Feed-in tariffs in selected EU countries

Transcription

1 ENERGY PRICES & TAXES, 1st Quarter xi Feed-in tariffs in selected EU countries Jan Kubat & Aidan Kennedy Energy Statistics Division INTRODUCTION The main aim of this article is to give an overview of the feed-in tariff system in general, to show practices in selected countries in detail and to highlight the main advantages and disadvantages of this support policy system. 1 Feed-In Tariffs (FiTs), also known as feed-in laws, advanced renewable tariffs or renewable energy payments, are a policy mechanism designed to increase the share of electricity generation from renewable sources by establishing incentives for the installation of renewable energy generators. This is intended to stimulate technological learning processes and move renewable energy technologies (RETs) down the learning curve, i.e. reduce the cost of electricity from RETs in order to make them competitive. In addition, the mass deployment of renewable technologies can bring about other benefits such as the lowering of CO 2 emissions and the enhancement of energy security through increased indigenous production. According to standard cost calculations RETs generally have a higher cost than conventional technologies, therefore, support is provided as a way of compensating for the negative externalities of fossil plants not fully accounted for in the economic model. FiTs come in two different variations: either the classical type, where generators get a fixed price per kwh, or as a FiT premium, where market revenues are supplemented by a guaranteed premium. As a general principle, less mature technologies which have not yet reached economic competitiveness require in addition to continued research and development support, very stable low-risk incentives, such as FiTs. These support the mass scale market introduction and subsequent cost reductions from learning by doing. For lowcost gap technologies such as on-shore wind or biofuels combustion, other more market-oriented instruments like feed-in premiums (fixed or variable) and Tradable Green Certificates (TGC) 2 systems with technology banding may be as appropriate or more. Once the technology is competitive with other CO 2 -saving alternatives and ready to be deployed on a large scale, and when 1. The authors would like to thank Cedric Philibert and Carlos Gasco from the IEA Renewable Energy Division for their contributions to this article. 2. Tradable Green Certificates (TGC) are certificates that prove that electricity was obtained from a renewable source. As the name suggests, these certificates can be traded amongst electricity generators and marketers/commercialisers. appropriate carbon incentives are in place, these support systems can be phased out altogether, if the market design ensure effective and timely building of necessary capacities. At that stage, renewable energy technologies will compete on a level playing field with other energy technologies, IEA (28). FEED-IN TARIFFS Under Feed-in Tariff schemes, generators of renewable energy are paid a tariff for each kwh of electricity they produce. In addition, regulation generally provides a guarantee that the electricity generated will be purchased at a standard rate that is guaranteed for a certain period of time. The tariffs and premiums paid usually differ depending on the source of electricity (i.e. hydro, wind, solar photovoltaics etc.) to take account of the different costs of electricity generation and to ensure an acceptable rate of return for all sources. An important difference between the FiTs and the premiums is that the premium exposes generators to market signals and thus facilitates the system integration of RETs. To encourage participation in the scheme, FiTs generally include three key provisions: guaranteed grid access for all eligible and approved producers of renewable energy, and priority dispatching, long-term contracts (15-2 years) for the purchase of the electricity produced, set tariffs and premiums for electricity produced and sold (that sometimes are adjusted for inflation for existing producers) and methodologically reduced tariffs for new producers to encourage innovation and the move toward cost competitiveness over time. The most common policy alternatives to FiTs (which are price based instruments) are quantity based quota obligations. Under a quota obligation, governments set a particular target for renewables and place a corresponding obligation on producers, suppliers or consumers to source a certain percentage of their electricity from renewable energy. This obligation is usually facilitated by the use of tradable green certificates (TGCs). Under this scheme, an obligated party failing to meet its quota obligation has to pay a penalty. This provides the incentive to either invest directly in new renewable electricity plants or to buy green certificates from other producers or suppliers. The certificates are used to prove compliance with the obligation. The certificate price is determined by the market, but it strongly depends on

2 xii - ENERGY PRICES & TAXES, 1st Quarter 211 several factors, including the level of quota targets, the size and allocation of the penalty and the duration of the obligation. Quota obligation systems with TGCs are generally technology-neutral support mechanisms, aimed at promoting the most cost-efficient technology options. However, technology-specific support can also be provided through separate quotas (bands) per technology, different durations of support or certificate denominations (certificates issued per MWh), IEA (28). Recent development of renewable electricity support mechanisms in Europe have focused on FiT type systems and have led to a decline in quota regimes with TGCs, which have now become negligible in the overall EU 27 framework (with only Finland, Poland and Sweden not using FiTs of some kind). The major supporter of TGCs, the United Kingdom, has also established a FiT system with the official release in summer 29 of its new FiT policy, EREF (211). Feed-in Tariffs (FiTs) have proven to be an effective component in meeting the objective of creating a lowrisk environment, i.e. capable of meeting the objective of predictability and reliability of the support scheme. In addition and contrary to what might be expected from most economic analyses, FiTs are also a more efficient way of supporting RETs, as the per kwh support costs of FiTs are frequently below those of certificate schemes (IEA 28). FiTs have proven particularly effective in deploying wind power in European countries and bringing costs down. Furthermore, analysts and policy makers have begun to realise that the costs of FiTs can be partially or even totally compensated by reductions of wholesale electricity prices in systems based on marginal pricing. In such systems, a greater share of renewables in the electric mix pushes the merit order curve 3 to the right and reduces market prices (Philibert, 211). One striking example is that of Ireland, where in 211 the reduction in market prices is expected to entirely compensates the costs of the support scheme (closer to a Feed-in premium despite its name of Renewable Feed-in Tariff ) plus the balancing costs resulting from the variability of the wind resource (Clifford and Clancy, 211). For renewable energy technologies that have not yet reached this stage, however, such as photovoltaics (PV), the unexpectedly rapid growth of the few last years and especially 21 has raised concerns amongst policy makers about the sustainability of FiTs. Hence the following review of some EU country policies tend to focus on the specifics of FiTs with respect to PV. 3. A merit order curve is a graph that compares competing sources of electricity generation. It shows available generating capacity (x-axis) and the short-run marginal cost of production (y-axis). Sources are shown from left to right in ascending order according to their short-run marginal costs of production. CZECH REPUBLIC 4 A feed-in system for renewable energy sources came into force in 22. Producers of renewable electricity in the Czech Republic can choose between two types of subsidies, a classical FiT or market price plus a premium ( green bonus ). The green bonuses are an additional top-up payment over the market price of electricity. Feed-in tariffs apply to electricity supplied and metered at the delivery point between the generating plant and the respective distribution system operators. Green bonuses apply to electricity supplied and metered at the delivery point between the generating plant and the regional system operators, and supplied by the generator to an electricity trader or eligible customer. Producers can choose to sell electricity at the FiT rate or offer it to traders at the market price and simultaneously receive green bonuses, which are paid by the transmission system operator. Prices are differentiated according to the renewable energy source and by the year of commissioning. Under the initial scheme, FiTs and green bonuses decreased annually by a maximum of 5%. However, as of 21, tariff degression can be decided freely by the Energy Regulatory Office (ERU). The cost of supporting renewable energy is passed on to final electricity consumers. At the end of each year, the Regulatory Office sets the surcharge which consumers must pay per kwh of electricity consumed in the following year by estimating the payments that renewable electricity producers will receive during the subsequent year. This is called the price for meeting the extra costs related to support of electricity from renewable sources, combined heat and power and secondary sources. Electricity generation (GWh) Figure 1. Czech Rep. - electricity from renewables 5, 4, 3, 2, 1, Source: IEA, ERU (211) 4. Based on IEA (21a) Hydro (< 1 MWe) Biogases Solar Solid biofuels Wind RETs share

3 ENERGY PRICES & TAXES, 1st Quarter xiii Figure 1 shows the evolution of electricity generated from renewable sources. Data for 21 are estimated. The renewables share (RETs share) includes all hydro power plants and is given as a share of domestic consumption. The Czech Republic rapidly increased its solar PV capacity during 21. This was driven by very high solar PV FiTs which did not reflect the fall in required investment costs over recent years. Due to the scale of solar PV deployment, there was a substantial increase in the cost of funding FiTs. The Czech Energy Regulatory Office increased the level of support for renewables and cogeneration from 6.6 euro/mwh 5 in 21 to 14.8 euro/mwh in 211, according to ERU (Czech Energy Regulator) this compared with average electricity end-use prices in 21 of about 14 euro/mwh for households and 1 euro/mwh for industrial consumers. Electricity prices in the Czech Republic consist of two components: a regulated component that includes the FiT surcharge and an unregulated component (wholesale price). Although the massive increase of PV leads to an increase in the regulated price component, higher RETs penetration reduces spot market electricity prices (the so called merit order effect) which in turn influences the unregulated price component. The final impact on consumer and industry prices still needs to be assessed in the future. In order to constrain the overall cost of RETs support and to reduce windfall profits that project developers made due to excessive support levels, the Czech Government introduced a special solar income tax. This tax is set at 26% and applies to incomes derived from electricity generated from solar PV installations with an installed capacity of greater than 3 kwe, commissioned in 29 and 21. The tax is valid from 211 to 213. This tax has been criticised by investors as it retroactively changes guaranteed rates of return, and may be subject to legal challenges by investors at both a Czech and EU level. The Czech government also promised to subsidise the feed-in tariffs budget with about.5 billion euros that comes from the sale of emission allowances by the Czech Republic to other countries. In the past, these profits went to the semi-state energy firm CEZ. If these interventions had not been taken, the 211 surcharge would have been euro/mwh according to ERU (Czech Energy Regulator). The final price increase for customers is expected to be 5 % for both households and industrial consumers, ERU (211). What remains uncertain is how much the Czech state would have to pay in the event that it loses the legal challenges. As the Regulatory Office has significantly decreased solar PV FiTs, solar installations commissioned in 211 will receive much lower FiTs than those commissioned in earlier years, which may discourage new investments in solar installations over the coming years. Another important aspect of the incremental increase in solar capacity is grid safety. As is the case with wind, solar power is variable and rapid increases or decreases in production could cause problems for the grid. In the event of sudden declines in solar production, backup generating capacity must be available to be switched on. However, there are not enough suitable power sources in the Czech Republic that could play this role. Usually gas power plants are suitable for this purpose. In the event that the share of electricity generated from solar sources reaches the point beyond which the grid would be unable to respond in sufficient time to counteract a sudden decrease in supply from solar sources, the Czech transmission system operator and the Czech electricty market operator plan to simply disconnect some of the solar capacity to prevent the share of electricity generated from solar sources reaching undesirably high levels. The market mechanism on how to choose which solar sources to disconnect and how to reimburse them afterwards has not yet been approved at the time of writing this article. However, sophisticated forcasting mechanisms can allow for large penetration of variable renewables, as has been seen in diffrent countries, such as Ireland, Denmark and Spain. FRANCE 6 The most important support mechanisms for renewable energy in France are the highly attractive feed-in tariffs for renewable energy electricity plants with capacities less than 12 MWe. These tariffs were created by the law of 1 February 2. The feed-in tariff system, as well as other collective service charges (uniform electricity tariffs over the whole territory, cogeneration and others) are financed through the CSPE (contribution au service public de l électricité 7 ), a supplemental charge added to the electricity bill of each French electricity consumer. In October 21, CRE determined that the CSPE cost attributable to support for RETs in 211 would amount to EUR 1.6 bn out of a total CSPE cost of EUR 3.5 bn. The FiT system obliges Electricité de France (EDF) to purchase renewable-based power. For most renewable energy technologies, FiTs have stimulated the deployment of renewables, especially the high tariff granted to PV. However, the FiTs for biofuel-fired CHP plants and 5. Assumed exchange rate of 25 CZK/euro. 6. Based on IEA (21c). 7. Contribution to the electricity public service.

4 xiv - ENERGY PRICES & TAXES, 1st Quarter 211 offshore wind parks appear to be insufficient to boost their deployment in France. The FiT systems for cogeneration and renewable energy are covered by the CSPE. From 26-21, the CSPE contribution could not be increased above 4.5 euro/mwh. Because of this, the budget is insufficient to cover all the charges of the CSPE. In 211 the CSPE contribution was increased to 7.5 euro/mwh, however, according to CRE (211), this will still be insufficient to balance the budget. In October 21, CRE proposed that the CSPE contribution be increased to 12.9 euro/mwh. In September 21, France revised its FiTs by the act L arrêté tarifaire which set the new FiTs and the eligibility conditions. From 212 until 22, the FiTs will be decreased by 1% every year. In December 21, the possibility for new PV installations to benefit from FiT was suspended for three months. In February 211, the Prime Minister announced a 2% reduction in the level of PV incentives and a quantitative cap to new commitments beyond the 2 to 3 GW of new PV systems in the queue at the time most likely to actually be built. This annual cap would be initially set at 5 MW but possibly expanded up to 8 MW. Electricity generation (GWh) Figure 2. France - electricity from renewables 14, 12, 1, 8, 6, 4, 2, Source: IEA Figure 2 above shows the increase in renewable electricity generation in France from The renewables share (RETs share) shows the contribution of electricity from all renewable sources (including large hydro) expressed as a percentage of total electricity consumption. Biofuels include solid and liquid biofuels and biogases. GERMANY Hydro Biofuels Wind Under Germany s feed-in tariff legislation, the Renewable Energy Sources Act (Erneuerbare-Energien-Gesetz, EEG), producers of renewable electricity receive a guaranteed rate for electricity production according to a tariff schedule differentiated by renewable energy source, type of installation (roof-top, ground mounted etc.), size of installation, resource and technology. The relative differentiation of tariffs is based on equalisation of cost across all technologies; rates are set so that producers should make a fair profit regardless of the cost of each technology. The tariff paid depends on the year in which the installation was built, with rates guaranteed for a term of between 15-2 years, depending on the technology type, BMU (29). In addition to the basic tariff, the EEG also offers bonus payments which differ depending on the energy source, the level of energy efficiency achieved and the technology utilised. For instance, biofuel installations (up to 5 MWe) that generate electricity solely from renewable sources i.e. they only use liquid manure or plants specifically cultivated for use in biofuel plants, receive a bonus payment; however, if they include waste or residues they do not. A technology bonus is also available for installations (< 5 MWe) which employ innovative technologies e.g Stirling engines or dry fermentation for electricity or gas generation. In addition, an energy efficiency bonus is available to installations (< 2 MWe) which use heat generated in CHP plants to heat residential buildings etc. Electricity generation (TWh) Figure 3. Germany - electricity from renewables Solar PV Tide RETs share Source: BEE (21) Hydro Wind Biofuels Solar PV RETs share Figure 3 shows the growth of electricity generation from renewable sources. The RETs share includes all hydro power plants and is given as a share of domestic consumption. Data presented in Figure 3 include some renewable installations not eligible for feed-in tariffs Since the introduction of the first feed-in law in 1991 (Stromeinspeisegesetz), electricity from renewables enjoys guaranteed access to the grid. Due to the high market penetration of RETs in Germany today, conventional electricity production has to be curtailed in favour of

5 ENERGY PRICES & TAXES, 1st Quarter xv electricity from renewable sources in some situations. The grid operator may reduce intake of electricity from renewable sources in favour of the conventional sources only if system stability is at risk. However, this is not a regular occurrence. Feed-in Tariffs in Germany are funded by an environmental levy (EEG surcharge) on the price paid for electricity by the end user. In 21, the direct cost of feed-in tariffs to consumers was 2.47 cents/kwh, up from.72 cents/kwh in 26. In 211, a further increase will bring the cost to 3.53 cents/kwh. Power-intensive companies pay reduced rates (and market prices), however, in order to maintain their competitiveness internationally, according to the German Regulator, Bundesneztargentur. In some cases these industries my even benefit from the merit order effect, that reduces spot market prices. The rate of feed-in tariffs offered to new installations is adjusted annually to account for technological advances, decreased equipment investment requirements and to incentivise innovation. In addition, should the annual growth of installations in a particular category e.g. photovoltaics, surpass the target growth rate in one year, the degression rate for the following year will be increased to stabilise growth, conversely, should the level of installation fall short of the target, the degression rate will be decreased. SPAIN 8 In 24, Spain introduced an important change to the support system of electricity production from renewable sources, allowing electricity generators under the so called special regime to choose between two remuneration options: a regulated tariff (FiT), or a market price plus a premium. In 27, Spain further modified the support system; in particular, it introduced maximum and minimum price levels (cap and floor) for some technologies. From 27, the support scheme has functioned as follows. Operators of renewable facilities can choose one of two sales options for a period of at least one year. If they choose to sell electricity to the grid operator, they receive a regulated FiT. If they choose to sell it on the wholesale market, they receive the market price plus a premium, which will vary according to the hourly wholesale (pool) price and cap/floor system. Each technology and type of installation has a specific target (maximum limit) for new installed capacity. The support scheme is guaranteed until this target is reached. As of 8. Based on IEA (21b). September 28, 95% of wind system operators opted for the market regime, while only 5% chose the regulated feed-in tariff. Offshore wind remuneration is based on tender mechanisms and reference premiums. The levels of feed-in tariffs, premiums, supplements, and cap and floor prices for existing installations are updated annually using as a reference the consumer price index minus.25 until the end of 212 and minus.5 from 213. In particular, in the case of PV, the level of support for has proven very generous and has generated a real boom of PV development in Spain, while putting pressure on the cost of funding FiTs. By September 27, 85% of the 4 MWe target set for 21 had already been met and as much more capacity was set to be built, the government decided to modify the support scheme after a 12-month transition period. In 28, the government reduced the premium for solar PV, following a solar boom which had been driven by high subsidies. This reduction was motivated by the need to foster a price decrease and reduce the government over-spending, sound reasons for revising any policy. However, reducing the subsidies resulted in complaints from PV developers of regulatory instability. Similar cases are familiar to other IEA member countries, underlining the importance of a stable, predictable and transparent framework with a clear time-frame for reducing and phasing out the support schemes. In December 21, the Spanish Government enacted controversial legislation that retroactively altered the payment terms for existing solar PV installations. The legislation does not cut the tariff levels, but caps the number of hours that installations are eligible to receive premiums. However, as an installation s income is the product of effective time and tariff, the net result will be a reduction in previously agreed payments to solar PV plants in some cases, especially for those that might have been overpowered (i.e. installations with an effective capacity greater than their rated capacity). The restrictions differ depending on installation type and size, and will be in effect from , after which they will be reduced. The legislation also extended the duration of some feed-in tariff payments from 25 to 28 years, probably as a compensation to be paid near the end of the projects lifetime. Figure 4 below shows the increase in electricity generated from renewable sources in Spain over recent years. The increased contribution of solar PV electricity is evident in 28 and 29. The renewables share (RETs share) is the total renewable electricity production (including sources not eligible for feed-in tariffs) as a percentage of total electricity consumption.

6 xvi - ENERGY PRICES & TAXES, 1st Quarter 211 Electricity generation (TWh) Figure 4. Spain - electricity from renewables Source: IEA Comparison Hydro Biofuels Wind Solar PV RETs share Although each country outlined above uses different criteria to decide the type and size of renewable energy installations eligible to receive FiTs, the general principle remains the same. FiTs are differentiated based on the year of commissioning, capacity, position (especially for solar panels) and sometimes the site location of the installation. Figure 5 illustrates the different structure of FiTs in the Czech Republic, Germany and France for solar sources commissioned in 21. France offers increased subsidies for micro installations on private houses, while the Czech Republic differentiated only by installed capacity alone which together with falling investments costs caused the solar boom in 21. Figure 5. Solar PV FiTs in selected countries in euro / MWh Figure 6. Unit surcharge paid by final consumers Czech Republic France Germany Source: ERU (211), CRE (211), BEE (21) In all three countries shown, the FiT system was designed to be self sufficient. This means that the difference between the FiTs paid to renewable electricity generators and the cost of the electricity had it been generated otherwise should be covered by surcharges that are paid by the final consumers. Due to legal requirements, the surcharge in France was fixed until 21. However, as the level at which surcharges were set was insufficient to cover the cost of the FiTs and other system charges, the French system (CSPE) was running at a deficit over recent years. This deficit was borne by the French utility EDF. Up until 21, the surcharges were sufficient in the Czech Republic to cover the FiTs. However, despite a unit surcharge increase of 13% in 211, a shortfall now exists in the cost of funding the FiT system, which has to be covered by additional subsidies. euro / Mwh up to 3 kwe > 3 kwe Czech Republic on private houses up to 3 kwe on private houses > 3 kwe, on hospitals, schools on other buildings France Source: ERU (211), CRE (211), BMU (211) Figure 6 below shows the unit surcharges that are passed on to final consumers to pay for FiTs. others simplified up to 3 kwe from 3 kwe to 1 kwe from 1 kwe to 1 kwe Germany > 1 kwe other open spaces CONCLUSIONS Encouraging strong growth of renewable energies leads to increased costs as capacity expands, even if policies are highly successful in reducing per kwh costs as, FiT schemes for wind power as well as, e.g., the German PV FiT scheme have demonstrated. Promoting the installation and development of renewable technology is important and necessary, but has its price. A well designed feed-in tariff system can give sufficient security to encourage investment in renewable energy projects. If not well designed, windfall profits due to excessively high FiT levels put undue pressure on electricity consumers and may jeopardize public acceptance of RETs in general. The feed-in tariffs for solar PV resulted in impressive growth in this technology in some countries but at significant cost to consumers. The lesson learned in many countries is clear: the level at which feed-in tariffs are set, the growth targets and budget allocations must be regularly evaluated, controlled and amended as necessary,

7 ENERGY PRICES & TAXES, 1st Quarter xvii to encourage continued advancements in technology, reduction of installation costs and a move towards cost competitiveness. This also implies that non-ret technologies are priced at their actual costs. REFERENCES BEE (21), Jahreszahlen Erneuerbare Energien 21. BMU (29), EEG The Renewable Energy Sources Act, BMU, Berlin. BMU (211), Bundesministerium für Umwelt, Naturschutz und Reaktorsicherheit, Clifford, Dr. Eoin and Clancy, Matthew (211), Impacts of Wind Generation on Wholesale Electricity Costs in 211, SEAI/EirGrid, February. CRE (211), Commission de régulation de l énergie. EREF (211), Prices for Renewable Energies in Europe for 29: Feed in tariffs versus Quota Systems - a comparison, European Renewable Energies Federation, ERU (211), Czech Energy Regulatory Office, IEA (28), Deploying Renewables: Principles for Effective Policies, OECD/IEA, Paris. IEA (21a), Energy Policies of the Czech Republic - 21 Review, OECD/IEA, Paris. IEA (21b), Energy Policies of Spain - 29 Review, OECD/IEA, Paris. IEA (21c), Energy Policies of France - 29 Review, OECD/IEA, Paris. Philibert, Cédric (211), Renewable energy policy and climate policy interactions, IEA Working Paper, Forthcoming.