SUPPORT SYSTEMS FOR RENEWABLE ENERGY: OVERVIEW OF EU MODELS AND EXPERIENCE

Transcription

1 SUPPORT SYSTEMS FOR RENEWABLE ENERGY: OVERVIEW OF EU MODELS AND EXPERIENCE INTERNATIONAL CENTRE FOR SCIENCE AND HIGH TECHNOLOGY

2 The opinions expressed in this publication do not necessarily reflect the views of the United Nations Industrial Development Organization (UNIDO) or the International Centre for Science and High Technology (ICS). Mention of the firms names or commercial products does not imply endorsement by UNIDO or ICS. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from ICS. ICS-UNIDO is supported by the Italian Ministry of Foreign Affairs United Nations Industrial Development Organization and the International Centre for Science and High Technology, 2008 High Technology and New Materials International Centre for Science and High Technology ICS-UNIDO, AREA Science Park Padriciano 99, Trieste, Italy Tel.: Fax: ii

3 Support Systems for Renewable Energy: Overview of EU Models and Experience Prepared by: G. Bertogli F. Mittempergher A. Avila-Merino INTERNATIONAL CENTRE FOR SCIENCE AND HIGH TECHNOLOGY Trieste, 2008 iii

4 This study provides an overview of European Union financial tools and incentive programmes (direct financing, green certificates, fiscal benefits) introduced by Member States in order to increase the exploitation of renewable energy sources in the production of electricity, heating and cooling, as well as fuel for transport. TABLE OF CONTENTS Acronyms.. iv List of Figures. v List of Tables. vii I. Introduction.. 1 II. EU Targets on Renewable Energy. 2 III. Support Systems. 2 IV. Financial Tools and Incentive Programmes.. 2 V. Member State Support Policies 7 VI. Support Systems Implementation. 9 VII. Renewable Energies Generation Cost VIII. Wind Energy.. 13 IX. Biogas X. Biomass/forestry residues.. 17 XI. Hydropower XII. Photovoltaic solar energy.. 23 XIII. Instruments to support RES heat 25 XIV. Instruments to support biofuels for transport. 25 XV. Programmes - Intelligent Energy for Europe 26 XVI. Main Renewable Heat Policies. 27 XVII. Support Systems Advantages and Disadvantages 32 XVIII. Conclusions XIX. References iv

5 Acronyms RES Renewable Energy Source kwh Kilowatts per hour RES-E Renewable energy sourced electricity EU European Union RD&D Research, Development and Demonstration EC European Commission v

6 List of Figures Figure 1. EU-25 Total Energy (in million toe) Figure 2. Overview of renewable electricity support systems in EU-15 Figure 3. Overview of renewable electricity systems in EU-10 and Bulgaria, Rumania Figure 4. Use of Incentives by country in EU Figure 5. EU-25 Electricity generation by fuel in 2003 Figure 6. Cost of electricity generation - Long run marginal costs (LRMC) Figure 7. Measure of the effectiveness Figure effectiveness indicator example biogas in UK Figure 9. Average effectiveness indicator for the period example biogas in UK Figure 10. Price ranges (average to maximum support) for direct support of wind on-shore in EU-25 Member States (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs). Support schemes are normalised to 15 years Figure 11. Effectiveness indicator for on-shore wind electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 12. Price ranges (average to maximum support) for supported on-shore wind in EU-10 Member States (average tariffs are indicative) compared to the long-term marginal generation costs Figure 13. 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) Figure 14. Effectiveness indicator for biogas electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 15. Price ranges (average to maximum support) for supported agricultural biogas in EU-10 Member States (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs) Figure 16. Effectiveness indicator for biogas electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 17. Price ranges (average to maximum support) for supported 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) vi

7 Figure 18. Price ranges (average to maximum support) for supported 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) Figure 19. Effectiveness indicator for biomass electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 20. Effectiveness indicator for biomass electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 21. 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 Figure 22. Effectiveness indicator for small hydro electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Figure 23. Effectiveness indicator for small hydro electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour code Figure 24. 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 Figure 25. 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) Figure 26. Effectiveness indicator of photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes vii

8 List of Tables Table 1. Overview of the main policies for renewable electricity in EU-15 Table 2. Overview of the main policies for renewable electricity in EU-10 Table 3. Main renewable heat policies in different EU countries Table 4. Main renewable heat policies in different EU countries Table 5. Main renewable heat policies in different EU countries Table 6. Main renewable heat policies in different EU countries Table 7. Main renewable heat policies in different EU countries Table 8. Main renewable heat policies in different EU countries viii

9 I. Introduction Although renewable energy is not a prime focus of European law, climate change and increasing dependency on energy is bringing it to the forefront for consideration by Europe and the Member States. Despite its higher costs and the geographic constraints involved, and the fact that for some time at least, fossil fuels and nuclear energy will play a major role, the EU promotes production and use of renewable energy. Figure 1 Source: EU 2005_12_07_biomas_memo_res The European Commission has launched several new legal instruments in support of Renewable Energy Sources (RES): Directive 2001/77/EC Directive 2003/30/EC Directive 2003/96/EC ELECTRICITY Directive 2004/8/EC BIOFUELS European Resolution 2005/2122(INI) TAX ENERGY COGENERATION HEATING AND COOLING 1

10 II. EU Targets on Renewable Energy It is in the electricity sector especially, that many European Member States have embarked on schemes to support RES. These efforts have been more or less sophisticated and effective since the mid 1990s. Now, sectors such as transport are receiving more attention. EU targets for 2010 involve: doubling the share of renewable energy from 6% to 12% increasing the share of green electricity from 13% to 21% raising the share of biofuels in transport to 5.75%. III. Support Systems Within the EU, there is a range of different support systems in operation that can be broadly classified into six main groups: Fixed feed-in tariffs (Germany, Spain, France, Denmark) Price premiums (Spain, Sweden) Tradeable green certificate systems (Sweden, UK) Competitive tendering (France, formerly UK, Ireland) Investment subsidies (Finland, UK) Tax incentives (Finland, UK) IV. Financial Tools and Incentive Programmes Within the EU, the various mechanisms introduced by Member States to promote the generation of renewable energy include: i. feed-in tariffs; ii. green certificates; iii. tendering systems iv. tax incentives. These support systems are analysed in the context of their cost effectiveness, cost efficiency, compatibility with the internal market, and ability to develop different technologies. i. Feed-in tariffs, the overwhelming majority of Member States use price regulation with fixed feed-in tariffs to launch renewable energy sources in the electricity sector, meaning that producers are allowed to feed electricity into the grid at fixed tariffs. The actual price, normally set for a period of a number of years, is paid by the electricity companies, usually distributors, for producers of green electricity for domestic use. 2

11 The additional costs of such schemes are paid for by the electricity suppliers proportional to sales volumes and passed on to consumers in the form of a premium on the kwh end-user price. These schemes have the advantages of investment security, and offer possibilities for fine tuning and promotion of mid- and long-term technologies. On the other hand, they are difficult to harmonise at EU level, and may be challenged under internal market principles and involve a risk of overfunding if RES-E (Renewable energy sourced electricity) technologies are not updated. A variation of the feed-in tariff scheme is the fixed-premium mechanism currently in operation in Denmark and partially in Spain. Within this system, government sets a fixed premium or establishes an environmental bonus for RES-E generators, which is paid over and above the normal or spot electricity price. Figure 2 Source: Forres report Alternatively, there are some Member States that have established state quotas (renewables obligations) on the share of RES in electricity production, a system that is usually combined with some form of green certificates. The drawbacks to these types of systems are the initial development, the complexity of the system and the risk that they will support only low cost technologies. The amount of support available corresponds to the price of the certificate on the certificates market. In December 2005 the European Commission (EC) analysed and compared Member States support schemes for electricity produced from RES; the main conclusion was that the feed in tariffs are currently cheaper and more effective than so-called quota systems. Member States support mechanisms are gradually coming in line with higher use of renewable sources of energy using this instrument. In the UK, for example, sub-quotas for individual RES are being discussed, whilst in Spain, price regulation is being accompanied by incentives for the producers to market the electricity themselves. ii. Under the green certificate system, in several countries, such as Sweden, the UK, Italy, Belgium and Poland, RES-E is sold at conventional power market prices. In order to finance the additional costs involved in producing green electricity, and give incentives to its generation, all users (and in some countries producers) are obliged to purchase a certain number of green certificates from RES-E producers according to a fixed percentage or quota of their total electricity consumption/production. Penalty payments for non-compliance are transferred either to a renewables research, development and demonstration (RD&D) fund or to the general government budget. 3

12 Since producers/consumers want to buy these certificates as cheaply as possible, a secondary certificates market can develop in which RES-E producers compete with one another over the sale of green certificates. Green certificates, therefore, are market-based instruments, which, in theory, have the potential, if functioning well, of ensuring best value for investment. These systems could work well in a single European market and presumably carry a lower risk of over funding. However, green certificates may pose a higher risk for investors and long-term - currently high cost - technologies are not easily developed under such schemes. These systems also involve high administration costs. Figure 3 Source: Forres report Proposals for a harmonised, quantity-based support mechanism were put forward in the late 1990s. Like national quota models, they proposed definition of a binding target quota for electricity produced from RES for all energy producers in Europe. Each year, producers are required to submit documentation proving that they have achieved their quotas. They will be awarded certification based on their production of RES-E or proof of purchase of certificates from other producers. iii. Pure tendering procedures currently exist in two Member States (Ireland and France). France has adapted the system in some cases combined with a feed-in tariff scheme, and Ireland announced the adoption of a similar scheme. Under the tendering procedure, the state announces a series of tenders for the supply of RES-E, which is supplied on a contract basis at the price established by the tender. The additional costs generated by the purchase of RES-E are passed on to the end electricity consumers through a special levy. While tendering systems in theory make optimum use of market forces, they have a stop-and-go character, which is not conducive to stability. Tendering schemes also involve the risk that low bids may result in projects not being implemented. Their advantages include increased attention on renewable energy investment opportunities and the element of competition they incorporate. One major disadvantage of these schemes in practice is that the overall number of projects actually implemented has been very low, resulting in much lower penetration of renewables than originally anticipated. iv. The fourth category of renewable energy promotion schemes is that of fiscal incentives, such as tax exemptions for carbon dioxide (CO2) emissions or energy taxes. They are attractive because of the clear message they carry to final energy consumers about the added value of renewable energy. Their biggest shortcoming is that they do not provide longer-term certainty about investments, thus increasing the investment risks for project developers and other renewable energy investors. 4

13 Systems based only on tax incentives are in operation in some EU countries such as: Malta and Finland. In other countries, e.g. Cyprus, the UK and the Czech Republic, tax incentives act as an additional policy tool. Price-based mechanisms Quantity-based mechanisms Feed-in Tariff Quota Tendering Green Fiscal Incentives Certificates (TGC) Investment Grants Tender Schemes There are several systems that involve a combination of the methods described above, and especially tax incentives (see Tables 1 and 2). Figure 4 Source: Ragwitz and Held (2007) (Effectiveness and efficiency of present RES-E support policies in EU Member States) The benefits depicted in Figure 4 are captured by the net added value for operators in the RES-E value chain. Directive 2003/96/EC harmonises the electricity and energy products tax structure. This type of standardisation previously applied only to the mineral oil sector. This directive sets a minimum tax rate, which applies also to biofuels. However, it opens up the possibility of promoting biofuels by means of tax breaks. The most effective wind energy systems are in Germany, Spain and Denmark and mostly operate in combination with feed-in tariff systems, although where green certificate systems apply, they provide a significantly higher level of support than the feed-in tariffs. This could be explained by the higher risk premium required by investors in the case of green certificate systems, the administrative costs 5

14 involved and the still immature green certificate market. How the price of green certificates develops in the medium and long term is of major importance. Analyses show that for wind energy, in a quarter of Member States, support is too low for any significant take off to occur. In several countries there is enough support, but results remain poor due to grid and administrative barriers. The situation for biomass and biogas is not so clear. The costs of generation of biomass vary widely depending on sources, transformation processes and production volume. The Danish feed-in tariff system and the Finnish hybrid support (tax return and investment subsidies schemes) show the best performance in the biomass sector, in terms of both effectiveness and economic efficiency. A long tradition in biomass use for energy production, stable planning conditions and combination with heat generation can be considered the key reasons. In the biogas sector, there are six countries with systems that are more effective than the EU average, four of them apply feed-in tariff systems (Denmark, Germany, Greece, Luxemburg), and two (UK, Italy) green certificates. However, in around 70% of the EU, state support levels are too low to facilitate development of this high potential technology. In addition to the production of electricity, RES can be used for heating and cooling. Geothermal power and solar irradiation, which are transformed into heat by means of roof installations of solar thermal power plants, or biomass from agriculture or forestry, are especially suitable. These heat generating technologies are becoming economically viable. However, the use of RES in this sector has not developed to its full potential. Although there are products that are almost ready for the market, the heating sector is lacking a set of rules similar to the directive on the promotion of electricity produced from RES. However, in a decision of 14 February 2006 the European Parliament (EP) called for a proposal from the EC for increasing the share of RES used in the production of heating and cooling. On 9 August 2006, the EP announced detailed recommendations based on the content of this proposal. 6

15 V. Member State Support Policies Note 27: TGC is tradable green certificates 7

16 8

17 VI. Support Systems - Implementation Under the Directive, 1 Member States are free to choose their preferred support mechanism in order to achieve the targets set for individual RES-E, and can continue to do so for a transitional period of at least seven years after which time a new EU-wide regulatory framework will be adopted. As per Article 4 of the Directive, 2 the findings from the EU commission report on the support of electricity from renewable energy sources states that while gaining significant experience in the EU with renewable support schemes, competing national schemes could be seen as healthy at least over a transitional period. Furthermore, it is believed that the level of competition among schemes should lead to a greater variety of solutions and also to increased advantages or benefits. The comparatively short length of time from implementation of legislation and incentive programmes favouring the introduction of new technologies and development of renewable Projects has not allowed the Commission to reach a final conclusion regarding the definition of a harmonised European system. Instead, it is of the opinion that the best approach in the immediate short-term involves a co-ordinated support scheme for renewable energy sources, based on greater cooperation between countries and optimisation of the impact of national schemes. Figure 5 - EU 25 electricity generation by fuel in 2003 Source: Communication from the Commission Biomass Action Plan COM (2005) 628, Council Directive 2001/77/EC of the European Parliament and of the Council of 27 September 2001 on the promotion of electricity produced from renewable energy sources in the internal electricity market. 2 Ibid 9

18 VII. Renewable Energies Generation Costs The generation costs for renewable energies show wide variation (see Figure 6). Individual assessments of support schemes therefore should be carried out for each sector. Figure 6 Cost of electricity generation Long run marginal costs (LRMC). Source: Forres report The current level of support for RES-E differs significantly among EU Member States, due to differing country-specific cost-resource conditions and the support instruments applied. In order to compare the prices paid for the different RES-E generation options with the costs in each Member State, both quantities have been analysed and are presented together for onshore wind, agricultural biogas, forestry biomass, small-scale hydropower and solar photovoltaic (PV). In order to compare costs and support levels among countries, we need to be dealing with comparable quantities, and the support levels in each country need to be normalised according to the duration of support, e.g. green certificates in Italy are guaranteed for eight years compared to 20 years for guaranteed feed-in tariffs in Germany. The support level for each instrument has been normalised to a common duration of 15 years. The conversion between the country-specific duration and the harmonised support duration of 15 years is based on an assumed 6.6% interest rate. Only minimum to average generation costs are shown in the interests of the readability of the graphs which would become too complex if the upper cost ranges for the different RES-E were included. The comparison of costs and prices for onshore wind, as shown in Figure 6, leads to the conclusion that the supported price level is clearly insufficient in Slovakia, Latvia, Estonia and Slovenia, as the level is below marginal generation costs. The level seems to be sufficient in at least Cyprus and the Czech Republic. For countries such as Hungary and Lithuania, support is just enough to stimulate investment. Effectiveness can be defined simply as actual renewable electricity production compared to the 2020 goals. This means that a country with an 8% yearly average effectiveness indicator over a six-year period 10

19 has been delivering 8% of the 2020 potential every year over that period as is the case in Germany (see Figure 11) for wind. Over the six-year period depicted, therefore, 48% of Germany s 2020 potential has been deployed. Effectiveness can also be defined as the ratio of the change in electricity generation potential over a given period of time, to the additional realisable mid-term potential by 2020 for a specific technology. Figure 7 Measure of the effectiveness Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Another definition of effectiveness is a measure of the available potentials in a specific country of individual technologies. This approach would seem more appropriate since Member States targets as determined in the RES-E directive are based mainly on the realisable generation potential of each country. Annual effectiveness of a Member State s policy is the ratio of change in the electricity generation potential in any year compared to the remaining additional realisable mid-term potential up to 2020, for a specific technology. Figure 8 depicts the concept of a yearly effectiveness indicator: Figure effectiveness indicator example biogas in UK Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

20 The indicators we employ are calculated for an average period of six or seven years. Figure 9 describes the annual effectiveness indicator for the particular example of biogas in the UK for 1998 to 2003, as well as the average during the same period. This can be interpreted as where a country has an average effectiveness indicator of 3% - as indicated by the dotted line in Figure 9 - this means that it has already mobilised 18% of its additional potential until 2020 in a linear manner. Figure 9 Average effectiveness indicator for the period example biogas in UK Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Germany and France apply a stepped tariff with different values depending on wind resources. This stepped support scheme although controversial as it does not use only the best potentials is justified at national level in its ability to extend the country s potential resources and avoid concentration in one region and production of a NIMBY (not in my back yard) effect. The values in Figure 10 are based on the maximum tariff for Germany. It is a common view that the high level of feed-in tariffs is the main driver of investment in wind energy - especially in Spain and Germany. As can be seen from Figure 9, the levels of support are well adjusted to generation costs. A long-term, stable policy environment seems to be the key to success in developing RES markets, especially in the early stages. The three quota systems in Belgium, Italy and the UK, currently provide a higher support level than the feed-in tariff systems. This higher level of support, which is reflected in the green certificate prices, is due to the higher risk premium requested by investors, administrative costs and the immature green certificate market. It will be necessary to study the development of price levels in the medium and long terms. Figure 10 depicts the differing situations in the three countries with the lowest support: Finland, Denmark and Ireland. Denmark has a very mature market with the highest per capita number of wind installations in the world. Support in Denmark is focused on re-powering. Ireland has the best wind potential in Europe but only 200MW of installed capacity; Finland has adopted a policy of biomass 12

21 promotion and the support given by the state is not sufficient to initiate stable growth in wind in the EU- 10. VIII. Wind energy Figures 10 and 12 depict wind energy generation costs and the level of prices supported in each country. Support schemes for wind vary considerably throughout Europe with values ranging from 30/MWh in Slovakia, to 110 per mwh in the UK. These differences as can be seen from Figures 10 and 12 are not justified by the differences in generation costs. Generation costs are shown in a range based in the case of wind on the different bands of wind potential. The countries that are most effective in producing wind energy are Denmark, Germany and Spain. Figure 10 Price ranges (average to maximum support) for direct support of wind on-shore in EU-25 Member States (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs). Support schemes are normalised to 15 years Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 11 Effectiveness indicator for on-shore wind electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

22 Figure 12 Price ranges (average to maximum support) for supported on-shore wind in EU-10 Member States (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs). Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, IX. Biogas Comparing apples and oranges could be said to be easier than analysing the biomass sector, which is almost like an exercise in comparing cows and trees. The biomass sector is very complex as it encompasses wastes, products and residues from very different sources: agriculture, forests, cities, animals, etc. Analysis of support schemes is made even more complex when 25 countries are involved. This report provides an overview of two main biomass sectors in Europe: biogas and forest residues. Figures 13 and 15 depict the different support levels for agricultural biogas electricity generation in the EU-15 and EU-10 respectively. Effectiveness indicators are shown in Figures 14 and 16. Among the EU-15, the level of promotion of biogas electricity in France and Sweden appears to be insufficient when compared to long-run marginal generation costs. Finland clearly does not specifically promote this technology. For Greece, Ireland, and Portugal, the level of support is at the lower end of the range. In Austria, the tariffs are relatively high with policy aiming to support small-scale agricultural applications (average range of kW) rather than large centralised plants. In Germany the support provided is very effective at promoting small-scale installations (Figure 14). In the UK the support is very effective (Tradeable Green Certificates (TGC) + Climate Change Levy (CCL) exemption), resulting in high levels of effectiveness. In Denmark support is medium level with good results. The Danish support scheme prioritises large centralised power plants. The tax rebates introduced in Sweden and Finland have not triggered solid investment in biogas plants. In Ireland, tender rounds seem to have ignored biogas as an option for increasing RES-E generation capacity. It should be noted that the high growth in 14

23 Italy and the UK has been based mainly on the expansion of landfill gas capacity, whereas in Austria, Denmark and Germany agricultural biogas has a significant share in the observed growth. Figure 13 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) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 14 Effectiveness indicator for biogas electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

24 The effectiveness of the support for biogas is influenced by the factors listed below, more than the support scheme in force: - choice of small or large plants: large plants are more effective. Small plants are supposed to be more important for the rural economy, but their costs are higher; - existence of a complementary support scheme. The biogas sector is intimately linked to environmental policy for waste treatment. Countries such as the UK support biogas production through secondary instruments such as tax relief (CCL exemption). A complementary investment aid is a good catalyst for this technology; - generation costs are higher for agricultural biogas, but so are the environmental benefits. It is cheaper to support landfill gas, but the environmental benefits are much less; - existence of district heating networks is important for the successful development of the biogas sector, as shown by the Danish sector. Figures for the EU-15 show that, when feed-in tariffs are at the appropriate level, market development is initiated. Green certificate schemes seem to need secondary instruments (based on environmental benefits) in order to have a real market effect. The situation in the new Member States is rather different from that in the EU-15. For most EU-10 countries, the support price is lower than the long-run marginal generation costs. With the exceptions of the Czech Republic and Slovenia, the financial support provided is insufficient to trigger significant investment in biogas technology. Effectiveness of any initiatives is near to zero due to inadequate support. Figure 15 Price ranges (average to maximum support) for supported agricultural biogas in EU-10 Member States (average tariffs are indicative) compared to the long-term marginal generation costs (minimum to average costs) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

25 Figure 16 Effectiveness indicator for biogas electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, X. Biomass/Forestry Residues In conducting an analysis of the sector, it is important to recognise and take account of its complexity and that it includes small combined heat and power systems, the big pulp and paper industry, the cofiring of wood residues, etc. Figures 17 and 18 show differences among support schemes in the EU-15 and the variations in generation costs. The level of state support in the EU-10 is generally relatively lower than in the EU

26 Figure 17 Price ranges (average to maximum support) for supported biomass electricity production from forestry residues in EU-15 Member States (average tariffs are indicative) compared to the longterm marginal generation costs (minimum to average costs) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 18 Price ranges (average to maximum support) for supported 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) Source: Communication from the Commission Biomass Action Plan COM (2005) 628, Figures 19 and 20 show the effectiveness of RES support for electricity produced from solid biomass. The first conclusion is that at EU-15 level, only a small part of the available potential has been exploited annually in the period The effectiveness indicator for solid biomass electricity is significantly lower than that for wind exploitation. This confirms the conclusion of the EC Communication of May 2004 that the development of biomass electricity is lagging behind expectations at EU level. 18

27 Figure 19 Effectiveness indicator for biomass electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 20 Effectiveness indicator for biomass electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan COM (2005) 628, With reference to Figure 19, it should be noted that the figure for Denmark includes both forest residues and straw, which represents half of their solid biomass market. The figure for the Netherlands includes the co-firing of palm oil, which in 2003 represented 3% of the total solid biomass market. Denmark experienced strong growth in biomass up to 2001 with large centralised combined heat and power (CHP) plants, initiated by the relatively high feed-in tariffs and a stable policy framework. 19

28 In the Netherlands, partial tax exemption was introduced in July 2003 for the feed-in tariff system. Additional support was given by investment grants. Co-firing is the main technology in the Netherlands. It is highly likely that this country will reach its 2010 target of 9% by In Finland, tax refunds for forestry chips have been the main driver of market growth in recent years. An additional 25% investment incentive is available for CHP plants based on wood fuels. The key element in the success of this mix of tax relief and investment incentives is Finland s important traditional wood and paper industry. In 2002, Sweden switched from investment grants to a TGC system and tax refunds. Austria and Germany have chosen a policy of medium- and small-scale biomass installations, which have higher costs. This choice has been driven by energy policy and environment and rural development considerations. The new German support system shows a large gap between support and generation costs. This new level of support was adopted in August The biomass forestry sector in Germany has not yet shown itself to be effective. The main barriers to the development of this RES-E are economic and infrastructural. The sectors in Denmark, Finland and the Netherlands show the greatest effectiveness, and also a smaller gap between support and generation costs. Denmark and the Netherlands have implemented feed-in tariffs and Finland s main support is provided through a tax relief system. Centralised power stations using solid biomass attract the largest share of RES-E investment in all three countries. However, biomass involves a wide variety of options, uses and costs. The promotion of large biomass installations should not be at the expense of potentially promising new technology providing an opportunity for technology learning. To summarise this sector: - in UK, Belgium, Italy and, to some extent, Sweden, the level of support is about adequate. It seems that the biomass sector in these countries is not able to cope with the risk of green certificate schemes; - the Danish, Finnish and Netherlands biomass sectors are the most effective and show the smallest gap between support and generation costs. Denmark and the Netherlands have implemented feed in tariffs and Finland gives both tax relief and 25% investment support. Centralised power stations using solid biomass attract the largest share of RES-E investment; - in France, Greece, Ireland, Luxembourg, Portugal and Spain, the feed-in tariff support is not enough to bring about real take-off in the biomass sector; - secondary instruments, especially small investment-plant support and tax relief, act as catalysts for biomass and involve less interference of the wood market; - CHP support promotes biomass development, resulting in higher energy efficiency; - in addition to demand, good management of agriculture and forest residues is required for efficient biomass exploitation. 20

29 XI. Hydropower A third example is small-scale hydropower, where country-specific costs show very large differences. The technology is also especially relevant for some of the new member states. Again, existing feed-in tariffs are generally in line with generation costs, with tariffs in Austria and Portugal at the lower end of the cost spectrum. The tax measures in Finland are not sufficient to stimulate investment in new generation capacity. The financial conditions for small hydropower are good in France and in Slovenia. In Cyprus, the support levels depicted in Figure 21 might actually be higher, since there have been some additional investment grants which are not included here. Figure 21 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) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

30 Figure 22 Effectiveness indicator for small hydro electricity in the period for EU-15 Member States. The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 23 Effectiveness indicator for small hydro electricity in the period for EU-10 Member States. The relevant policy schemes during this period are shown in different colour code. Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

31 Figure 24 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) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, XII. Photovoltaic Solar Energy Figure 26 shows that the strongest growth in PV electricity generation, in the period considered occurred in Luxemburg followed by the Netherlands and Austria. The support system in these three countries comprises fixed feed-in tariffs supplemented in Germany by additional mechanisms, such as soft loans. As expected, quota obligations and tax measures provide little incentive for investment in PV technology, since these schemes generally promote only the cheapest available technology. The PV support scheme in Denmark, the Netherlands, Spain and Austria were implemented as part of a longterm policy aimed at market development of this technology. 23

32 Figure 25 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) Source: Communication from the Commission Biomass Action Plan - COM(2005) 628, Figure 26 Effectiveness indicator of photovoltaic electricity in the period The relevant policy schemes during this period are shown in different colour codes Source: Communication from the Commission Biomass Action Plan - COM(2005) 628,

33 XIII. Instruments to Support RES Heat Despite the fact that a significant share of European primary energy production goes to heating, current European policies provide very few incentives for renewable heating possibilities. Support for renewable heat in Europe is mainly through selective, local support policies. Often these are based on local policy objectives which combine industrial support or employment opportunities with promotion of renewable heating. Examples include the programme for solar thermal heat in Upper Austria and support for biomass heating in the Scandinavian countries. The first EU-wide promotion policy was formulated in 2002 when the Energy Performance of Buildings Directive (EPBD) was published. This Directive promotes the use of renewable heating technologies, although this is not its main aim. However, in a highly diversified market, greater efforts are required to build up a strong European market for renewable heating. These include the promotion of qualified and experienced manufacturers and importers in the market, financial support mechanisms to close the price gap with natural gas heating, increasing the level of awareness among users and increasing the knowledge and experience of installers. If Member States choose to interpret the EPBD rather loosely and refrain from further promotion of renewable heating, the great potential to increase its share in European markets will remain unexploited. XIV. Instruments to Support Biofuels for Transport The production and use of biofuels is at an early stage of development in the European market, as is the promotion of biofuels. In 2001, the EU promoted the use of biofuels in transport through the Directive on the Promotion of Biofuels. This Directive was aimed at increasing the share of biofuels in total transport fuels to 2% by 2005, and 5.75% by The Commission has also formulated regulations allowing full tax exemptions for biofuels. Several EU countries have exploited this opportunity to largely exempt their biodiesel and bioethanol from energy taxes, making them more competitive with conventional transport fuels. Impressive growth has been achieved in Germany, France, Spain and Italy, but there is still no common approach to the promotion of biofuels. The challenging targets at EU level, set in the EU Directive on the promotion of biofuels, give member states a strong incentive to set indicative targets, but many countries have not been pro-active in this area. At country level, compensation schemes and tax exemptions have been and still are the main instruments used to promote renewable heat and biofuels; innovative support instruments have yet to be developed. Tax exemptions for biofuels are currently very effective in making them competitive with conventional fuels. Major biofuel production capacities have been set up in Germany, France, Italy, Spain, Poland and the Czech Republic. 25

34 XV. Programmes - Intelligent Energy for Europe Intelligent Energy for Europe is a current EU programme to create a new direction and focus for energy policy in Europe. The previous energy programme ended December The programme promotes energy efficiency and renewable energy and provides a framework for international co-operation in these areas and on aspects of energy in transport. The current energy programmes include: - ALTENER - Renewable energy - SAVE - Energy efficiency - COOPENER - International energy support - STEER Transportation. These four programmes were designed to respond to the problems of supply and demand outlined by the Directorate General responsible for transport and energy. These areas represent what the Commission has described as areas needing improvement to meet energy security goals and the Kyoto Protocol targets. An overall budget of 200 million was allocated for , split between the EP 255 million, the EC 215 million and each country s energy ministry 190 million. The overall budget will increase as new Member States are admitted to the EU. The EP has proposed establishment of a strategic European Intelligent Energy Agency to ensure that best practice is replicated across the EU and to facilitate the introduction and deployment of new technologies in energy efficiency and renewable energy. 26

35 XVI. Main Renewable Heat Policies Table 3. Main renewable heat policies in different EU countries 27

36 Table 4. Main renewable heat policies in different EU countries 28

37 Table 5. Main renewable heat policies in different EU countries 29

38 Table 6. Main renewable heat policies in different EU countries 30

39 Table 7. Main renewable heat policies in different EU countries 31

40 Table 8. Main renewable heat policies in different EU countries XVII. Support Systems Advantages and Disadvantages Feed in Tariffs Advantages Disadvantages Removes market risk from investors; lower returns necessary; Usually provides long-term security, enhances bankability and quality of project development; Enables development of the business and the infrastructure; Has been proven to be an effective support mechanism; Easy administration and low transaction costs; Does not adapt to changing circumstances (low dynamic efficiency); Costs for consumers difficult to estimate ex ante; Does not necessarily encourage cost reduction and efficiency; Not fully in line with the principles of a competitive electricity market; Successful only in cases of high tariff levels over long periods. Easy to differentiate between technologies. Premiums 32

41 Advantages Disadvantages Cost to society (per kwh) is known ex ante; If well designed, theoretically an efficient way to internalise external costs (or external benefits ); More in line with the principles of competitive electricity market (cf. feed-in tariffs); More risk for investors (good or bad?); Low electricity prices lead to low investment activity, high electricity prices lead to oversubsidisation; Does not enable adaptation to changing circumstances. Easy to administer; low transaction costs; Easy to differentiate between technologies. Tradeable Green Certificates Advantages Disadvantages Theoretically provide high dynamic efficiency; Channels support to the cheapest renewable energy production; Enables more sophisticated risk sharing and other possibilities provided by financial sector players; In line with the principles of a competitive electricity market. In practice seems difficult to operate; efficiency gains not yet demonstrated; Volatility and regulatory risk; High risk for investors adds to costs of capital intensive technologies; Does not promote immature technologies; Potentially high administrative and transaction costs. Competitive TenderinG Has ability to drive down production costs; Developers must reveal the true costs; Allows government to have control while enabling the use of market mechanisms; Low political risk. Advantages Disadvantages Game-playing with proposals and contracts; Competition drives costs too low; Encourages low quality project development; On/off nature does not encourage business development, risk of unsuccessful bidding; Has led to high proportion of failed projects; Competition is difficult for small developers. 33

42 Investment Subsidies Advantages Disadvantages Support is received in full at the beginning of operation; Works well in complementing other mechanisms; Encourages new capital intensive technology development and investment; Good control for government; discretionary decision making (which may be good or bad). May be less efficient than performance based mechanisms; May not fit well with technologies with high operating costs; Discretionary decision making increases investors uncertainty in the project development phase diseconomies of scale ; May suffer from regulatory risk (continuity). Tax Incentives Advantages Disadvantages Practically all pros of price premiums apply here as well; Channels the extra costs to the state budget (i.e. taxpayers), if electricity prices cannot be increased; Direct subsidies can be avoided (fiscal illusion); Enables performance based support. Does not follow polluter pays principle; May include high regulatory risk (annual state budget debates); Requires a sufficient tax base (electricity taxes or corporate taxes); May lead to complex tax planning including tax optimising ownership arrangements. XVIII. Conclusions With such a diversity of policy instruments in the EU, it is impossible to highlight any one as being the best support mechanism for all markets in all circumstances. The specific design or implementation of the instrument rather than the type selected, and the alleviation of market barriers, underlie the strong development in renewables. This project has identified those policies that have resulted in the largest growth in renewable energy deployment. But this is not to say that these policies are the best or the most cost-efficient. They serve merely to illustrate how quickly the sector might develop if policies throughout Europe were more effective. This study does not include a full analysis of market barriers, although some were identified during the desk research and some were mentioned by stakeholders in the stakeholder consultation. The German support system must be highlighted for its success in bringing large quantities of renewable energy onto the market. The combination of feed-in tariffs and investment support has played an important role in this success, but the key factor is and will continue to be a clear and longterm institutional setting; providing good investor security. Many other markets have applied high 34