Core Theme Interim Report

INTERIM REPORT Core Theme Interim Report Core Theme 2: Cooperation Mechanisms Authors: André Poschmann, Anne-Maria Ide, Federal Ministry for Economic Affairs and Energy, Germany Sofía Martínez, Institute for the Diversification and Saving of Energy, Ministry of Industry, Energy and Tourism, Spain Date: 17 April 2015 This is a public CA-RES II report

Table of Contents Table of Contents... 2 1. In a Nutshell... 3 2. In the Spotlight: Partial opening of support schemes... 5 2.1. Regional Cooperation in renewable energies gains more dynamics... 5 2.2. Case Studies on Cooperation Mechanisms developed within a EU Commission s project... 6 2.3. Emerging concrete cooperation initiatives and projects... 9 3. Emphasis on regional cooperation within the future 2030 framework and the Energy Union... 10 Abbreviations... 12

1. In a Nutshell The European Directive 2009/28/EC establishes national targets for renewable energy sources (RES) for each of the European Member States until 2020. To give Member States the flexibility to achieve these targets, Cooperation Mechanisms were introduced under the same Directive. With these instruments Member States can potentially reach their national renewable energy targets cost efficiently by complementing their national renewable energy deployment with foreign renewable energy. So far, the Cooperation Mechanisms have been implemented to a limited extent only. However, recent discussions show that the implementation of specific joint projects is gaining momentum. Core Theme 2 (CT 2) provides a platform for discussing the current level of implementation and the future role of Cooperation Mechanisms in Member States, enabling participants to conceive solutions to concrete cooperation opportunities. During the CA RES meetings CT 2 participants took a closer look at current concrete initiatives as well as theoretical case studies making use of the Cooperation Mechanisms. It became clear that Member States see great opportunities in jointly deploying renewable energy potentials across borders and making use of Cooperation Mechanisms. Recently, a number of Member States are planning to partially open their national support schemes to foreign RES production. A particular background for this development is the new state aid framework for renewable energies that puts a specific emphasis on cross-border access to support schemes. CT 2 participants highlighted that while cross-border access to support schemes can be beneficial, Member States need to be able to decide on whether to support foreign RES production and to limit and control it. As confirmed by the judgement of the European court of justice in the cases of Alands Vindkaft 1 as well as Essent Belgium 2, Member States need to be able to decide upon supporting renewables in other countries. The ability to control support for foreign renewable energy installations is vital in order to ensure a balanced approach and win-win situation. There are still many aspects and implications that need further analysis and discussion. Overall, discussions have shown that an opening of support schemes needs to be thoughtfully analysed and addressed when entering into cooperation to support foreign renewable energy production. In particular, a fair share of costs and benefits between the cooperating parties needs to be found. Furthermore, throughout the CA RES it became clear that for many Member States physical import or export respectively of RES electricity is a key element when entering into cooperation. Therefore, suitable solutions for the proof of such physical transfer are needed along with balanced and controllable options for opening support schemes. In light of discussions by EU Climate and Energy Framework 2030, CT 2 participants also discussed the role and potential of the Cooperation Mechanisms in the post-2020 framework. Overall, it was highlighted that regional cooperation bears great potential for jointly reaching the EU RES target, while the need for energy infrastructure development is highlighted. In addition when setting up the governance system for the 2030 framework, regional cooperation can provide for strong flexibility for Member States to contribute their share in reaching the overall EU target. Furthermore, a more 1 ECJ 2014, Alands Vindkraft, 01.07.2014, C-573/12. 2 ECJ 2014, Essent Belgium, 11.09.2014, C-204/12 to C-208/12

regional approach entails great benefits in terms of energy security and achieving the internal energy market.

2. In the Spotlight: Partial opening of support schemes 2.1. Regional Cooperation in renewable energies gains momentum In the past the EU Commission has underlined the benefits of enhanced cooperation in the field of renewable energies and encouraged Member States to implement the Cooperation Mechanisms. In recent years the Commission has particularly advocated for a stronger consideration of cross-border access to support schemes in the framework of the Cooperation Mechanisms. While respecting Member States right to choose to open support schemes in its Communication Delivering the internal electricity market and making the most of public intervention published on 5 November 2013 the Commission stated The Renewables Directive does not prohibit Member States from limiting their support schemes to nationally generated renewables production. [ ] The Commission strongly encourages Member States to use these opportunities and progressively open up their nationally oriented support schemes to producers from other Member States. With the aim of facilitating the use of Cooperation Mechanisms the Communication also included Guidance on the use of renewable energy cooperation mechanism, and a template for agreements. In order to identify existing barriers for the use of Cooperation Mechanisms and to develop beneficial solutions, the Commission also launched a research project on Cooperation Mechanisms (http://rescooperation.eu/) (see section 2.2). Member States have welcomed this initiative and emphasized that the Cooperation Mechanisms entail great opportunities for regional cooperation in the field of renewable energy. Nevertheless, regional cooperation is still at an initial stage with the certificate scheme between Norway and Sweden being the single fully implemented Cooperation Mechanism. As regards the opening of support schemes, already it is clear from discussions within CT 2 that there many aspects to be addressed and challenges to be sorted out before opening support schemes.. In particular, a balanced approach for sharing of direct and indirect costs and benefits, avoiding over-subsidization and public acceptance have been highlighted as crucial aspects. Moreover, for many Member States physical import of electricity is a key precondition when opening national schemes and engaging in cooperation. However, the use of the Cooperation Mechanisms is gaining momentum. Lately, numerous Member States have started to get more involved in possible cooperation projects and options for opening national support schemes as well (see section 2.3). In recent state aid procedures on reformed support schemes for renewable energies the discussion on a partial opening of support schemes has become very prominent. The revised Guidelines on State aid for environmental protection and energy 2014-2020 - adopted in April 2014, accentuate that the Commission will consider positively [support] schemes that are open to other EEA or Energy Community countries (margin 122). While state guidelines do not require Member States to open support schemes, against the background of Article 30 and 110 of the Treaty on the Functioning of the European Union (TFEU), the Commission has raised legal concerns on national support schemes in several state aid cases. Potential discrimination perceived by the Commission was regarded to be compensable by partially opening support to installations in other Member States. Furthermore the discussion on the 2030 Climate and Energy Policy Framework as well as the current debate on the Energy Union emphasizes the role of regional cooperation in the energy field. The

European Council of 23 and 24 October 2014 agreed in its conclusions (SN79/14) on the 2030 Climate and Energy Policy Framework, consisting of three target-pillars for greenhouse gas emissions, renewable energy and energy efficiency. Particularly with the regard to renewable energy, the conclusions underline the importance of regional cooperation by stating that the integration of rising levels of intermittent renewable energy requires a more interconnected internal energy market and appropriate back up, which should be coordinated as necessary at regional level. Also in the Communication on the Energy Union published in February 2015 the Commission stresses the benefit of regional cooperation and announced it will facilitate cooperation and cross-border opening of support schemes. 2.2. Case Studies on Cooperation Mechanisms developed within an EU Commission s project In 2013 the European Commission commissioned a project analysing the potentials and barriers for the implementation of Cooperation Mechanisms. The project consortium explored the practical implementation of Statistical Transfers (Art. 6), Joint Projects (Art. 7), and Joint Support Schemes (Art. 11) of European Directive 2009/28/EC. An outline of the project was presented in the framework of the CA RES. CT 2 participants provided valuable input to the project. Five theoretical case studies 3 were elaborated and the potential set-up and challenges of renewable energy cooperation between Member States were discussed in detail and solutions were provided for their implementation. The case studies were based on concrete cooperation opportunities between two or more Member States. CT 2 participants agreed to participate in concrete case studies and gave important feedback and input. Overall, the case studies showed that regional cooperation can bear great potential and benefits for the parties involved. CT 2 took a particular look at two case studies: a Joint Project between the Netherlands and Portugal a Statistical Transfer between Luxemburg and Estonia An outline of the case studies as well as the main insight from the discussion among CT 2 participants is described below. Case Study 1: Joint Projects between the Netherlands and Portugal The Dutch-Portuguese case study is based on the opening of the Dutch tender scheme (SDE+) to Portuguese renewable projects. The main rationale is that Portugal has more cost-efficient renewable resources than the Netherlands. Support costs in the Netherlands could therefore be lowered by supporting Portuguese renewable projects and counting these amounts towards the Dutch national RES target. The Netherlands would have to introduce new categories for renewable energy projects from Portugal within its SDE+ scheme to allow their participation. If Portuguese projects are competitive with local projects in the Netherlands, they would receive a sliding feed-in premium ( SDE+ contribution ) in addition to the average annual electricity value ( correction amount ) over a time period defined in the SDE+ scheme (5, 12 or 15 years, depending on the technology). 3 The case studies have been elaborated with the kind support of the respective Member States. However, the views expressed in the case studies do not necessarily reflect the opinion of the European Commission or the Member States.

Within the case study, the Netherlands did not require physical import of the electricity. However, for Portugal physical export of electricity was a main precondition for engaging in the cooperation. In this context, the reference price for calculating the premium payment was remarked on as being particularly important. In the case study the Portuguese electricity price was selected. Figure 1: Host and off-taking countries Portugal and Netherlands Source: Ecofys et al. (2014): Case Study: Joint Projects between the Netherlands and Portugal Case Study 2: Statistical Transfer between Estonia and Luxembourg The Statistical Transfer between Luxembourg as the off-taking country and Estonia as the host country involves the sale of surplus electricity from Estonia to Luxembourg. The case study provides an analysis of how costs and benefits can be identified and how a fair transfer price could be determined. The different support costs in both countries as well as the grid-related costs have been identified as the most important costs. A price corridor for the statistical transfer is discussed as a starting point for negotiations e.g.: Possible floor price: Estonian support level (uniform feed-in premium for new renewable energy installations or lower (partial recovery of support costs in the past) or LCOE of biomass for heat generation. Possible ceiling price: alternative cost of domestic renewable energy deployment in Luxembourg or cost of potential penalties from infringement payments in case the target is not fully met domestically. Discussion Results and Main Insights Member States perceived both case studies as valuable approaches and results on how to implement a concrete Cooperation Mechanisms. Main drivers and challenges Besides reflecting on the specific case studies, the CT 2 participants on a general level within the CA RES identified several main drivers and challenges varying in importance according to national circumstances:

Main drivers for Cooperation Mechanisms Cost-efficiency o Access to more cost-efficient potentials o Additional profits from sharing energy potential o 2020 target compliance in most costeffective way Energy security/security of supply o Reduction on energy dependence o Diversification of energy sources o Proper integration of variable renewable energy sources into the electricity grid/market Joint learning through cooperation Local benefits o Local added value, e.g. job creation, industry development o Positive health effects o Innovation Main challenges for using Cooperation Mechanisms Technical complexity, in particular: o Cost and benefit calculation o Allocation of costs o Risk sharing o Etc. Public acceptance Interference with domestic support schemes Grid infrastructure bottlenecks Uncertainty about 2030 Framework First mover risk Compatibility with state aid regulations Case study 1 on Joint Projects As regards case study 1 the analysis showed that joint projects can bear various benefits in terms of cost-efficiency but also energy security, grid integration and innovation amongst others. One of the main challenges included a fair sharing of the respective cost and benefits among the cooperation countries. The discussion in particular showed that for some Member States physical transfer of electricity is for various reasons an important precondition for entering in cooperation. While the Netherlands did not require physical import, for several Member States (e.g. Portugal) physical electricity transfer is one key element for justifying cross-border cooperation. For Portugal the avoidance of own grid constraints and to reduce the impacts of variable renewable electricity on its electricity grid were important. For other Member States (e.g. Germany) physical import is a prerequisite to assure a real impact on its national electricity grid, thus ensuring the integration of renewables into the electricity grid. Therefore, even though a tracking of individual electron flows is technically not feasible, a suitable option for a reliable proof of physical renewable electricity transfer is needed. Moreover, it was stressed that grid infrastructure bottlenecks remain a major challenge to be tackled in order to tap the potential cross-border cooperation within the internal energy market. It is essential, therefore, to strengthen the capacity of interconnectors between Member States. It was also highlighted that uncertainties regarding the post-2020 framework might hinder the implementation of joint projects at this stage. Member States and project developers need investment certainty beyond 2020 to get engaged in a Cooperation Mechanism.

Case study 2 on Statistical Transfers With respect to the case study on Statistical Transfers discussion showed that the determination of the transfer price is the main challenge. CT 2 participants welcomed the outlining of possible approaches for setting the price and the illustration of a potential corridor as a starting point for discussions undertaken within the case studies. The discussion emphasized that in the end the fixing of price is a matter of bilateral agreement. In order to allow for a win-win-cooperation a fair balance of costs and benefits of the parties involved needs to be found. Discussions have also shown that public acceptance is one of the main challenges when implementing a statistical transfer. The selling country needs to be able to justify the selling of surpluses to the consumer/ taxpayer that has initially supported the RES production on its territory. Similarly, the buying country will need to do the same for import of target amounts. This also needs to be reflected in the negotiations of the transfer price. Within the discussion the question arose whether a Statistical Transfer could in fact be undertaken before the transferring Member State has fully reached its binding 2020-RES-target. Here the European Commission clarified that Art. 6 paragraph 1 of Directive 2009/28/EC does not impede Member States from engaging in Statistical Transfers before 2020. This provision does rather underline that a Member State making use of a Cooperation Mechanism continues to be responsible for ensuring its own national renewable energy target, that is, the obligations contained in the rest of the Directive regarding the trajectory and the targets themselves remain in place. 2.3. Emerging concrete cooperation initiatives and projects In CT 2 Member States discussed opportunities for implementing Cooperation Mechanisms, i.e. emerging specific joint projects. Recent discussions showed that the implementation of specific joint projects is gaining momentum. Several Member States are now engaging in Cooperation Mechanisms very concretely, partly as a result of the notification process of their national support scheme by the European Commission. In Germany, the new Renewable Sources Act EEG 2014 introduces the option of partially opening the support scheme. In January 2015 a pilot tender on ground mounted photovoltaic has been introduced. In a testing phase of 2015 and 2016, Germany will partially open this pilot tender to renewable energy installations from other Member States. As of 2017, renewable support for all technologies should in principle be determined by tendering procedures. By then, at least 5% of the newly installed renewable capacity should be open to other Member States. For such an opening the EEG 2014 defines three requirements to opening: An international cooperation agreement has to be in place. The principle of reciprocity needs to be applied. Physical import to show a real impact on the German power system. Furthermore, Denmark has committed to open up its support scheme in 2015 and 2016 within the framework of a pilot tender on PV for installations from other Member States. Denmark intends to open up a part of that tender. Denmark has similarly introduced the requirement of a conclusion of a reciprocal cooperation agreement with another Member State as well as the proof of physical import. Estonia has also committed to open up its renewable and cogeneration bidding processes as of 1

January 2015 for producers in other Member States. The opening of the bidding processes can be subject to the conclusion of cooperation agreements as specified in Art. 6-11 of the EU Directive 2009/28/EU to enable the accounting of imported renewable electricity towards the Estonian renewable energy target. The Netherlands already changed the legislation of the current support scheme to have the possibility to introduce renewable energy projects in other EU Member States. Nevertheless, due to a lack of public acceptance and political support, the Netherlands will first try to reach its renewable energy target by national means. In 2014, the UK published its position 4 on opening its Contract for Difference (CFD) scheme to non-uk projects. UK will continue to consider how to develop non-uk CFDs that align with affordability, security and decarbonisation objectives. Challenges of opening include negotiation of international agreements, institutional and regulatory arrangements in different jurisdictions, and allocation within a competitive framework. UK and Ireland signed a Memorandum of Understanding on Cooperation in the Energy Sector in January 2013 and undertook joint work on how Irish renewable energy resources might be developed to the mutual benefit of Ireland and the UK. This included costbenefit analysis and options for support mechanisms and regulation of connection assets. Discussions were deferred in 2014 since there was no prospect of projects being commissioned by 2020. Overall, the discussion highlighted that the implementation of the Cooperation Mechanisms is gaining momentum. An opening of support schemes to foreign renewable energy production is being considered by various Member States. Notwithstanding, challenges remain and need tailormade solutions. Many of the aspects involve very context-specific aspects that depend on the particular circumstances in Member States as well national energy policy preferences. A balanced sharing of direct and indirect costs and benefits as well as avoidance of over-subsidisation are crucial aspects. An opening of support schemes remains a sensitive issue also with respect to the overall acceptance for public support. It was underlined that controllability over the support to foreign renewable energy installations is vital in order to ensure a balanced approach and win-win situation. As highlighted by the judgement of the European court of justice in the cases of Alands Vindkaft 5 as well as Essent Belgium 6, Member States need to be able to decide upon supporting renewables in other countries. Support for national and foreign renewable energy production need to usefully complement each other in line with the Member States energy policy goals. 3. Emphasis on regional cooperation within the future 2030 framework and the Energy Union Building on the emerging cooperation projects, CT 2 participants highlighted the important benefits of regional cooperation in the field of electricity. By increasing regional cooperation Member States could make use of existing synergies, reduce costs and benefit from mutual learning. This would be beneficial with respect to achieving the internal market, the increased deployment of renewable energies and energy efficiency, increasing energy security as well as decreasing costs of energy supply in general. 4 www.gov.uk/government/uploads/system/uploads/attachment_data/file/340932/decc_non- UK_CfD_August_2014.pdf 5 ECJ 2014, Alands Vindkraft, 01.07.2014, C-573/12. 6 ECJ 2014, Essent Belgium, 11.09.2014, C-204/12 to C-208/12

With respect to the 2030 climate and energy framework, it was emphasized that enhanced regional cooperation could increase flexibility for Member States to reach both the European 2030 targets that were decided by the European Council in October 2014 as well as their Member States national energy and climate objectives. It was highlighted that more clarity on the implementation of the 2030 framework, including a reliable governance system that ensures the achievement of the decided 2030 targets, is important to provide reliable and strong incentives for Member States to invest in renewable energies and to engage in Cooperation Mechanisms. Participants also stressed the importance of regional cooperation as a key instrument for further enhancing the Internal Energy Market and increasing energy security. In this sense, increased interconnections and strengthening of existing infrastructure will be needed. The discussion also revealed that additional incentives, e.g. through a dedicated EU funding could facilitate cooperation projects. For instance, a stronger focus on renewable energy cooperation projects within the EU cohesion funding as well as specific EIB programmes could be suitable means for accelerating the use of Cooperation Mechanisms. In the conclusions of the European Council of October 2014 the EU particularly emphasized the role of regional cooperation by calling for a transparent and reliable governance system that would facilitate coordination of national energy policies and foster regional cooperation between Member States. Likewise the European Council of March 2015 highlighted the important role of regional cooperation that should go together with developing a more effective, flexible market design. Also, the European Commission gave a key role to the idea of a more regional approach in the field of energy in its Communication on the Energy Union of 25 February 2015. The Communication foresees actions on a regional level across all five dimensions of the Energy Union (energy security, internal energy market, energy efficiency, decarbonisation of the economy, research and innovation). Particular focus is placed on the increased coordination and cooperation of Member States to increase electricity market integration and to better use renewable energy and energy efficiency potentials.

Abbreviations Abbreviation CA-RES CFD CT EC EEG EIB EU GHG RES Full Name Concerted Action on the Renewable Energy Sources Directive Contract for Difference Core Theme European Commission German Renewable Sources Act European Investment Bank European Union Greenhouse Gas Emissions Renewable Energy Sources Participating Country Austria Belgium Bulgaria Croatia Cyprus Czech Republic Denmark Estonia Finland France Germany Greece Hungary Ireland Italy Latvia Lithuania Luxembourg Malta Netherlands Country Code AT BE BG HR CY CZ DK EE FI FR DE EL HU IE IT LV LT LU MT NL

Norway Poland Portugal Romania Slovakia Slovenia Spain Sweden United Kingdom NO PL PT RO SK SI ES SE UK

This is a public CA-RES report For more information please send an email to: Leonardo.Barreto- Gomez@energyagency.at, Cornelia.Schenk@energyagency.at, Shruti.Athavale@energyagency.at The Concerted Action to support the implementation of the RES Directive 2009/28/EC (CA-RES) was launched with the participation of the responsible authorities from 30 EU countries and supported by Intelligent Energy Europe (IEE) in July 2010 to provide a structured and confidential dialogue on how to address the cost-effective implementation of the RES Directive 2009/28/EC. For further information please visit www.ca-res.eu