable energy sources (RES-E) in the EU-15 countries amounted to 417 TWh in 2005 in the EU-10 countries to 21.7 TWh respectively. The historical development of RES-E is shown in Figure 2 for EU-15 and EU-10. EU-15 countries EU-10 countries Large-scale hydro Small-scale hydro New' RES-E excl. hydro Electricity generation [TWh/year] _ Figure 2 Historical development of electricity generation from RES in the European Union from 1990 to 2005 in the EU-15 (left) and EU-10 countries (right) 1 As can be seen, hydropower is the dominant source, but new RES-E 2 such as biomass or wind are starting to play a role. The following figures provide some information about these technologies: Figure 3 outlines their historical development in the European Union (EU-25). 1 2 Based on EUROSTAT data, which are up-to-date until Generally EUROSTAT data were modified where alternative data proved to be more accurate. Provisional IEA-data was used for In general, definitions of RES-E sources are made in accordance with the Directive for the promotion of electricity produced from renewable energy sources in the internal electricity market, 2001/77/EC. The technologies assessed include hydropower (large and small), photovoltaic, solar thermal electricity, wind energy (onshore, offshore), biogas, solid biomass, biodegradable fraction of municipal waste, geothermal electricity, tidal and wave energy. - Page 3 -

12 Electricity generation [TWh/year] _ Wind off-shore Wind on-shore Photovoltaics Geothermal electricity Biowaste Solid biomass Biogas Figure 3 Historical development of electricity generation from new RES-E in the European Union (EU-25) from 1990 to The country-specific progress is illustrated in Figure 4 with a comparison of actual and normalised RES-E penetration (2004 versus 1997). Almost all member states have achieved an increase in terms of additional RES-E deployment, but only a few, namely Denmark, Germany and Hungary are well in line with the requirements to meet their 2010 targets. For Austria, France and Portugal, the assessment based on historical data highlights the need to set strong incentives in order to meet their goals. Additional RES-E penetration (2004 versus 1997) _ as share of RES-E directive target for 2010 [%] _ 100% 80% 60% 40% 20% 0% -20% -40% -60% Interim target for 2004 ACTUAL additional RES-E penetration (2004 versus 1997) NORMALISED additional RES-E penetration (2004 versus 1997) AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK CY CZ EE HU LA LT MT PL SK SI Figure 4 RES-E target achievement at country level: comparison of actual and potential additional RES-E penetration (2004 versus 1997). 3 Based on EUROSTAT data, which are up-to-date until Generally EUROSTAT data were modified where alternative data proved to be more accurate. Provisional IEA-data was used for 2005 (International Energy Agency [IEA] 2006). - Page 4 -

13 3 Best practice support schemes from a historical perspective 3.1 Effectiveness of RES-E support A technology-specific analysis Under the effectiveness of a policy scheme for the promotion of renewable electricity we understand the increase of normalised electricity generation 4 due to this policy as compared to a suitable reference quantity. Such reference quantity could be the additional available renewable electricity generation potential or the gross electricity consumption. We define the effectiveness of a member state policy in the following as the ratio of the change of the normalised electricity generation during a given period of time and the additional realisable mid-term potential until 2020 for a specific technology, where the exact definition of the effectiveness reads as follows: E i n = i En i Gn ADD i i Gn Gn 1 i ADD POTn 1 Effectiveness Indicator for RES technology i for the year n Electricity generation potential by RES technology i in year n i POT Additional generation potential of RES technology i in year n until 2020 n This definition of the effectiveness has the advantage of giving an unbiased indicator with regard to the available potentials of a specific country for individual technologies. Member states, need to develop specific RES-E sources proportionally to the given potential to show comparable effectiveness of their instruments. This appears to be the correct approach because also the member state targets as determined in the RES-E directive are derived mainly based on the realisable generation potential of each country. In the following section we will show the effectiveness indicator for the sectors wind onshore, solid biomass, biogas and photovoltaic electricity generation. The effectiveness indicator for solid biomass and biogas is presented for the period for the EU15 and for the period for EU-10 countries, whereas the effectiveness for the support of wind on-shore, and photovoltaics was measured between 1998 and As in most EU member states significant policy changes took effect during this period, the evolution of the main support instrument for each country shall be given in Figure 5. This figure shall serve as 4 The normalised electricity generation represents the output potential of all plants installed up to the end of each year. Of course, the figures for actual generation and normalised generation differ in most cases due to the fact that, in contrast to the actual data, the potential figures represent normal conditions, e.g. in case of hydropower, the normal hydrological conditions, and furthermore, not all plants are installed at the beginning of each year. - Page 5 -

14 the relevant basis for the interpretation of the effectiveness indicator presented. As can be seen only 8 out of the 15 countries did not experience a major policy shift during the period Belgium, Sweden and the UK have changed their instruments into quota systems based on tradable green certificates during the year 2002 or later. Although the introduction of the new systems in these member states took place during or after 2002 the policy changes caused investment instabilities even in the periods before this date. Therefore for the period , and respectively for which the effectiveness indicator is analysed in the subsequent section a mixed policy is considered in Belgium, France, Italy, the Netherlands, Sweden and the UK. In principle it would be desirable to present temporal correlations between the implemented policies and the effectiveness indicator, which are both known in the time domain. As previous analyses have shown, however, only little information can be drawn from the temporal representation of the effectiveness indicator. Therefore we will show this quantity as an average value for the period and respectively. - Page 6 -

15 AT BE DK FI FR DE GR IE Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Wind Bioenergy PV Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Change of the system Adaptation of the system IT Wind Bioenergy PV LU Wind Bioenergy PV NL Wind Bioenergy PV PT Wind Bioenergy PV ES Wind Bioenergy PV SE Wind Bioenergy PV UK Wind Bioenergy PV Figure 5 Evolution of the main policy support scheme in selected EU member states from 1997 until Page 7 -

16 3.1.1 Effectiveness of wind on-shore support Figure 6 and Figure 7 show the average annual effectiveness indicator for wind on-shore electricity generation for the years for the EU-15 and the EU-10 countries, respectively. Several messages can be derived from this figure. Firstly, the three member states Demark, Germany, and Spain that show the highest effectiveness during the considered period have applied fixed feed-in tariffs during the entire period (with a relevant system change in Denmark in 2001). The high investment security as well as low administrative and regulative barriers has stimulated strong and continuous growth of wind energy during the last decade. It is commonly stated that the high level of the feed-in tariffs is the main driver for investments in wind energy especially in Spain and Germany. However, as will be shown at the end of this section in Figure 18 and Figure 20 the tariff level is not particularly high in the two countries as compared to the other countries analysed here. Therefore a long term and stable policy environment seems to be a key criterion for the success for developing RES markets. As can be observed from a country like France high administrative barriers can significantly hamper the development of wind energy even under a stable policy environment combined with reasonably high feed-in tariffs. Among the new Member States progress was generally much lower than in EU-15 countries. Latvia showed the highest relative growth in the considered period, followed by Hungary. After the interpretation of the average effectiveness indicator for a six-year-period, the temporal evolution of the effectiveness indicator for wind-onshore is presented in Figure 8 for the EU-15. It is striking, that the Danish effectiveness indicator shows an abrupt decrease from 2003 on. In 2002, nearly 15% of the additional realisable potential of wind-onshore could be exploited, whereas the value of the effectiveness indicator in 2003 and 2004 was even smaller than 2%. This decline can be explained by a policy change in Denmark in 2001 leading to an unstable policy framework and a lower support level for the promotion of windonshore energy. The countries Belgium, Finland, France, Italy and the United Kingdom show a slight increase of the effectiveness indicator from 2002 to 2004, but at a comparatively moderate level. In particular, the Belgium and the British effectiveness of wind onshore support experienced a stronger increase during the year In Figure 9 and Figure 10 the temporal evolution of the effectiveness indicator for wind on-shore is shown in more detail for the time horizon from 1998 to 2005 for selected groups of countries. For Spain and Germany one can well recognise the stable growth during the last six years whereas for Ireland one can see the stop and go effect of the tender procedure and a very strong push in 2004 and Austria, Portugal and the Netherlands are all characterised by a steady increase of the effectiveness until the end of In particular Portugal could increase its effectiveness significantly in Page 8 -

17 12% Average effectiveness indicator Wind on-shore - 10% 8% 6% 4% 2% 0% AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU15 Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 6 Effectiveness indicator for wind on-shore electricity in the period The relevant policy schemes during this period are shown in different colour codes 1.0% Average effectiveness indicator Wind on-shore - 0.8% 0.6% 0.4% 0.2% 0.0% CY CZ EE HU LA LT MT PL SK SI EU10 Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 7 Effectiveness indicator for wind on-shore electricity in the period The relevant policy schemes during this period are shown in different colour codes - Page 9 -

18 20% Effectiveness indicator 15% 10% 5% 0% AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK -5% Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 8 Evolution of effectiveness indicator for wind on-shore electricity in the period for EU-15 countries. 25% Effectiveness indicator 20% 15% 10% 5% DE ES IE 0% Figure 9 Effectiveness indicator for wind on-shore electricity in the period for Germany, Spain and Ireland. - Page 10 -

19 25% Effectiveness indicator 20% 15% 10% 5% AT NL PT 0% Figure 10 Effectiveness indicator for wind on-shore electricity in the period for Austria, the Netherlands and Portugal Effectiveness of solid biomass support In Figure 11 and Figure 12 the effectiveness indicator for RES support in the sector of electricity from solid biomass is shown. It can be seen that on EU-15 level a significantly smaller part of the available potential could be exploited on an annual basis during the period compared to the wind onshore effectiveness. As is well known the development of biomass electricity is lacking behind expectations on EU level although biomass electricity is rather cost efficient in countries where exploitable wood waste potentials of reasonable size exist. The main barrier for the development of this RES-E source is often of infrastructural rather than of economic nature. Since solid biomass represents the cheapest RES-E source in some countries such as Finland, Sweden and to some extent in the Netherlands it attracts the largest share of RES-E investment under policy schemes which are technology unspecific. Both, the tax measures in Finland, the Netherlands and in Sweden (before 2002) as well as the present Swedish support scheme (quota obligation), lead to a concentration on the presently least cost technology. Very often additional RES-E generation under these support schemes is even possible without investments into additional generation capacity. Thereby the static efficiency of these instruments is improved at the cost of ignoring promising future technology options with significant potential for technology learning. Certainly the long term traditions in the biomass sector and the importance of the forestry industry in countries like Finland, Sweden are strong success factors for the development of the biomass electricity sector. However, the nature of the RES support scheme promoting only the cheapest technology options is a critical success factor as well, which can be concluded also from the UK case. Denmark has seen a strong growth of biomass until 2001, initiated by the relatively high feed-in tariffs and a stable policy framework. - Page 11 -

20 8% Average effectiveness indicator Solid Biomass - 7% 6% 5% 4% 3% 2% 1% 0% -1% AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 11 Effectiveness indicator for solid biomass electricity in the period The relevant policy schemes during this period are shown in different colour codes 2% Average effectiveness indicator Solid Biomass - 2% 1% 1% 0% CY CZ EE HU LA LT MT PL SK SI E+ Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 12 Effectiveness indicator for solid biomass electricity in the period The relevant policy schemes during this period are shown in different colour codes Effectiveness of biogas support In Figure 13 and Figure 14 the effectiveness indicator for RES support for biogas electricity is shown. Similarly to the sector of solid biomass electricity the overall progress on EU level was relatively low in the period In this case Austria, Denmark, Germany, Greece - Page 12 -

21 and Luxemburg, countries applying fixed feed-in tariffs, Italy with a mix of feed-in tariffs and TGCs, as well as the UK using a tender system show the highest growth. The Swedish and the Finish tax rebates have been unable to trigger relevant investments into biogas plants, which shows again that these systems are not appropriate to stimulate the market diffusion of new technologies. Similarly the Irish tender rounds seem to have ignored biogas as an option for increasing RES-E generation capacity. It should be noted here that the high growth in Italy and the UK was mainly based on the extension of landfill gas capacity, whereas in Austria, Denmark, and Germany agricultural biogas had a significant share on the observed growth. For the case of Austria the temporal evolution of biogas electricity is shown in Figure 15. As can be seen the effectiveness indicator shows a significant increase in the years 2003, 2004 and 2005 based on the evolution initiated by the Austrian feed-in system coming into force in % Average effectiveness indicator Biogas - 4% 3% 2% 1% 0% -1% AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 13 Effectiveness indicator for biogas electricity in the period The relevant policy schemes during this period are shown in different colour codes - Page 13 -

22 1.0% Average effectiveness indicator Biogas - 0.8% 0.6% 0.4% 0.2% 0.0% CY CZ EE HU LA LT MT PL SK SI E+ Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 14 Effectiveness indicator for biogas electricity in the period The relevant policy schemes during this period are shown in different colour codes 6% Effectiveness indicator 4% 2% 0% -2% % Figure 15 Effectiveness indicator for biogas electricity in the period for Austria Effectiveness of photovoltaics support As presented in Figure 16 the sector of photovoltaic electricity generation has shown the strongest growth in Germany followed by the Netherlands and Austria during the considered period. The support system in these three countries consisted of fixed feed-in tariffs supplemented by additional mechanisms like soft loans in Germany. As expected from theory quota obligations and tax measures give only very little incentives for the investments in PV tech- - Page 14 -

23 nology, since these schemes generally promote only the cheapest available technology if they are not supplemented by additional measures. 3% Average effectiveness indicator Photovoltaics - 2% 1% 0% AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 16 Effectiveness indicator for photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes 0.10% Average effectiveness indicator Photovoltaics % 0.06% 0.04% 0.02% 0.00% CY CZ EE HU LA LT MT PL SK SI E+ Feed-in tariff Quota / TGC Tender Tax incentives / Investment grants Figure 17 Effectiveness indicator for photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes - Page 15 -

24 3.2 Evaluation of the level of RES support in relation to the effectiveness At the end of this section we compare the observed effectiveness of the different support schemes for the case of wind energy with the level of financial support as seen from the perspective of an investor. This analysis will be performed for the most recent year In a first step the actual level of the payments per kwh of electricity generation in the year 2004 is shown for the policy systems considered. In a second step we present the effectiveness indicator defined above versus the expected annuity for an investment into wind energy for each country realised in In this way one can correlate the effectiveness of a policy with the levelised profit. Thereby one is able to analyse, whether the success of a specific policy is primarily based on the high financial incentives, or whether other aspects have a crucial impact on the market diffusion of the wind power in the considered countries. Figure 18 shows the current average country specific level of support and the range of the tariffs for the year Belgium applies a mixture of quota obligations and a minimum tariff system to increase the investment security. The level of support for countries applying quota obligations turns out to be generally higher than in other countries if only the payments during one individual year are considered. One exception is the very low support level in Sweden. The Irish tender system is characterised by a relatively modest support level as well. 16 Support wind power onshore ( ct/kwh) AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK Feed-in tariff Quota / TGC Tender Tax Incentives / Investment grants Figure 18 Comparison of support levels in 2004 for wind power onshore For evaluating the economic efficiency of the different promotion schemes the total level of support is only of limited use, because it abstracts from the duration the support is granted and the future development of the support level. Therefore we show in Figure 19 the level of support levelised by the duration of support and based on the expected future development of the support level. The calculation is based on the assumption of an interest rate of 6.6% - Page 16 -

25 and for the green certificate prices a constant development during the duration of the certification period was assumed Annuity of support ( ct/kwh) AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK Feed-in tariff Quota / TGC Tender Tax Incentives / Investment grants Figure 19 Comparison of present support levels in 2004 normalised by the duration of the instrument (to 15 years support duration) for wind power onshore Going one step further by including also the country specific costs of generation into the analysis one can translate the annual payments presented in Figure 19 into a quantity that characterises the total expected profit of an investment. Therefore again the duration of the payments has to be included. 5 Furthermore it has to be taken into account that different wind conditions require different support levels. Thus country specific wind yields are used to calculate the generated income during the lifetime of the plant. This analysis has only been carried out for a selection of countries in order to show the principal differences between the different policy schemes. One possible approach to calculate the actual support during the entire lifetime from an investor s perspective is to determine the average expected annuity of the renewable investment. The annuity calculates the specific discounted average return on every produced kwh by taking into account income and expenditure throughout the entire lifetime of a technology. i A = (1 (1 + i) n ) n t= 1 Re venue t Expenses t (1+ i) A= Levelised profit; i=interest rate; t=year; n=technical lifetime t 5 An extreme example is the Italian certificate price, which appears to be very high. However, considering the duration of the support, the high price partly is partly justified by the fact that Italian renewable electricity producers are only allowed to deal with green certificates during the first 8 years of the operation time of the plant. - Page 17 -

26 The levelised profit resulting from wind energy investments for Germany, Spain, France, Austria, Belgium, Italy, Sweden, the UK and Ireland has been calculated based on the expected support level during the period the promotion is given. The level of support in the German system is annually adjusted according to the degression implemented in the German EEG. For the four countries using quota obligation systems the certificate prices of the year 2004 were extrapolated for the entire active period of the support. 6 Furthermore an interest rate of 6.6% was assumed 7 and country specific prices of wind technology were used according to the average market prices of wind turbines in those countries in Therefore the annuity of expected profit considers the country specific wind resources, the duration the support is given as well as additional promotion instruments like soft loans and investment incentives. An important limitation of this approach concerns the fact that an estimate of the future evolution of certificate prices in quota systems is needed. Such an estimate does typically not exist. We assumed therefore that TGC prices remain constant at 2004 levels. Since TGC prices in Belgium for example have been rather high in the annuity of expected profit is relatively high in Belgium as well. Effectiveness indicator 20% 15% 10% 5% 0% LT AT SE FI ES- Fixed Price DE IE FR CZ BE- Wallonia ES- Market Option BE- Flanders Expected Annuity [ Cent/KWh] IT UK Feed-in tariffs Quota/TGC Tender Tax incentives/ Investment grants Figure 20 Historically observed efficiency of support for wind onshore: effectiveness indicator in relation to the annuity of expected profit for the year 2004 In a second step the correlation between the levelised profits resulting from investments and the effectiveness of the support instrument, which is shown in Figure 6 shall be analysed. This is done in a qualitative manner by plotting the effectiveness versus the annuity in Figure 20. It needs to be mentioned that Belgium has two different quota schemes, 6 7 This assumption might be questionable because certificate prices might relaxe as the certificate markets in those countries mature. However, only very little knowledge exists about the temporal development of prices in these markets. Only for Germany an interest rate of 4,8% was used based on the granted soft loans. - Page 18 -

27 one in Walloon and the other in Flanders. Based on the Spanish feed-in law (RD 436/2004) three different tariff options exist in parallel, a fixed price option, a market oriented option with a feed-in-premium and a transitional solution with a lower premium price. Results for the example of wind onshore Generally the levelised profit as well as the effectiveness shows a broad spectrum in quantitative terms for the countries under consideration. It has to be mentioned that the different instruments show a different level of maturity and policy schemes in some countries - in particular quota obligation systems - are still in a transitional period. It is striking, that three countries Italy, the UK and Belgium, which have recently transformed their markets into quota systems as the main support instrument, have high levelised profits, but low growth rates. The high profit results in particular from the extrapolation of the presently observed certificate prices. Although this assumption is questionable, the results show that certificate systems can lead to high producer profits resulting from high investment risks. On the other hand countries with feed-in-tariffs seem to be typically more effective at generally moderate low support levels. An exception from this rule is France were strong administrative barriers are preventing a fast development of wind energy. Spain reached the highest growth rates in terms of the effectiveness indicator offering an adequate profit. The reason for the higher expected profit in Spain than in the other feed-in countries is not a high support level, but rather relatively low electricity generation costs due to good resource conditions on the one hand and low investment costs on the other hand. In 2004 Ireland reached an effectiveness similar to countries with feed-in-tariffs like Germany and Austria despite of a significantly lower absolute support level, however at a similar expected profit. In Ireland a lower support level than in Germany is required because of the significantly better wind resources (2600 full load hours have been assumed for the typical Irish location, the corresponding figure in Germany amounts to 1800) 8 In Sweden, little growth of wind power is the result of a very low expected profit As a general conclusion it can be stated that the investigated feed in systems are effective at relatively low producer profit. On the other hand it can be observed that in the present status quota systems reach only a rather low effectiveness at comparably high profit margins. We 8 However, the high Irish growth rate in 2004 has to be considered carefully since a comparatively high capacity development in 2004 is due to the impacts of the results of the last Irish bidding round whereas in former years the growth rate was much smaller. (A tender system seems to be an instrument which allows rapid growth in a short period of time) - Page 19 -

28 would like to emphasise however, that these quota systems are rather new instruments in all countries which are currently using them. Therefore the observed behaviour might still be characterised by significant transient effects. The same analysis as has been carried out for the case of wind energy above has also been pursued for electricity generation from biomass. The final result of this exercise, which has been carried out for the year 2003, is shown in Figure 21. The economic data regarding investment costs and the O&M costs are based on biomass electricity generation using CHP technologies. Therefore also the selling of heat as a by-product has been considered for the economic assessment. The main results can be summarised as follows: Finland clearly shows the best performance, both in terms of effectiveness as well as economic efficiency of support. A long tradition in biomass use for energy purposes, a strong wood sector and stable planning conditions can be considered as key reasons for this development Austria has shown a significant growth during the last two years especially for small scale biomass technologies based on the feed-in system Also other feed-in systems like Spain, Germany and Hungary have initiated reasonable growth rates, for Hungary based on an annuity, which is even lower than in Finland A steady growth has been observed in the UK during the last four years indicating that also under the quota system an effective expansion of biomass took place, however due to the risks involved with the certificate market at rather high annuities The Belgian market for biomass electricity has even seen a small decline in 2003, no investments have been triggered by the quota system during its first operational year 5% Effectiveness indicator 4% 3% FI ES- Fixed Price AT ES- Market Option 2% HU DE 1% BE- SE Flanders BE- FR IE IT Wallonia 0% 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 4,5 5,0 5,5 6,0 6,5-1% UK Expected Annuity [ Cent/KWh] Feed-in tariffs Quota/TGC Tender Tax incentives/ Investment grants Figure 21 Historically observed efficiency of support in the case of biomass electricity: effectiveness indicator in relation to the levelised profit for the year Page 20 -

29 3.3 Level of support for RES-E in the EU and costs of RES-E generation The current level of support for RES-E differs significantly among the different EU member states. The reason for this fact can be found in the country specific cost-resource conditions as well as in principal differences of the support instruments applied in those countries. In order to compare the prices paid for the different RES-E generation options to the costs occurring in each member state both quantities are analysed and shown simultaneously in the following section for the sectors of wind onshore, agricultural biogas and small scale hydropower. With regard to the support instruments the dominating support measures are considered as well as secondary instruments with a considerable direct impact on the support level (in particular investment incentives). Before comparing costs and support level among the countries one has to make sure to deal with comparable quantities. Especially the support level in each country needs to be normalised by the duration of support in each country, e.g. the duration of green certificates in Italy amounts only to eight years compared to the 20 years of guaranteed feed-in tariffs in the German case. Therefore we have normalised the support level under each instrument to a common duration of 15 years. The transformation between the country specific duration and the harmonised support frame of 15 years has been performed based on the assumption of 6.6% interest rate. Minimum to average generation costs are shown because this range typically contains presently realisable potentials, which investors would normally deploy in order to generate electricity at minimum costs. Furthermore the maximum generation costs can be very high in each country, therefore the readability of the graphs would suffer from showing the upper cost range for the different RES-E Support level versus electricity generation costs for windonshore In the following Figure 22 and Figure 23 we show the country specific costs and support level for the year 2004 for wind onshore for the EU-15 and the EU-10 member states. As can be seen from Figure 22 for many countries the support level and the generation costs correlate. Countries with costly potentials frequently show a higher support level. A clear deviation from this rule can be found in the three quota systems in Belgium, Italy and the UK, for which presently the support is significantly higher that the generation costs. The reason for the higher support level expressed by the presently observed green certificate prices can be found in the fact of still immature TGC markets as well as in a higher risk premium requested by investors. For a more thorough analysis on the issue of expected rate of return from the investors point of view for the example of wind energy we would like to refer to chapter 0. For countries like Denmark and Finland the level of support for wind onshore is clearly too low to initiate a stable growth of capacity. In the case of Spain and Germany the support level indicated in Figure 22 appears to be above the average level of generation costs. However, it needs to be said that in these countries, due to the successful market growth during the recent years, the low cost potentials are already exploited. Therefore a level of support that is moderately higher than average costs seems to be reasonable. - Page 21 -