European renewable energy policy at crossroads ...

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In March 2007, the European Council adopted an overall binding target for Renewable Sources of Energy (RES) at 20% of energy for final consumption by 2020 ...

ARTICLE IN PRESS Energy Policy 36 (2008) 4079– 4092

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Energy Policy journal homepage: www.elsevier.com/locate/enpol

European renewable energy policy at crossroads—Focus on electricity support mechanisms Doerte Fouquet a,, Thomas B. Johansson b a b

Kuhbier Law Firm, Avenue de la Fauconnerie 73, B-1170 Brussels, Belgium International Institute for Industrial Environmental Economics, Lund University, P.O. Box 196, 221 00 Lund, Sweden

a r t i c l e in fo

Keywords: Europe Renewables Energy

abstract The European Union has adopted targets for the expanded use of renewable energies (REs) as one mean to achieve improved energy security, reduced greenhouse gas (GHG) emissions, and improved competitiveness of the European economies. Realising that rapid expansion of RE will not happen in the energy market place, as it now exists, various support mechanisms are under consideration, most prominently these may be grouped into two major categories, tradable green certificates (TGC) and feed-in tariffs (FiT). Experiences from a number of countries in Europe suggest that FiT deliver larger and faster penetration of RE than TGC, at lower cost. The two major systems are compared in overall terms. In a TGC system, a target for RE penetration is set by public authorities seeking to minimise cost for achieving this target. The certificate price is set by the market. In a FiT system, public authorities set an effective price but are not limiting the quantity installed. This has led to impressive growth rates, particularly in Denmark, Germany, and Spain. It is found that investor risks are much lower in a FiT system, and that innovation incentives are larger. Against this background, the European Commission proposal for an EU-wide TGC system is discussed. It is found that such a system is likely to be less effective and less efficient than maintaining national FiT systems, and that it also risks time-consuming legal processes during which investor uncertainties would risk a marked slow-down in investments. Given the underlying objective of addressing security, climate change and competitiveness, it therefore appears that, at least for the time being, continued reliance on national systems, especially FiT would be preferred. & 2008 Elsevier Ltd. All rights reserved.

1. The European plan for renewable energies In March 2007, the European Council adopted an overall binding target for Renewable Sources of Energy (RES) at 20% of energy for final consumption by 2020. It also adopted a target of an efficiency improvement to decrease energy use in the EU by 20% below projected levels by 2020 and on greenhouse gas (GHG) emission reductions.1 For the first time, the Commission proposes a binding target for renewable energy (RE), not just for electricity or for biofuels from renewable sources. The new EU 27 RE target is based on the final energy consumption, which avoids converting problems in view of the different energy sources and applications. As part of the RE target, biofuels are to increase to a minimum of 10% of out

 Corresponding author. Tel.: +32 26724367; fax: +32 26727016.

E-mail address: [email protected] (D. Fouquet). The target for energy efficiency improvement is to decrease energy use in the EU by 20% below projected levels for 2020. The EU target for GHG emission reductions is set to 20% below 1990 levels, and this will increase to 30% if other nations adopt meaningful targets. 1

0301-4215/$ - see front matter & 2008 Elsevier Ltd. All rights reserved. doi:10.1016/j.enpol.2008.06.023

of the total fuel consumption of petrol and diesel for transportation by 2020. On 23 January 2008, the European Commission published a set of six communications to the European Parliament and the European Council proposing new European Directives, including one on RE policy (EC, 2008a, b). The draft Directives are now being discussed by the European Council and the European Parliament. This paper focuses on the proposed renewables Directive only. In this process between the European Council, the European Parliament and the European Commission it will be decided how the European Union and its 27 Member States will deliver on these objectives and reach the targets. This paper presents the current national support mechanisms in Europe and reflect on differences between the Member States and the RE industry on one side wanting to safeguard their national support mechanisms and, on the other side, representatives from a minority of Member States, the European Commission, the incumbent major electricity utilities and energy traders that favour a shift towards a harmonised EUwide certificate trade mechanism similar to the EU Emission Trading System.

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2. Europe at the crossroads on support policies There are at present two major different political support mechanisms applied in EU 27 Member States, the feed-in tariff (FiT) systems and the tradable green certificate (TGC) systems.2 TGC mechanisms are established in Belgium, Italy, Poland, Romania, Sweden and in the United Kingdom. In these systems a defined member of the electricity supply chain, be it consumer, generator or supplier, has to present a fixed minimum quantity of certificates each year, as set by a public authority. The certificates originate per MWh of RE electricity generated. An obligated party thus may generate himself or purchase certificates on a certificate market. The obligated party may pass on the cost of certificates to the consumer. The principle behind the quota mechanism is that a RE producer may receive additional financial benefit from the selling of certificates on the market. This means that the target of RE under the TGC system is set by the government and the certificate price is determined by the market (Klessmann et al., 2007). With more certificates generated than required by the target, the price will fall to close to zero, and the investments in RE will have to rely on the revenue collected from electricity sales only. In the FiT systems the basic principle is that any national generator of renewable electricity (RES) can sell its electricity at a fixed tariff for a specified time period under specific conditions depending on location, technology, etc. The price remains constant for the defined period but for new connections in later years a lower price level is offered. Alternatively, the RE producer receives a fixed premium in addition to the electricity market price. The main elements in FiT systems are often combined with priority grid access.3 The costs of FiT payments are in general passed on to the electricity consumers.

3. The European policies on RE support Focussed policies for RE were put into motion in Europe since the mid 1990s. With Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules entering into force, the way towards an internal market in electricity was opened. The Directive faced a long struggle for getting approved: it took more than 10 years to acquire a majority in the European Council, starting in the mid 1980s with the Single Market initiative, launched by the Commission in its White Paper on 15 June 1985 (COM(85)310, 1985), which focussed on the removal of barriers to the freedom of movement provided for by the Treaty, and the building of an internal electricity and gas market without frontiers.4 Member States have since been obliged to nationally 2 Finland relies only on a tax regime as main support mechanism. There are meanwhile numerous publications on support systems especially FiT mechanisms; ˜ oz et al. (2006), see for e.g. with further source indications: Lipp (2007), Mun Mendonc- a (2007), Fouquet and Prall (2005), Fouquet (2007a), Lauber and Mez (2004) and Kratzat et al. (2007), see especially in view of the discussion concerning the Directive proposal: Neuhoff et al. (2008). 3 Under the German FiT (Renewable Energy Sources Act (Erneuerbare Energien Gesetz) (EEG)) e.g. the tariffs vary in relation to different RE technologies and locations, with a yearly digression, a nation-wide equalisation in order to balance the costs of the feed-in system equally and a regular review of the tariff structure. Grid operators are obliged to connect to their grids RE electricity generation installations as defined in the act, to purchase electricity available from these installations as a priority, and to compensate the suppliers of this electricity. The compensations levels are laid down in the act and they differ depending elements such as the use of the specific RE technologies, the site locations and the size of the RE project, based on the capacity. 4 See for the difficult development towards this Directive: Johnston, Cambridge Yearbook of European Legal Studies 239 (Chapter 11).

establish and enforce conditions for an internal market for electricity. The European Commission set things in motion for renewables with the publication of the ‘‘White Paper on Energy’’ in 1995 and with subsequent increased research and promotional programmes. It was followed in 1997 by the specific ‘‘Energy for the Future: Renewable Sources of Energy—White Paper for a Community Strategy and Action Plan,’’5 which for the first time proposed a target for a minimum penetration of 12% of RE in energy programmes in the European Union by 2010, based on specific use of European Structural Funds. Despite the backdrop of a certain tendency in the late 1990s of too low trust in the European Commission in the growth capability of REs and very low forecasts also from the International Energy Agency (IEA),6 based on the assumption that there would be no new policies to introduce more renewables, it is clear that Europe in the mid 1990s started to introduce and has then followed a RE agenda. The Directive 2001/77/EC set—for the first time—indicative targets for each Member State until 2010, with the overall objective to increase the share of renewables in the EU final energy consumption to 12% for the contribution by renewable electricity to the European Union’s gross inland energy consumption. One major reason for the European Union to increase the share of RE was the integration of the ‘‘polluter pays’’ principle7 in all domains of policies, especially also in the energy sector. The other factor lies in the ongoing barriers and discrimination on the overall electricity market. Even though some RE technologies without any support are at cost levels comparable with those of conventional sources of energy, unsupported new RE is still not commercially competitive in the current distorted electricity market (Meyer, 2003). This deformation of the internal EU 27 electricity market is especially caused by public direct and indirect subsidies.8 There are several examples to highlight this market distortion. The so-called windfall profits or producer rents resulting from marginal cost pricing and earned by electricity companies owning large depreciated nuclear and lignite-fuelled utilities, as is the

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COM(97)599 final (26 November 1997). According to Martinot et al. (2007) the International Energy Agencies’ World Energy Outlook 2006 provides a pessimistic but often-cited reference scenario for 2030 that gives 720 EJ world primary energy (up from 480 EJ in 2004), of which renewables are 100 EJ (14%). Electricity in 2030 is 33,800 TWh (up from 18,200 TWh in 2005), of which renewables are 7100 TWh (21%). The IEA ‘‘alternative policy scenario’’ includes additional policies to support renewables that are contemplated or expected, but not yet enacted. But also this scenario shows renewables achieving only 16% of primary energy and 26% of electricity by 2030. On the contrary, the German Advisory Council on Global Change in its ‘‘exemplary path’’ scenario as Shell envisages that renewables reach 50% of primary energy by 2050. The ‘‘exemplary path scenario’’ places several additional constraints on energy beyond carbon, including restrictions on land use for biomass energy crops, limits to urban air pollution levels, avoidance of nuclear power, and achieving a minimum economic output per capita for all countries. This scenario shows 620 EJ of renewables in 2050 (up from 80 GJ total in 2004), of which 288 EJ is solar PV, 135 EJ is wind, and 100 EJ is modern biomass. 7 The polluter pays principle was firstly mentioned on international level in the 1972 Recommendation by the OECD Council on Guiding Principles concerning International Economic Aspects of Environmental Policies and reaffirmed in the 1992 Rio Declaration, at Principle 16: ‘‘National authorities should endeavour to promote the internalization of environmental costs and the use of economic instruments, taking into account the approach that the polluter should, in principle, bear the cost of pollution, with due regard to the public interest and without distorting international trade and investment.’’ 8 UNEP, the World Bank and the International Energy Agency put global annual subsidies for fossil fuels in the range of US$100–200 billion, representing ‘‘a substantial market distortion, discourage new entrants into the market, and undermine the pursuit of energy efficiency’’; Beck and Martinot (2004) and Goldemberg and Johansson (2004). 6

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case especially in Germany and France.9 Unless removed by taxation, these windfall profits enhance the market power of large utilities. Additional windfall profit is derived from the ability of power producers to pass on a large share of the non-occurring additional costs for GHG emissions allowances10 to customers, despite their allocation for free in the EU 27.11 This system of burdening consumers in the electricity sector via increases in power prices could be argued to be state aid to the utility sector.12 The policy of Germany to leave the funds for the future dismantling of nuclear power stations in the budget of the four companies owing nuclear plants amounts to a further considerable addition to market power at the order of approximately h30–40 billion (Irrek et al., 2007). Moreover the full lifecycle costs of all energy sources are not reflected in the respective market price per kWh, including e.g. also the inadequate risk insurance for nuclear power as specific problem.13 A recent publication on developments in energy services, based on the case of the United Kingdom, underlines the failed internalisation and the importance of externalities as a hidden second price more costly than the direct service price as such.14

9 Based on companies’ publicly available information, these figure are estimated to amount for 2005 and 2006 together for the companies RWE, EnBW, E.On and Vattenfall Europe with their German operations at the order of h8.2 billion and for EDF in France to h13 billion; see Leprich (2005, p. 4). 10 This free allocation or so-called grandfathering is rectified under Directive 2003/87/EC of the European Parliament and of the Council establishing a system for GHG emission allowance trading within the Community and amending Council Directive 96/61/EC (ETS Directive)—which only allowed 5% allowances’ auctioning between 2005 and 2008 and 10% between 2008 and 2012. The European Commission proposed in January 2008 and within the climate and efficiency package a Directive of the European Parliament and of the Council amending Directive 2003/87/EC so as to improve and extend the EU GHG emission allowance trading system. This proposal now foresees the principle of full auctioning of emission allowances for EU 27. 11 They are opportunity costs linked to the respective allowances before handing them over for target fulfilment within the respective accounting period, which are transferred as increase on the electricity price to the consumer. The windfall effect from freely allocated emission rights on the consumer prices is underlined in an evaluation by the International Energy Agency (IEA) as follows: any evidence is needed of the CO2 pass-through into electricity prices, it was provided by the abrupt fall of the CO2 price in May 2006, as market players were made aware of the excess quantity of EU allowances for the year 2005. The fall by EUR 10/tCO2 was immediately followed by a drop in wholesale electricity prices of EUR 5–10/MWh. This electricity price adjustment can be directly attributable to the CO2 price fall, itself not connected to other energy market movements that could also affect electricity prices’’ Reinaud (2007). 12 See this topic in Johnston (2006). 13 The financial consequences of a nuclear accident are so great that nuclear power stations can be operated only because they are practically completely under-insured. In 1992, the German Ministry of Economy asked the well-known Prognos Institute of Switzerland to evaluate such costs. Prognos estimated that the cost of a nuclear disaster would be about h5.5 trillion. No commercial enterprise would provide that kind of insurance coverage. The Prognos Basel study also estimated that the price of nuclear power would rise to about 51 eurocents/kWh if its insurance coverage were adequate, Ewers and Rennings (1992). 14 Fouquet (2008, p. 335): ‘‘In the nineteenth century, the reductions in energy service prices led to vast increases in consumption, which were far greater than the environmental gains of efficiency. Markets have an incentive to externalise the costs of energy service production. Technologies and fuels that manage to externalise the costs are more likely to be adopted. The costs have been passed on to society in general, although often on to the politically weaker or poorer segments of the population. Can it be seen as the price to pay for cheaper heating, power, transport and light? Society carries some of the cost for private producers and consumers. A problem is that the costs of externalisation are not distributed evenly. The least economically and politically powerful groups carry the greatest burden. Another problem is that the benefits of cheap consumption are not spread equally either. Powerful firms producing energy and technology are able to capture high profits by externalising the costs. Their sales and profits would be far lower if the full costs were paid by consumers. Markets have failed to respond adequately to the public’s demand to reduce these costs.’’

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4. The conflict on RE support mechanisms In 1999, before the publishing of the draft proposal of Directive 2001/77/EC for the promotion of RE in Europe in May 2000 conflicts appeared and deepened within the European Commission and between Member States as to which support model would best suit a development towards more REs. The United Kingdom especially favoured a TGC mechanism,15 whereas countries such as Denmark, Spain and Germany at that time already employed feed-in mechanisms. The European Commission, especially the Directorate General for Competition, favoured the introduction of a then EU 15-wide TGC. The first Commission’s report on harmonisation requirements within the framework of the Directive on the liberalisation of the electricity market (COM (1998) 167 Final (16 March 1998)) was fully committed to the question of renewable support mechanisms. It underlined the need for a harmonised renewable support scheme in order to avoid a distortion of competition and outlined further research towards a specific legislative proposal, including topics such as internal market distorting effect of different RE support schemes, the relative costs for support mechanisms, effectiveness, additional benefit to the EU, competitive handicap for European industry by introducing of RE mechanisms.

5. The initial commission analysis A critical document in view of the years in the run-up towards the Directive on the promotion of RE (2001/77/EC), and in view of the current discussion about a new Renewable Directive, is the Commission Working Document SEC (1999) 470 final of April 1999, titled ‘‘Electricity from RE sources and the internal electricity market,’’ which was developed on the grounds of the above first liberalisation report. It was in fact this document, which introduced a negation of FiT mechanisms as viable competitive instruments for the promotion of RE in Europe. FiT mechanisms were labelled as non-competitive and not to be considered further for a harmonised mechanism in Europe. According to this Working Document, FiT incentives for innovation ‘‘must by definition be less pronounced’’ than under a competition-based scheme.16 A move from FiT to ‘‘trade and competition-based schemes’’ would ‘‘at some stage be inevitable’’17 notably when RE makes up a significant proportion of total installed electricity consumption. It was not discussed under what conditions RE support schemes could be eliminated, including the role of subsidies to conventional sources of electricity, and reflection of external costs in market conditions. The main claims concerning competitive disadvantage of the FiT mechanisms in comparison to TGC are according to the

15 The scheme was organised during the 1990s under the ‘‘Non-Fossil-Fuel Obligation’’ (NFFO) policy, where power producers bid on the obligation to provide a fixed quantity of renewable power, with the lowest-price bidder winning the contact. There were four NFFO bidding rounds, the last in 1997. Bidders reduced prices relative to the last round. Major criticism against this scheme underlined that the NFFO process encouraged competing projects to bid below cost in order to capture contracts, ‘‘with the result that successful bidders were unable to meet the terms of the bid or ended up insolvent,’’ see Beck and Martinot (2004). 16 Commission Working Document SEC(1999) 470 final, April 1999, titled ‘‘Electricity from renewable energy sources and the internal electricity market.’’ 17 Commission Working Document SEC(1999) 470 final, p. 17.

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Working Document of 1999 on RE Support mechanisms is as follows:

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Claim I TGC are competitive mechanisms,18 as opposed to FiT; Claim II FiT systems are state aid mechanism; Claim III FiT fail to ensure equivalent price reductions to stimulate technology research contrary to competition-based TGCs; Claim IV FiT limit investor’s confidence over time because tariff digression depends on political willingness and legality under State Aid and internal market rules is questionable. Section 5.1 will analyse each of these claims.

5.1. Claim I TGC are competitive mechanisms as opposed to FiT mechanisms 5.1.1. Quota restrict the market size A quota classically restricts the amount of an item that is permitted to enter a market. Quotas are one of the major direct interventional measures governments and the European Union rely on, in addition to price ceiling and tax systems. The authority in general sets a quota or cap to be respected and fines are attached in case the quota scheme is binding and if the quotaobligated persons or industries are not fulfilling the obligation. The longest experience with TGC has the United Kingdom, which started in 1989 with the Non-Fossil Fuel Obligation Programme (NFFO) as quota-based programme. This mechanisms, laid down by orders by the Secretary of State under the Electricity Act 1989 asked the then Public Electricity Suppliers to purchase electricity from renewable generators—or from nuclear—and provided for this electricity to be purchased at fixed prices for long-term contract periods (typically for 15 years).19 In its 1999 Working Document on RE Support Mechanism, the European Commission evaluated 10 years of the British NFFO quota system experience and outlined that success should have been faster but that the slow deployment of renewables was primarily due to lack of planning permissions and adequate structures. This is certainly a valid argument especially for the United Kingdom, where lack of clarity and active support by the government to encourage RES,20 still create a major obstacle. The difficult situation on planning, authorisation and grid enforcement has been recently underlined by E.ON UK to the House of Lords Select Committee.21 There are further important reasons for failure in the systematic of NFFO in 1998: the system was set to constantly lower the tendered guaranteed prices. For wind power, the contract prices declined from 10 p/kWh in 1990 under NFFO-1 to 4.5 p/kWh in 1997 under NFFO-4. These prices were disconnected from the reality of wind energy production. Competing 18 This would follow ‘‘economic theory,’’ a term that is not further explained in the Document. 19 The last NFFO contracts will expire in 2019. The power purchaser under each NFFO contract is the Non-Fossil Purchasing Agency Limited (NFPA). The former public utilities established with NFPA a structure in England and Wales to enable them to carry out their obligations to collectively contract with renewable generators and so comply with the legislation. 20 It is also criticised that NFFO meagre result reflected a too weak overall commitment for RE by the Government of the UK in those years: according to Mitchell (1995), the UK Government support for renewable energy technologies via the NFFO and its justification ‘‘was based on expediency. It is argued that the underlying reason for support of renewable energy was a byproduct of the primary need to support nuclear power’’ (p. 1079). 21 E.ON answer to the House of Lords Select Committee on the European Union Internal Market Sub-Committee (Sub-Committee B), Inquiry into the EU’s 20% Renewable Energy Target, April 2008.

projects bid below cost in order to capture contracts, leading to the consequence that successful bidders were unable to meet the terms of the bid or became insolvent (Beck and Martinot, 2004). ‘‘This system produced some very low prices but few real schemes’’ (Toke, 2004). According to data from the German Ministry of Environment under the German FiT scheme a premium for 1 kWh onshore wind is in 2008 paid at the order 5.3 eurocents as lowest tariff and 8.4 eurocents for the highest tariff, whereas under the UK quota scheme the price lies at present between 12.0 and 14.0 eurocents/kWh. Other quota systems such as the Swedish mechanisms have lower prices per kWh wind onshore including the certificate price. For the first months in 2008 the Swedish price per kWh is on average at 8.9, with a price of 3.5 eurocents for the TGC.22 This may change for a lower price again thus it the investment is exposed to high fluctuation, which increases the risks and thus the costs for the investment. TGC, which have only moderate targets have similar negative consequences than a TGC system, which has high prices such as in the United Kingdom but low output in projects realised. The claim that quota system produces RE investments at the lowest cost of electricity generated is thus not sustained. In view of the objectives for RE policies and the need for deployment of RE the NFFO programme was a complete failure. This lost decade for RE deployment especially in the United Kingdom adds to the conflict on the redistribution of targets per Member States under the new proposal for Directive for the promotion of RE as the starting point, especially for the United Kingdom is low in comparison to other more advanced Member States, as will be shown below. 5.1.2. Quota systems tend to restrict variety and innovation Again, under the TGC systems it is mostly just wind energy technology, which is applied and used. Only in early 2008, the United Kingdom tried to heal this obstacle in introducing a specific legislation to encourage broader banding of technologies, as will be shown below. With TGC, the market tends to first choose the least costly RE options, leaving others for later. This would not invite expenditures by corporations for activities related to currently non-attractive RE systems, and innovation for these would be relatively slow. With FiT, all RE systems incorporated in the system develop, provided the prices paid are effective. This leads to innovation activities on all these systems. 5.1.3. Quota systems with long-term purchase contracts are not competitive The Working Document from 1999 assumes that quota systems such as the NFFO Scheme in Great Britain ensure higher security for the successful bidder because of the long-term purchase contract linked to the successful bid. However, this leads to the legally critical view in Europe on long-term purchase agreements in the energy sector. Via the link of the quota mechanism to a ceiling or cap access to RE contracts is limited to very few RE producers. It should be noted that in 2004, 70% of the United Kingdom’s wind power capacity was owned by only four major electricity suppliers, Npower (owned by RWE), PowerGen (belonging to E.ON), Scottish Power and Scottish and Southern Electricity (Toke, 2004).23 22 Data from Tricorona AB Stockholm (as of 21 May 2008, SKM-Svensk Kraftma¨kling EL-Certificate Price History, www.tricorona.se). 23 http://www.wind-works.org/FeedLaws/Great%20Britain/ DavidTokeAregreenelectricitycertificatesthewayforaward.doc.

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Long-term contracts in line with European law need to fulfil the following principles for exceptional approval: A surrounding market situation with a large number of different players in the market; No state aid involvement and Cost clarity and appropriateness. Contracts with tacit renewal clauses and long termination periods can, according to the European Commission, create substantial barriers to market development.24 It may be necessary to have long-term contracts when choosing a TGC to support renewables, but this goes against the very competition philosophy of the European Commission and thus contradicts its own claim of competitiveness of TGC. 5.1.4. Quota mechanisms reduce renewable energy away from the energy market and block flexibility and access of independent producers The consequence of the introduction of a TGC is the creation of a niche certificate market outside the liberalised energy market. It has never been clarified by the European Commission why such a move away from a focus on direct market penetration by RE is beneficial for the European Energy Policy and more marketoriented than lowering market access barriers through FiT mechanisms. Under this quota and certificate approach the assumption is that REs would need to compete with each other. But support mechanisms were introduced in Europe to enhance the access of RE on the overall distorted electricity market. Once this access assistance is given, the RE competes with all other electricity in the distorted liberalised market. The demand in a TGC is non-elastic, there is a strong demand to reach the compulsory quota, but there is no further incentive to go beyond. There is the possibility, that a large supplier can control the certificate price depending on its supply of certificates to the market. By doing this, large producers can create price changes. At the same time the large companies have due to their financial situation little problems surviving such price fluctuation on a minor part of their total energy market portfolio. Large producer can hold back their investments and supply of certificates, and let the certificate price rise so as to make investors build windmills, etc. The risk is that important market players could at one point then start to sell off certificates to lower the price, wait a few months and then start buying the capacity from smaller investors who face cash-flow problems, too large to handle because of the lowered certificate price. This creates an investment risk for independent power producers. 5.2. Claim II: FiT systems are state aid mechanisms contrary to TGC This is a claim in favour of TGC systems strongly put forwards in the 1999 Working Document on RE Support Mechanisms. However, reality and ECJ jurisdiction show a different picture. 5.2.1. Quota systems are often authorised as state aid mechanisms Quota systems such as the UK NFFO contain direct state aid by guaranteeing a fixed surplus price. They needed explicit 24 Vertical tying of markets by long-term downstream contracts in the energy field needs to be reviewed under competition law. When such contracts, concluded with dominant firms, foreclose the market, Article 81 or 82 EC may be infringed; see European Commission, Sector Inquiry under Art 17 Regulation 1/2003, on the gas and electricity markets, 16 February 2006, preliminary report.

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authorisation by the European Commission.25 In July 1998, for example the Commission approved the fifth non-fossil fuel obligation for renewables in England and Wales,26 extending the NFFO scheme in force, first authorised in 1990.27 The Commission authorised the scheme in line with its ‘‘Guidelines on State Aid for the Environment,’’ stating that the aid would be progressively reduced, that the scheme would be re-notified within 5 years from the date of the decision. The NFFO scheme’s budget for the United Kingdom’s public treasury amounted for the financial years 1997/1998 and 1998/1990 to ECU 383 million.28 Also, the subsequent British Renewables Obligation (RO) scheme, following the NFFO scheme in 2002 has been evaluated several times been by the European Commission and found to be state aid. The RO introduced a Green Certificates mechanism (Renewables Obligation Certificate (ROC)). ROCs represent a metered unit of eligible renewable electricity that has been generated and then supplied by licensed suppliers to their customers in Great Britain.29 Certificates will then be issued to those generators according to the quantity of such electricity produced and supplied. Generators will trade these certificates to licensed electricity producers. The ROC scheme, which came into effect in 2002, is in its set quota inconsistent with the RE Directive 2001/77/EC as it foresees market penetration for RE until 2027 reaching an envisaged level of 10.4% RE penetration,30 whereas the indicative targets under the RE Directive for the United Kingdom is set at 10% for 2010. Obligated suppliers can meet their duties in different ways:

 By physically supplying power from RE generating stations and by that earning ROCs;

 By purchasing ROCs independently of the power that gave rise to their issue; and

 By paying the buy-out price if not delivering on the ROC quota of renewables, which will be collected by a fund and recycled to suppliers. The fund mechanism attached to this scheme objectively constitutes a decisive state aid factor.31 According to the European Commission and jurisdiction by the European Courts fund-pooled financing mechanism in general are regarded as a parafiscal levy. The European Court on several occasions reviewing fund mechanisms had taken the view that ‘‘the use made of the revenue from a parafiscal chargey, may constitute a State aid incompatible with the common market.’’32 25 See e.g. Commission authorizes extension of aid for renewable energy projects in England and Wales, Aid No N 410/93. 26 Reference Nr. N 153/98 (OJ C 300, 29.9.1998), see Competition Report of the European Commission 1998, p. 256. 27 The main element of the NFFO as State Aid is based in the following characteristics: The scheme secures payment of the difference between the cost of purchasing electricity generated from renewables and what that electricity would cost if it had been generated by a fossil-fuel generator. The aid was provided through a contract between public electricity suppliers and generators of electricity from renewables. This contract established numerous obligations relating to the purchase of electricity generated from renewables in line with the Directive 96/92 on the liberalisation of the electricity market. 28 Competition Report of the European Commission 1998, p. 256. 29 The ROCs are issued by the British regulator (OFGEM). OFGEM monitors data on the metered output of each accredited renewable electricity generator. 30 Competition Report of the European Commission 1998, p. 256. The ROC scheme came into effect on 1 January 2002. The UK authorities notified the scheme for 10 years and agreed to end the scheme after the period of approval, if an extension to that period had not been previously agreed upon by the Commission. 31 Competition Report of the European Commission 1998, p. 256. 32 ECJ Case C 72/92 (Herbert Scharbatke GmbH v Federal Republic of Germany) [ECR, 1993, p. I-05509], paragraph 18; the Court made stated that the

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It is also noteworthy that quota systems such as the ROC contain clear eligibility restrictions as do all current national support mechanisms for renewables.33 The European Commission accepts this,34 whereas it criticises FiT systems being not open for access from renewable electricity produced in third countries.

5.2.2. Feed-in systems without state funds involved do not constitute state aid The Directorate for Competition put itself between the mid 1990s and 2002 into direct and deep conflict with the German government on the question whether the German FiT mechanism, the so-called Stromeinspeisungsgesetz (StrEG), and the following FiT, the Erneuerbare-Energien-Gesetz (EEG) constituted state aid and had to be authorised by the Commission. Complaints were filed especially by the Association of German electricity utilities, the Verband Deutscher Elektrizita¨tswirtschaft (VdEW), leading to a formal State Aid investigation.35 In the end, this conflict was solved for Germany and subsequently other Member States with similar feed-in mechanisms through the Preussen-Elektra decision36 by the European Court of Justice.37 The Court ruled that the German feed-in mechanism did not constitute state aid because the State did not give or guarantee any financing within the structure of the StrEG: ‘‘A statutory provision of a Member State which, first, requires private electricity supply undertakings to purchase electricity produced in their area of supply from RE sources at minimum prices higher than the real economic value of that type of electricity, and, second, distributes the financial burden resulting from that obligation between those electricity supply undertakings and upstream private electricity network operators, does not constitute State aid within the meaning of Article 92(1) of the Treaty.’’38 (footnote continued) collection of a parafiscal charge may, depending on how the revenue from it is used, constitute State aid. 33 The eligibility for the RO is restricted to electricity from renewable sources from specific generating stations located within the United Kingdom, its territorial waters and continental shelf. 34 According to the European Commission in its State Aid decision N 153/98, the UK authorities are concerned that imported electricity generated from renewable sources, where no reciprocal arrangement exists, would make no additional contribution to the achievement of the UK’s carbon emission targets than imported electricity generated from fossil fuels and that it would prove impossible to ensure that renewable electricity imported from other Member States was genuinely renewable and had not received support in other Member States. The Commission also accepts the view of the British government that these restrictions are consistent with the decision of the European Court in the PreussenElektra case. Only once these issues have been resolved through developments such as harmonised European support for renewable energy and free access to other member states’ energy markets, the United Kingdom would be ready to reconsider the issue. 35 In answering to the VdEW complaint letter from March 2000, the then Director General Alexander Schaub of Directorate Competition with letter of 7 April 2000 immediately announced before close evaluation and final decision that the Commission will probably evaluate the German EEG as illegal state aid and he even asked the utilities to refuse payment of tariffs in case the Commission would evaluate the EEG as being state aid; see press declaration of German Renewable Energies Association (BEE) Monday, 29 May 2000 http://www.solarwirtschaft.de/ unternehmer/branchennews/meldung.html?no_cache=1&tx_ttnews%5Bpointer%5D=202&tx_ttnews%5Btt_news%5D=2239&tx_ttnews%5BbackPid%5D=525. 36 Judgement of the Court 13 March 2001 Case C-379/98. 37 It must be underlined though that some feed-in systems in Europe have been classified as state aid mechanism after the Preussen-Electra Ruling of the European Court of Justice, because of state involvement in the respective transfer scheme, see e.g. Commission Decision on authorising the Austrian feed-in mechanism as state aid, July 2006, IP/06/953; for the evaluation of state aid cases in the field of RE see: Rusche (2007, p. 143). 38 Judgment of the Court of 13 March 2001, Case C-379/98, point 66.

The Commission was obliged to close the whole state aid investigation.39

5.3. Claim III FiT fail to ensure equivalent price reductions to stimulate technology research contrary to competition-based TGCs 5.3.1. Price and cost digression and technology development is ensured so far only under FiT mechanisms Technology cost digression and electricity production cost decrease rely on the rapid uptake of the different technologies and on support mechanisms, which encourage access to the market. At first sight, and based on figures of 2004 for onshore wind energy, one could come to the conclusion that the German FiT prices are much higher than the United Kingdom’s RO prices. Under the ROC onshore wind in 2004 could receive payments between about 3 and 5 p/kWh. Under the EEG, for wind energy projects, which started production of RE electricity before 2004 the tariff is fixed at 9.1 eurocents or 6.1 p/kWh for schemes that began before 2004, and 8.7 eurocents (or 5.8 p/kWh at 1.5 h/£) for projects starting in 2004 or later.40 But this scheme requires a closer look: tariffs in Germany, for new projects, for example for onshore wind under the EEG digress over the 20 years of fixed payments, meaning that each new project will start in a given year with a lower tariff of that respective year than if it would have started a year earlier.41 And the natural conditions for wind harvesting are much less attractive in Germany than they are in the United Kingdom.42 Evaluations by the German Ministry of Environment for 2006 show that the effect of the German FiT system on the German electricity price is limited, as outlined in the following graph (Fig. 1) On the technology price effect, taking the example of onshore wind turbines, these costs decreased in Germany from 80 to 39 eurocents/kWh between 1990 and 2004, leading to the result of ‘‘a reduction of 53% in total and an average learning rate of 5.2% per year’’ (Klein et al., 2006). The rapid deployment of RE in Germany corresponds to the figure of h 4.5 billion of investment in this industry in 2005.43 According to research in Sweden, TGC are not efficient as a measure to correct for the effect of environmental external costs of fossil fuels and nuclear power, not efficient as a measure to create ‘‘nursing markets’’ for new electricity supply technologies.44 39 For the whole investigation and decision process concerning the German FiT regulations, see Commission Decision C(2002) 1887 of 22 May 2002, State aid case NN 27/2000, Law on promotion of electricity generation from renewable energies, OJ C 164/5 of 10/7/2002, and Commission Decision C(2002) 1889 of 22 May 2000. 40 For comparison details see Toke (2004, p. 19). 41 According to economic research and in consideration of effects such as oligopolistic market behaviour, emission trading, restricted electricity trade and production capacities, effects on producer prices and firm profits and the impact of the feed-in of renewable energy in Germany had two outcomes: a substitution effect triggered by the displacement of conventional sources and a permit price effect induced via the emission trading system (ETS). In line with this it was evaluated that the renewable support increases consumer prices slightly by 0.1 eurocent/kWh, while the producer price decreases by 0.4 eurocent/kWh; see Traber and Kemfert (2007). 42 ‘‘In Germany even the best sites have wind speeds that would be of only marginal interest to the main wind power developers in the UK.’’ Toke comes to the further conclusion, based on modelling starting from the capacity factors of each country, that the German feed-in tariff gives a much lower support per quantity of installed capacity than is the case in the UK under the RO scheme; c.f. p. 27: ‘‘Thus, annual payments per kW of installed wind power are at least 27 per cent lower in Germany.’’ 43 REN 21, Renewable Global Status Report 2006 (in US $7 billion). 44 The evaluation states clearly: ‘‘It appears that guaranteed feed-in tariffs are a more efficient policy instrument to promote industrialisation of technologies for new sustainable sources of electricity’’ Ka˚berger et al. (2004).

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5.4. Claim IV FiT limits investor’s confidence

Fig. 1. German Feed-in EEG: share of costs for one kWh of electricity in private households (19.4 eurocents), 2006.

According to the Commission’s evaluation from 2005 all TGC mechanisms seem to need a secondary instrument (based on environmental benefits) to achieve ‘‘a real market effect.’’45

5.3.2. The growing delivery disparity between FiT and TGC In its above 2005 evaluation report (COM(2005) 627.) on the different national mechanisms the European Commission came to the conclusion that so far FiT are ‘‘cheaper and more effective.’’46 Positive effect in price curve comes primarily from rapid uptake in FiT countries: In 2003, in the United Kingdom, the price per kWh generated by wind turbines was at 9.6 eurocents, whilst it was 6.6–8.8 eurocents in Germany (Spain:6.4 Ct) (Fouquet et al., 2005). For 2006, under the ROC scheme, the total average price per kWh for wind was at 11.52 eurocents, which is based on the addition of the average ROC price (6 Ct) plus the average market price for electricity (5.5 Ct). In Germany, the average price for wind installation in 2006 was at 8.9 eurocents (Fouquet, 2007b). The progress of EU 27 Member States achieved in general in 2005 towards their 2010 indicative RE target is presented in the following overview: Fig. 2 Even countries with excellent RE development such as Spain may not reach the indicative 2010 targets due to the fact that the overall increase in energy consumption could so far not be curbed (Table 1). The graph below underlines that as general observation progress is predominately ensured in FiT countries. On the other hand, not all FiT countries can present clear success, and FiT mechanisms alone without administrative clarity, good tariffs structure and a positive policy underachieve. Share of renewable electricity in gross electricity consumption (%) in EU 27 in the years 1990, 1995, 2000 and 200547 (Fig. 3).

45 European Commission, Staff Working Document, as Annex to: Communication from the Commission, The support for electricity from RES, Impact Assessment COM(2005) 627 final, p. 37; see Held et al. (2006). 46 The major reasons for the Commission were that FiT gives more investment security, differentiates between technologies, by that generating less windfall profits, promotes mid- and long-term technologies and gives better chances for new comers and new technologies. 47 Based on data from EEA Copenhagen, share of renewable electricity in gross electricity consumption (%) 1990–2005 and 2010 indicative targets (November 2007).

This claim could so far not be justified. On the contrary, major international financing houses question the validity of certificate trading as adequate or sufficient to generate enough financial security to encourage investment in new technologies.48 FiT systems on the other hand are labelled the ‘‘venture capital investor’s best friend,’’ preferring ‘‘risk-minimizing market-pull policies such as FiT for RE over CO2 emissions trading and certificate trading systems’’ (Wu¨stenhagen, 2007). The strength of the FiT system for RE support is its long-term secured market access capability for independent actors, private persons, small- and medium-sized companies, farmers, communities and communal power suppliers alike. A guaranteed, clear and foreseeable tariff structure over 15–20 years creates sound investment security and leads to a broad variety of investors and of technologies. The increase of renewable electricity in Germany alone by more then 6 percentage units during the past 7 years since 2001 is more than 90% generated by independent power production.49

6. The European deployment story—interim conclusions from unsupported claims The outcome of the comparison of TGC on the one hand and FiT is apparent: end of 2006 a total of 20 GW of RE capacity from wind power alone was installed in Germany, after 15 years of FiT systems. In Great Britain, just 2 GW of RE capacity was installed from wind power, after 17 years of existence of the two major quota and trade mechanisms ever established in Europe, the NFFO and the ROC. In addition, the gap between prices paid for example for wind energy onshore under quota mechanisms and paid under FiT conditions is widening. Other technologies than wind energy had very little success in the United Kingdom. Therefore, in January 2008, a new Energy Bill was introduced in the House of Commons accompanied by a new Planning Bill. The Energy Bill foresees now ‘‘banding,’’ which aims to enable different numbers of ROCs per MWh to be given to different types of RE technology depending on their maturity.50 It should be noted, that a more challenging target and better enforcement would have improved the results of the NFFO and 48 According to Ken Newcombe, Managing Director of Goldman Sachs’ US Carbon Emissions Desk, capping and trading carbon emissions will not be enough to fight output of the gases blamed for warming the planets. He underlined: ‘‘I’m not at all convinced from what we’ve seen internationally that a cap and trade regime and a price on carbon is going to motivate investment in truly transformational technologies.’’ Cap and trade not enough to cut carbon—Goldman Source: Reuters, Date: 17 January 2008—Byline: Timothy Gardner; Jack Ewing, Business Week, 31 January 2008, ‘‘The Wind at Germany’s Back’’: ‘‘Thanks to smart regulation, Germany has become a global powerhouse in green energy, producing more electricity from wind than any other country. While the industry owes some of its success to German expertise in fields such as aerodynamics, the biggest boost has come from the government. The nation’s energy law guarantees operators of windmills and solar generators an above-market price for power for as long as 20 years. Other countries have similar policies, but few have applied them as consistently as Germany. 49 Estimate from the German Wind energy Association BWE e.V. 50 According to the UK Government’s Trade and Investment Service’s explanation ‘‘the highest-scoring ’Emerging’ band, including wave, tidal stream, solar photovoltaic and microgeneration technologies, as well as ’fuels created using an advanced conversion technology’ and certain types of dedicated biomass crops, will be upgraded to 2 ROC/MWh. The number of certificates awarded for offshore wind production and dedicated regular biomass in the ’Post-Demonstration’ band will increase to 1.5 ROC/MW. Other technologies such as onshore wind, hydro and geopressure will remain on 1 ROC/MWh in the ’Reference’ band.

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80 75

Other renewables Large hydro Indicative targets 2010

Share of renewable electricity (%)

70 65 60 55 50 45 40 35 30 25 20 15 10 5

Malta

Cyprus

Estonia

Poland

Belgium

Lithuania

Luxembourg

United Kingdom

Czech Republic

Ireland

Hungary

Greece

Netherlands

France

Germany

Bulgaria

Italy

Spain

Portugal

Slovakia

Finland

Slovenia

Denmark

Latvia

Romania

Sweden

EU-15

Austria

EU-27

0

Fig. 2. Progress of EU 27 Member States achieved in general in 2005 towards their 2010 indicative RE target. Source: EEA Copenhagen (2007), based on 2006 data.

Table 1 Overview on the different support mechanisms per country Feed-in systems Austria Belgiuma Bulgaria Cyprus Czech Rep. Denmark Estonia Finland France Germany Greece Hungary Irelandb Italy Latvia Lithuania Luxemburg Malta Netherlands Poland Portugal Romania Slovenia Slovakia Spain Sweden United Kingdom

Quota systems

m m m m m m m m m m m m m m m m m m m

based on inadequate tariffs, missing cost digression and direct involvement of the State in the payment system.51 However, for the sake of rapid deployment of RE and security of investment and in view that a consensus on ambitious deployment quotas is very difficult to reach it is evident that unrestricted market access by FiT systems embedded in a sound legal and administrative structure are at a clear advantage to TGC systems with quota regulations. The idea to put a lid on RE increase on a given energy market is in contradiction to the need to deploy as fast and as much RE as possible and to change the incumbent energy supply structure towards sustainable energy systems. A key observation in this respect is that it is often very difficult to reach agreement on TGC target levels that are ambitious in relation to the needs derived from energy security and climate change mitigation concerns, while agreement of incentives for FiT are more easily obtained, as demonstrated by recent developments in Europe. The preference of the Commission for TGC rather than FiT systems is not supported by evidence.

m m m m m m

7. Spring 2008 situation concerning the debate on the draft RE Directive m m

a Belgium cannot be counted as a 100 % TGC country since the Flanders region uses a FiT mechanism for PV promotion. b Ireland had for many years a tendering and quota mechanisms (AER programme) and changed to FiT in 2006.

ROC or other TGC systems in that respect. Similarly, FiT systems can fail if they are not designed properly, e.g. not embedded in a positive administrative and planning environment, if they are

The January 2008 draft Directive proposes as a first milestone in European RE policy and as role model for the international community a legally binding target of 20% RE partition in the overall final energy consumption in Europe by 2020.52 It aims to 51 In Denmark for example under its former FiT mechanism the payments were covered by the Government’s budget and the increasing payment for the system led the Government to cancel the system and new investment stopped. 52 The proposal is part of a legislative package that aims to establish GHG and renewable energy commitments for all Member States. In addition to the RE Directive proposal, the legislative package proposed by the Commission includes a

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80 70

1990 1995

60 50

2000 2005

40 30 20 10

E EU EA -2 7E U Be -15 lg C ze Bu ium ch lg R ari e a D pub en li G ma c er r m k Es any to Ire nia l G and re e Sp ce Fr ain an ce Ita C ly yp r La us Li tv Lu thu ia xe an m ia b H ou un rg ga N et M ry he a rla lta n Au ds st Po ria Po lan r d R tug om a l Sl ani ov a Sl en ov ia a Fi kia nl U ni Sw an te d ed d Ki en ng do m

0

Fig. 3. Share of renewable electricity in gross electricity consumption (%) in EU 27 in the years 1990, 1995, 2000 and 2005.

set mandatory targets for the overall share of energy from renewable sources in energy consumption and for the share of energy from renewable sources in transport. It lays down rules for administrative procedure and electricity grid connections in relation to RE. It establishes sustainability criteria for biofuels and other bioliquids. Each Member State shall ensure that the share of RE in final consumption of energy in 2020 reaches at least their overall target for the share of RE in that year, as set out in Part A of Annex I. They shall ensure that the share of RE equals or exceeds the indicative trajectory interim targets, which are specified in Part B of Annex I of the proposed Directive. Member States should establish a national action plan including sectoral targets. In order to open towards flexibility for Member Stats in how to reach their targets the Commission introduces a certificate trade mechanism, related to new RE capacity, between Member States and between persons. As shown below this will have consequences for all existing national support tools by creating a harmonised regulation for a new trading good. 7.1. A move away from FiT and national support mechanism The January 2008, Commission Staff Working Document and the related Impact Assessment (IA) for the Proposal and subsequently the new draft RE Directive build on the same arguments favouring TGCs, which were already controversial in 2000 and 2001 in the process leading up to the current European Directive 2001/77/EC. Under the Directive 2001/77/EC GoOs were introduced for the purpose of being disclosure papers, guaranteeing the origin of electricity produced from RE.53 Directive 2001/77/EC makes it clear, that GoOs are not tradable documents: According to Recital (footnote continued) Regulation updating national GHG emissions targets and a Directive to improve and expand the EU emissions trading system (EU ETS). The Commission sees the various elements as complementary: EU ETS will facilitate growth in renewable energy, see: COM(2008) 19 final, p. 5. 53 Article 5 states that ‘‘Member States shall, not later than 27 October 2003, ensure that the origin of electricity produced from renewable energy sources can be guaranteed as such within the meaning of this Directive according to objective, transparent and non-discriminatory criteria laid down by each Member State. They shall ensure that a guarantee of origin is issued to this effect in response to a request.’’

(11) it ‘‘is important to distinguish guarantees of origin clearly from exchangeable green certificates.’’ And at present GoOs do not count automatically or as a rule for target fulfilment.54 However, under the new Directive proposal GoO will be modified per legem into TGC for the EU 27. As will be detailed below, especially Articles 7–9 of the current draft proposal change the legal structure and objectives of the GoOs: They can in future be counted for the national target of the country where they will be cancelled and can be transmitted without the renewable electricity attached to it. The Commission aims at reducing with this flexibility the fear of Member States not to be able to reach their targets. Some Member States such as Luxemburg, Malta and Austria express not to have enough own natural potential and resources to reach their target. It is also claimed by the Commission that it would be adequate to enable a unified TGC system in order to enhance RE in the most effective way. Failure of Member States to deploy RE during the past decade plays a considerable role as well. The United Kingdom especially finds itself in a situation where sufficient domestic increase of RE may become quite expensive.55 The problem for EU 27 may be that this failure by some Member States to deliver in the past and the proposed introduction of a harmonised EU 27 TGC system may not only not guarantee success of underperforming countries to reach its future binding target but may also jeopardize successful national support mechanism of other Member States. This

54 Recital (10) (1): ‘‘This Directive does not require Member States to recognise the purchase of a guarantee of origin from other Member States or the corresponding purchase of electricity as a contribution to the fulfilment of a national quota obligationy. (Sentence (3)): Schemes for the guarantee of origin do not by themselves imply a right to benefit from national support mechanisms established in different Member States.’’ This makes it clear that there is no obligation in any way that GoOs become TGCs but it leaves choice to individual Member States to give a specific TGC denomination to GoOs. 55 A recent report to the UK Department for Business, Enterprise and Regulatory Reform on Compliance costs for meeting the 20% Renewable Energy Target in 2020 comes to the conclusion that business as usual amounts to 5% RE of final UK energy consumption whereas the target would be 15% under the proposed EU Directive for RE promotion, and that without trade UK would have to rely on more expensive domestic technologies, which would be more costly for the UK and less efficient for the EU as a whole amounting to h 6.7 billion annual 2020 resource costs. The report comes to the result that a mix between trading and own domestic achievement will come to annual increased incremental costs of h 5.1 billion (h 2.6 billion for domestic effort and h 2.5 billion for trading-related costs) (Po¨yry, March 2008).

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neglects the effort which other Member States and their final consumers have made over the past years.

participate on the regular electricity market in competition with other producers and this supply will have an influence on the price.

7.2. The Impact Assessment

With feed-in tariffs, the renewable electricity is not sold directly in the market. The electricity is paid for through a purchase obligation which is normally put on the system operator. This electricity is shared among the customers and paid for through a fee included in the network tariff. Although renewable electricity which receives a feed-in tariff is not sold directly in the market, this additional supply will have an indirect impact on the market price (Commission Staff Working Document SEC(2008) 57, p. 12).

The Commission’s Impact Assessment (IA)56 accompanying the 2008 Directive proposal does not explicitly detail and evaluate effects of such a harmonised TGC system; neither did the IA evaluate any alternatives such as introducing a harmonised FiT system in EU 27. And neither does the IA explain why it did not proceed on these issues. The IA document and its related Annex paper57 do not respond to the basic established criteria for such assessment procedures in Europe. The IA does not outline the consequence in changing the characteristics of GoOs towards tradable certificate towards a new EU 27 trading product and for the effect on the national support mechanisms. The Commission only suggests in its IA Annex58 that with the introduction of a GoO-based trade mechanism all national support schemes could continue to exist alongside this new structure. But since discussions over the introduction of such EU-wide TGC between the Commission, stakeholders, Member States started already in summer 2007 and since strong disbelief in such a path was clearly outlined, often accompanied by scientific documents, as in the case of the critical evaluation by the German government,59 the Commission would have been obliged to reflect on this in its IA and a specific legal evaluation and explanation would have been clearly necessary. However, this did not happen. The IA therefore represents an imbalanced assessment of the issues and options at hand. 7.3. The unchanged view on support schemes by the European Commission The 2008 Working Document—in following the tradition of the Working Document from 1999—is narrowly labelling the characteristics of national support mechanisms and is especially inventive on feed-in systems: Support schemes differ with regard to their compatibility with the principles of the internal market. With premiums, quota/ TGC schemes, tendering schemes, tax exemptions and investment support, renewable electricity is normally traded in the electricity market and subject to market prices and conditions. The support is therefore remuneration on top of the electricity price. Since the electricity is sold in the market, the producers 56 Commission Staff Working Document, Impact Assessment, Document accompanying the Package of Implementation measure for the EU’s objectives on climate change and renewable energy for 2020, 23 January 2008, SEC(2008) 85/3. 57 Annex to the impact assessment SEC(2008) 85 vol. II. 58 Commission Staff Working Document, SEC (2008) 85, vol. II, 27 July 2008. 59 See for example contribution of German Ministry for the Environment at the Amsterdam Forum V, on 2 October 2007, Meeting the EU 20% RE objective by 2020 MS efforts and compensation schemes, http://www.senternovem.nl/mmfiles/ Martin%20Sch%C3%B6pe%20-%2020%25%20RE%20objective%20by%20202%20MS%20 efforts%20and%20compensations%20schemes_tcm24-241765.pdf. The Amsterdam Forum is a jointly organised regular event, headed by the European Commission and the Dutch Government with participants from National Governments and Stakeholders and concerning renewable energies; letters from the Spanish, the German governments and joint letters of several countries from the FiT cooperation, lead by Spain and Germany had been sent during the last half year of 2007 to the President of the Commission, respectively the different Commissioners. During the Fourth Feed-in Corporation Workshop in Ljubljana from 18 to 19 October 2007 the Commission was confronted with critical views of the FiT countries against trade mechanism harmonisation for Europe; see http:// www.feed-in-cooperation.org/images/files/4thWorkshop/agenda_4th_workshop_ feed-in_cop.pdf.

According to the European Commission’s previous evaluation in 2005, the adoption of the Directive 2001/77/EC led to a ‘‘positive European-wide political process towards developing adequate frameworks for renewables, but, in many Member States, these frameworks are still not yet fully operational.’’ Given the urgency of enhanced RE deployment, it is a legitimate question if changes towards an EU-wide system now would seriously delay the development for years, at a critical time for these technologies, seriously preventing or delaying Member States in meeting their national targets. It is noteworthy that the Commission itself on the other hand esteemed it to be too early to draw a final conclusion on the relative effectiveness of the various policy options for support mechanisms available,60 which shows inconsistency in view of its Directive proposal. 7.4. The path towards a harmonised EU 27 TGC mechanisms and the risk for national systems Article 9 Paragraphs 2 and 3 in relation especially to Article 8 of the draft Directive proposes the establishment of a harmonised EU-27-wide certificate trade mechanism.61 Paragraph 3 outlines that, ‘‘guarantees of origin may be transferred between persons in different Member States provided they have been issued in relation to energy produced in the EU from renewable sources by installations that became operational after the date of entry into force of this Directive. Such transfer may accompany the transfer of the energy to which the guarantee of origin relates, or may be separate from any such transfer.’’ This sets the rules of the game, focussing on certificate trade, with or without energy physically accompanying the transaction. The proposal introduces an, up-to-now unknown ‘‘good’’ in the sense of Article 28 ECT, the EU-wide exchangeable certificates for RE. The proposal is legally a trade harmonising legislation. The change of GoOs into tradable papers, which are integrated in a new EU 27 trade mechanism, will create a specific, 60 Commission Staff Working Document SEC (2005) 1571 Annex to the Communication from the Commission—The support for electricity from RE-Impact Assessment, (COM(2005) 627 final), 7 December 2005, p. 7: ‘‘while feed-in tariffs and premiums have proven effective in attracting investment, more complex systems, such as tradable green certificates, are still in an experimental phase and at a very early stage of implementation.’’ And importantly, this evaluation from 2005 at least showed openness towards FiT mechanisms by underlining that the future better co-ordination of national support schemes could be a good approach. In this evaluation by the Commission, an intensified co-ordination should be the first step towards harmonisation in the long run. A view which has been again repeated in the 2008 Working Document but without the consequence to restrict from introducing a mechanism of EU-wide trade, which puts national support systems at risk. 61 Despite some considerable improvement on the proposal for a new Directive just before its publication on 23 January 2008, a progress which was reached thanks to opposition from Member States, Members of Parliament, science and a joint alliance of the industry associations for renewable energies, the Commission still maintains in the current proposal the introduction of virtual trade.

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harmonised market for TGC in the EU 27. In consequence all other State measures, such as national quota systems or national FiT giving a special treatment and support and not accepting this overall TGC mechanism are legally creating barriers to free trade under Article 28 of the European Communities’ Treaty (ECT). Such barriers can only be rectified for a restricted time period and following the exemptions under Article 30 ECT or in case of a specification of exemption as proposed by the Commission in the new Directive they have to be judged in view of those exemptions specifically regulated in the January 2008 draft Directive proposal.62 The risks associated with an overall TGC introduction are manifold. National policies on support will come under constant and close scrutiny by the European Commission, respectively national or European Courts—in cases of attacks of opt out decisions of a Member State—and thus affecting immediately investment security. According to recent research on the impact of such trade introduction Member States would have no control over the import and export volumes to and from their countries and to the effects of trade (Klansman et al., 2007). As economic consequence the introduction of such EU 27 certificate trade between persons could offset the reduced CO2 windfall profits in the European power sector due to auctioning increasing share of CO2-emission allowances (Ragwitz et al., 2007)63 and thereby not helping to lower existing market dominance by a small number of powerful electricity producers. TGC trading for all types of RE energy technologies will probably introduce a technology-neutral TGC price in Europe, which follows the marginal price of the most expensive TGC offer accepted in reflecting the demand for TGCs. In order to achieve the best profit, low-cost RE production in a given country would be—as TGC—exported outside the national system in an uncontrollable way. The amount of RE increase reflected in the virtual certificate could not be counted in the respective Member State of origin. This Member State would then remain behind with the more costly energy sources to reach his target. FiT Member States under such opened systems would face increase of costs for consumers by import of high-cost RE production willing to benefit from the FiT premium. The national systems, especially FiT systems would thus come under imminent threat. Additional annual windfall profits would be approximately h30 billion higher than the costs of an EU-27-wide technology-specific support as it is acknowledged by the Commission in its IA.64 The German government adds in its comment ‘‘considerable

administrative costs’’ to the costs to consumers from these profits.65 The introduction of EU 27 certificate trade increases the risk that FiT systems will need to put a cap and quota on market access in order to regulate the overall price situation if cheaper energies leave for windfall profits and would no longer be counted under the national targets. This is a direct conflict to the basic idea of FiT systems not to restrict the amount of RE entering the market. Moreover, the existing Directive 2001/77/EC justifies explicitly, that Member States only give access to national support mechanisms for nationally produced electricity. The new Commission proposal opens national support instruments un-controlled for TGCs from energy produced in other Member States. This may increase the amount of TGCs but not the amount of RE in the respective EU country and will undermine security of energy supply from RE in the mid and long term. There is a shift away from the clear link of needs for national support mechanisms in view of the market distortion. The Commission’s 2008 proposal no longer refers to the distorted internal market for energy and to the subsequent need for Member States to provide market access mechanisms as it is clearly laid down under the Directive 2001/77/EC. The 2008 draft Directive subsumes national instruments under a specific definition for such ‘‘support mechanisms,’’ which as a result puts them under application of the principle of Free Movements of Goods in line with Article 28 consecutive ECT. The new wording in Article 2 (h) defines a support scheme as a ‘‘scheme, originating from a market intervention by a Member State, that helps energy from renewable sources to find a market by reducing the cost of production of this energy, increasing the price at which it can be sold, or increasing, by means of a RE obligation or otherwise, the volume of such energy purchased.’’ However, there is a question mark on whether support mechanism themselves are trade mechanisms in line with the trade rules or rather policy instruments in form of marketenhancing tools. As policy instruments they would, following the European courts’ jurisdiction, not necessarily fall under the legal limitations of the free trade rules. The definition proposed by the Commission for the new Directive turns support schemes into trade measures, and therefore subject to Article 28 ECT. There is the need for a more indepth assessment on this question of the legal quality of RE support mechanisms. Even though the European Court in its Preussen-Electra decision had evaluated the question of a violation of the free trade principles under the former German FiT law, but the examination by the Court was cursory because the parties involved presented only few facts and evidence related to this since the main focus of all parties was on the question of state aid.66

62 ECJ Case C-379/98; in this context it is also interesting, that the Commission offers in its Working Document from 2008 a narrow view on the interpretation of the ECJ’s Preussen-Electra Case. The European Commission suggest in this Document that with this judgement FiT create ‘‘a restriction to the free movement of goods in the sense of Article 28 of the Treaty.’’ The Commission Staff Working Document outlines on pages 12 and 13: ‘‘According to EU case law, electricity is a good, covered by the Treaty provisions on the free movement of goods. In some Member States, support schemes foresee a purchase obligation, which obliges suppliers to purchase all renewable electricity produced in a certain region at a fixed price.’’ 63 The authors outline: ‘‘Export restrictions (by Member States) of GOs will be limited to a minimum’’ as stated in the paper by Ecofys (2007). In this case, profitmaximizing RES-E generators will aim for the highest support level offered in any of the Member States. This will put pressure on current support schemes to align. Eventually, technology-differentiated support schemes will be replaced by a uniform EU-wide trading system.’’ 64 Calculated for the year 2020, cf. Annex to the impact assessment SEC (2008) 85, vol. II, p. 104.

65 German Government, official comment to Commission and Council ‘‘Consequences of the COM proposal for a trading system for GOs’’ (31March 2008). 66 Concerning the scarcity of information see Opinion of Advocate General Jacobs delivered on 26 October 2000 Case C-379/98 Preussen-Elektra AG v Schleswag AG in presence of Windpark Reussenko¨ge III GmbH and Land SchleswigHolstein: ‘‘195. Unfortunately, however, the issues have not been fully discussed by the parties, and the Court is not fully informed of the facts. Until now the litigation about the validity of the Stromeinspeisungsgesetz [Electricity Feed-In Law, StrEG] has concentrated on its effects either on the undertakings which have to finance the mechanism or on the undertakings competing with the producers of electricity from renewable sources. The national court’s third question deals by contrast with a third effect of the StrEG 1998, but one hitherto largely neglected, namely its impact on cross-border trade in electricity. Moreover, it is not clear precisely how and to what extent imports of electricity from other Member States are in practice affected by the operation of the StrEG 1998, and in particular for example whether imports of electricity from renewable resources are technically feasible at all and whether such electricity can be distinguished from electricity generated from conventional sources.’’

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It is also important to note that the Directive 2001/77EC was not yet in force at the time of judgement in the case PreussenElektra.67 A new decision by the European Court on this whole issue would need to reflect especially on the Directive’s definitions given for support mechanisms. This makes it crucial not to prejudge with introducing of such a narrow definition on support mechanisms as proposed by the Commission. The Court would also need to reflect on the fact that Europe has agreed on a 20% binding target for Europe. Moreover, all Member States in the EU 27 have introduced mechanism for their national RE electricity entering the electricity market. This was not the case at the time of the Preussen-Elektra decision. This makes any claim just against a single support mechanism of one given country on the grounds of arguments on violation of free trade rules quite arbitrary.68

trade is apparent. This makes secure investment planning difficult. Member States could no longer justify deviant national policies, which would go beyond the specific regulated exemptions in the Directive outside the framework of the Directive itself.71 Closed feed-in systems, which would be continued as opt out by a Member States in restricting the selling of TGC to another country would be seen as having the effect of a trade restriction for the purchase of these new certificates from a foreign country, because the grid companies as market participants in the closed national market would be obliged to directly purchase and pay for the national RE without having the right to participate in the certificate trade.72 With the 2008 RE Directive proposal Europe is losing its FiT mechanisms in favour of a TGC system.

7.5. Are adequate exemptions proposed for safeguarding of national support mechanisms in place?

7.6. Amendments sought by Member States and the rapporteur in the European Parliament

The flexibility mechanism in the RE Directive proposal is not able to ensure sufficient stability for national support mechanisms outside a European-wide TGC system. The proposal under Article 9 Paragraph 2, that under specific conditions Member States may opt out of TGC in order to assure their national systems, has been criticised as being an ‘‘empty box.’’69 Paragraph 2 of Article 9 of the Directive Proposal accepts only very few and limited exemptions, which are:

The Member of the European Parliament and rapporteur for the RE Directive, Claude Turmes, and a number of Member States, led by Spain and Germany, in May 2008 call for clear amendments ensuring that no harmonised TGC for EU 27 will be introduced and that the GoOs remain only disclosure documents.73 They all call for a strictly voluntary basis approach if some Member States may want to decide to issue target accounting certificates (TAC). They underline that the proposed Directive should not grant a legal right to the issuance of TAC. They outline that it needs to be in the sole discretion of Member State whether and to what extent they wish to introduce national schemes to allow flexibility for private investments such as joint projects, joint target achievement and the like, again organising the transfer on a statistical basis or via TGC, which the rapporteur and the German government now call target, respectively—TAC. For both options, be it flexibility between Member States or between private persons, they argue that virtual transfer does not have to be based on certificate transfer between Member States, but can also be implemented on a statistical basis, thus reducing the administrative burden. If certificates are applied the different possible functions of certificates are separated. GOs as such, issued by all Member States upon request, only possess the disclosure function as introduced by the ‘‘2001 Directive’’ Proposal beyond that, Member States are free to decide if they issue certificates with the function of accounting the amount of RE towards their national target. They only accept the functions of foreign certificates, which they have attributed to their own certificates (principle of reciprocity). It is noteworthy, that the alliance between Member States in the Council consists of FiT countries and of TGC countries.74

1. in the case, that the transfer of GoOs is likely to impair a secure and balanced energy supply or is likely to undermine the achievement of the environmental objectives underlying Member States’ support schemes, 2. in case that the transfer of GoOs is likely to undermine the achievement of national renewable targets.70 There are strong doubts as to whether the national support mechanisms especially the FiT could operate in parallel with the help of these exemptions. In general, exemption from the trade principle can only be granted by Member States in a non-discriminatory and balanced way and only for as long as the imminent reason for blocking 67 Concerning promotional support mechanisms for renewable electricity and the related question to examine whether there is already in an EU-wide harmonisation one needs to focus on the current Directive 2001/77/EC, but certainly not on Directive 2003/54/EC on the internal market for energy. Directive 2001/77/EC again is in this respect lex specialis; in so far erroneously: Karpenstein/ Schneller, RdE 2005;—The European Court in case Rs. C-379/98, Preussen-Elektra did examine harmonisation principles in view of the internal market Directive 96/ 92/EC (now 2003/54/EC), but that was logical since at time of judgement Directive 2001/77/EG had not passed yet; it entered into force only on 27 September 2001. See for the evaluation of Preussen-Elektra in the light of the new Directive Proposal for the Promotion of Renewable Energies Neuhoff (2008) http://www.econ.cam.ac.uk/eprg/pubs/misc/neuhoff_renewables_directive.pdf. 68 The rapid price decrease in Germany and Spain, especially for wind energy already encourages increased use of direct marketing of RE outside the FiT mechanisms, which reduces the arguments on trade barriers. 69 Director General Urban Rid, German Ministry for the Environment, during the Fifth Workshop of the Feed-in Cooperation in Brussels, April 2008. 70 Article 9 Paragraph 2 outlines that Member States may not allow trade between persons if trade is ‘‘likely to impair their ability to ensure a secure and balanced energy supply or is likely to undermine the achievement of the environmental objectives underlying their support scheme’’ and ‘‘Member States may provide for a system of prior authorisation for the transfer of guarantees of origin to persons in other Member States if in the absence of such a system, the transfer of guarantees of origin is likely to impair their ability to comply with Article 3(1) or to ensure that the share of energy from renewable sources equals or exceeds the indicative trajectory.’’

71

See Becker (2000), EU Kommentar, Article 28 EC-Treaty, marginal no. 95. The purchase of virtual GoO from other EU Member States cannot be avoided under the current Directive proposal; it is not specified under Article 9 paragraph. 2. From a European legal perspective it will be completely irrelevant as so-called national resident discrimination (Inla¨nderdiskriminierung). But it can result in considerable economic consequences for a Member State which would try to opt out of the virtual trading system. 73 Draft Report on the proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (COM(2008)0019—C6 0046/2008—2008/0016(COD)), Committee on Industry, Research and Energy, Rapporteur: Claude Turmes, 13 May 2008; German Government, Proposal for alternative options to allow for flexible achievement of national RE targets within the RE Directive, May 2008. 74 A prominent TGC country and critical to the introduction of a harmonised EU-wide TGC system is Poland. Finland also opposes any introduction of such a system. 72

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For the sake of rapid deployment of RE it can only be hoped that a solution will be found, which ensure the stability and validity of performing national support systems. Any new regulatory system should minimise the risk of legal challenges that would lead to lengthy periods of legal struggle and reduced levels of investments until the situation is clarified.

8. Conclusions Rapid and broad penetration of renewable energy (RE) is required to meet GHG emission reduction and energy security targets. In order to achieve this RE has to be deployed as much as possible in all EU countries. Support policies need to be strongly motivating and not restrictive. The subsidiarity principle suggests that the European Union should continue to leave to Member States their clear choice of instruments for support market access to RE.75 It would well serve the underlying purpose of the RE expansion if targets have the character of minimum levels rather than maximum levels to be achieved. Slowing down or delaying renewable energy deployment due to legal uncertainty of the Directive provisions, lengthy court procedure and disintegration of national mechanisms would lead to losing ground in the RE market for EU industries and jeopardize reaching EU objectives for energy security and GHG emissions reductions. Any European regulation on REs needs to acknowledge that well-designed FiT systems are effective policy instruments, especially creating benefits beyond the strict RE deployment leading to faster shift towards distributed energies and access parity for a magnitude of players and industry development. Hence support must be assured by the European institutions to strengthen these systems. Member States should further be encouraged to combine their efforts and to start opening their national systems to neighbouring countries76 rather than to loose effective policies, time, targets and credibility by introducing of an EU-wide TGC system. Europe is under international scrutiny concerning its credibility to deliver, and delays and ineffective mechanisms would risk slowing down the global effort to enhance RE. Another conclusion relates to investor risk and investor confidence in the income stream to be generated. This is particularly important for small and medium size investors that have characterised the RE investments so far. With TGC markets the value of the certificate is uncertain, and may change considerably over time. Would there be an oversupply of certificates the price would become very low. This could significantly affect the financial situation of investors. This mechanism would lead investors to refrain from investments that would affect the certificate prices too much leading to a lower level of investments than would otherwise have flowed.77 A safeguard of successful systems is also important in the present situation, where concerns over global warming and energy security are growing. Rapid introduction of RE is one of the major options to improve the situation in this respect, and at the same time increase the competitiveness of RE industry and create new jobs. Any system implemented should allow for more 75 The principles on subsidiarity and proportionality are outlined in the current Directive 2001/77/EC in Article 4, stipulating that support mechanisms should be effective, simple and efficient especially in terms of costs. 76 First concrete preparing steps for clustering of FiT mechanisms are already introduced by FiT countries, see evaluation of possibilities in: Resch et al. (2008). 77 This mechanism was illustrated by the price collapse of the price of the certificates in the EU ETS in the pilot phase. The value of the TGCs may also be subject to price-influencing market actions. These risks and uncertainties are likely to significantly reduce investments from small- and medium-sized investors.

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than expected and hoped for levels of investment. The targets set in the TGC systems serve the opposite purpose. While TGC favour corporations with large market power, FiT would be the choice of those that favour competitive market and as much as possible in the way of RE investments. Overall the European Union has the option to lay the ground for meeting the next challenge in creating a Europe with close to zero GHG emissions and a stable sustainable energy supply by 2050. As the costs of RE systems are coming down the learning curve, and if subsidies to conventional energies (fossil fuels and nuclear) are further reduced, external costs of different energy sources reflected in market conditions, any specific support system can be phased out. Those mechanisms which lead to this goal most rapidly should be preferred.

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