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POLICY SUPPORT FOR RENEWABLE ENERGY IN THE EUROPEAN UNION A review of the regulatory framework and suggestions for adjustment
J.C. Jansen
Acknowledgement This report is an outgrowth of the project ‘Renewable Energy Trends’ under ECN project number 7.7448. Constructive comments and suggestions were given by Wim van Arkel, Maroeska Boots, Bert Daniëls, Ruud Egging, Theo de Lange, Elke van Thuijl and Martine Uyterlinde. Yet the sole responsibility for the contents and opinions expressed in this report rest with Jaap Jansen (
[email protected], tel.+31.224.564437).
Abstract After putting renewable energy policy support in an overall policy perspective, some key EU renewable energy policy documents are reviewed. Recently promulgated EU policies on automotive biofuels are given special attention. The report generally questions the soundness of the basis on which the EU has set indicative targets for renewable energy, renewables-sourced electricity, and renewable fuels. The justification provided for the ‘reference values’ with respect to the use of renewable fuels (that is, automotive biofuels) is found particularly wanting and the European Commission is urged to more credibly account for the alleged positive impacts of the targeted penetration of automotive biofuels on aggregate income and employment. The European Commission should also fully address the issue of the low efficiency of this policy instrument, relative to other options, in securing energy supply and reducing greenhouse gas emissions. Lessons from the Common Agricultural Policy should be taken to heart by fully charting the risks of creating new vested interests. The current support frameworks for electricity from renewables (RES-E) at Member State level are reviewed. The EU and some of its Member States have taken a leading role in the design of innovative policies in support of renewable energy. But much EU policy making is still to be done if a genuine EU-wide RES-E electricity market is to be created. Renewable energy targets need to be redefined at the Community level using a long-term framework and making due allowance for the three foremost energy policy concerns, namely: • overall competitiveness of the EU economy, • security of energy supply, • environmental protection. The report outlines the design of a Community framework for harmonisation of national RE support frameworks. Issues addressed include the choice of framework model for market development support to distinct eligible RES-E technologies and the relationship between the RES-E market and automotive biofuels.
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CONTENTS GLOSSARY
4
SUMMARY
5
1.
INTRODUCTION 1.1 Background 1.2 Outline
9 9 9
2.
BROADER POLICY PERSPECTIVES 2.1 Introduction 2.2 Improving overall competitiveness and market integration 2.3 Energy supply security 2.4 State aid for environmental protection technology 2.5 Conclusions
10 10 10 11 13 13
3.
THE EU RENEWABLE ENERGY POLICY FRAMEWORK 3.1 Introduction 3.2 The White Paper on renewable sources of energy 3.3 Directive on electricity from renewable energy sources 3.4 Concluding observations
16 16 16 20 23
4.
EU POLICIES ON BIOFUELS FUELS FOR TRANSPORTATION 4.1 Introduction 4.2 Instruments to reduce the dependency on oil 4.3 The Directive on the promotion of biofuels and other renewable fuels for transport 4.4 A review of the EU renewable fuels policy 4.5 Concluding remarks
27 27 27
5.
A BLUEPRINT OF A HARMONISED AND COHESIVE POLICY DESIGN 5.1 Introduction 5.2 National regulatory frameworks for direct market support 5.3 Harmonising RES-E support 5.4 Harmonising and integrating the RF support framework 5.5 Optimising standards for RES-E and renewable fuels 5.6 Concluding observations
35 35 35 38 46 49 51
6.
AN AGENDA FOR REGULATORY ADJUSTMENT
54
REFERENCES APPENDIX A APPENDIX B
28 30 33
56 MAIN FEATURES OF THE COMMUNITY GUIDELINES ON STATE AID FOR ENVIRONMENTAL PROTECTION
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APPLYING LEARNING CURVES FOR TRANSITION MANAGEMENT
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APPENDIX C C.1 C.2 C.3
DERIVATION OF A CONVERSION RATIO BETWEEN RES-E CERTIFICATES AND RF CERTIFICATES Keys to determine the conversion ratio between RECs and RFCs Assumptions Determination of certificate conversion ratio
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GLOSSARY Additional cost
Ambitious targets EJ ECJ Eligible EU FIT system
GJ GO IEA MS(s) MWh RD&D PES PJ PV RE REC
RES-E RET RF RFC RFS RPF
TGC Toe TPES
4
Extra cost to end users and the public sector over and above the cost of the energy carrier concerned or its closest substitute (grid electricity, gasoline, etc.) if no RE policy support would have been in place Policy targets which will not be achieved without effective additional measures Exa (1018) joule European Court of Justice 1) Qualifying for RE support; 2) counting for the RE policy target concerned European Union Feed-in tariffs system: a RES-E support system, in which distinct regulated preferential tariffs have to be paid to technology-specific categories of RES-E generators for feeding their electricity directly into the central grid within the jurisdiction concerned Giga (109) joule Guarantee of origin: a unique proof of the source of a certain quantity (e.g., 1 MWh) of RES-E electricity International Energy Agency Member State(s) Mega (106) watt-hour Research, development and demonstration Primary energy source Peta (1015) joule Photovoltaics: technology by which direct and diffuse sunlight absorbed by solar panels, is converted into electricity Renewable energy Renewables-based electricity certificate: a unique proof that a certain quantity of electricity (e.g., 1 MWh) has been generated by eligible renewables-based electricity Renewables-based electricity; renewably-generated electricity Renewable energy technology Renewable fuels: comprises at least automotive biofuels, including biomassbased hydrogen to be used as biofuel (definition based on the RF Directive) Renewable fuels certificate Renewable fuels standard: a regulatory minimum share for renewable fuels in the total consumption of automotive fuels within a jurisdiction Renewables portfolio standard: a RES-E support system, in which the regulator sets a minimum share of total electricity supply or demand in a jurisdiction to be sourced from eligible RES-E sources Tradable green certificate: synoym of REC (term used in current EU legislation) Tonne of oil equivalent, equal to 41,868 MJ (IEA definition) Total primary energy supply
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SUMMARY This report focuses on some specific features of renewable energy policies in the European Union. It discusses among others the appropriateness of current approaches regarding the setting of (portfolio) targets for renewables, in particular biofuels, and the issue of harmonisation of renewable energy policies among the Member States. The main research questions are: • Should renewables contribute as envisaged by the European Commission to meeting demand in the EU energy markets, the electricity and automotive fuel markets in particular? • Does the European renewable energy policy framework leave room for improvement?
Main energy policy considerations The general EU policy objectives considered most relevant to the design of energy policy are: (1) competitiveness of the EU economy, (2) security of energy supply, and (3) environmental protection. All renewable energy policies should be measured by the contributions they make to these goals. Overall competitiveness is pursued by liberalising the EU electricity and gas markets and by separating of production, transportation, and distribution activities of gas and electricity. The European Commission aims for a single EU market. This requires the integration of the EU energy markets including, in view of their planned greater weight, renewables. The Green Paper on energy supply security (EU, 2000) paints a dismal long-run picture in which the Union’s dependency for gas and oil on extra-territorial sources, geographically concentrated, grows alarmingly. Diversification of primary energy sources and supply regions is recommended. By implication, renewable energy should be vigorously stimulated, although this is hardly elaborated. The Green Paper focuses on managing demand growth and supply dependence as main policy priorities: • Demand growth should be managed through fiscal measures. By removing externalities, existing price distortions among both energy carriers and Member States, energy prices would reflect their real costs, including environmental costs. Priority demand sectors for which the growth of energy use should be controlled most urgently are transportation (especially road transportation) and buildings. • Supply dependence management. The Green Paper suggests, among a host of other measures, that new renewables should be vigorously stimulated. The ‘Community Guidelines on State Aid for Environmental Protection’ (EU, 2001a) offers a framework for assessing the compatibility of various forms of State aid for renewable energy development with the Community’s internal market and competition regulations. These Guidelines, unfortunately, leave ample room for Member States to introduce distinct incentive systems. By not firmly guiding Member States towards the transparent frameworks and readily accessible legal procedures that underpin a level-playing field, these Guidelines will not halt the ongoing fragmentation of the Internal Market, as far as renewable energy sources are concerned.
Framework for EU renewable energy policies The Renewable Energy White Paper states that indigenous renewable sources of energy will have to play an important role in improving energy supply security. It sets an indicative target of 12% for the share of renewables in the EU’s primary energy portfolio in year 2010, more than double this share in 1995. The total investment in renewables over the period 1997-2010, required to reach the aforementioned EU objective is put at € 165 billion. Some 58% (€ 95 billion) would be ‘incremental’, i.e. accounted for by the higher investment cost of renewables.
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To the 12% target for renewables in the Renewable Energy White Paper, the RES-E Directive (EU, 2001b) adds the indicative target contribution of 22.1% by renewables-based electricity to total EU electricity consumption in year 2010. This RES-E objective, as distinct from the RE objective has been broken down into a corresponding but differentiated (non-binding) target for each Member State. These targets are the outcome of political negotiations, based on the most ambitious renewable energy policy scenario considered (Best Practice), run through an energy system simulation model (SAFIRE). There is no apparent link between the targets and the three main goals of EU energy policy. What is more, the RES-E Directive does not put a harmonised support framework in place to ensure that the targets will be achieved. Without a suitable harmonised framework the additional cost, and the net associated welfare loss on short and medium term, to achieve the ambitious RES-E targets will be much higher.
Renewable fuels The Commission aims to promote alternative transport fuels at the expense of mineral oil fuels. An ‘optimistic development scenario’ projects shares for biomass, natural gas, and hydrogen in the EU automotive fuel market in year 2010 (2020) of 6% (8%), 2% (10%), and 0% (5%) respectively (EU, 2001c). Current EU policies on alternative motor fuels focus on the promotion of biofuels. In a proposed Biofuels directive (EU, 2001d) the introduction of a mandatory share scheme for biofuels, including as from 2009 minimum blending shares. In the Commission’s view mandating the use of biofuels will (i) improve energy supply security and (ii) reduce greenhouse Gas emissions and (iii) boost rural incomes and employment. Current regulations would preclude a notable negative impact on the rural environment. This report challenges the Commission’s biofuels strategy. It puts the adequacy of the justification for the draft Biofuels Directive in doubt and questions the validity of some elements. This document simply ignores the interactions between the RES-E and the biofuels markets and implementation may well have negative aggregate income and employment effects. Much more effective (in terms of achieving stated goals) and efficient (e.g., in terms of additional cost per unit of greenhouse gas emission reduction achieved) alternative options are at hand. The recently adopted renewable fuels Directive (EU, 2003b) has no fuel blending requirement and Member States are not obliged to achieve the ‘reference values’ of 2% and 5.75% in years 2005 and 2010 respectively. Their commitment is limited to “ensure that a minimum proportion of […] renewable fuels is placed on their markets, and, to that effect shall set national indicative targets”.
Recommended adjustments of EU policies on renewables Supply security and environmental considerations appear to persuasively favour policies to promote production and use of renewable energy in the European Union. What is still missing however is a comprehensive analysis, including these and other major energy policy considerations, on which to base quantitative EU targets. This includes credible analysis of the impact on EU-wide income and employment before proposing targets for renewables, renewables-based electricity and biofuels. There also appears to be ample room for improving the efficacy and consistency of European renewable energy policy frameworks. Current interventions at Member State level work against the Internal Market. Not least by empowering the lobbies of special interest groups that resist the opening up of domestic markets. If this is left unchecked, the benefits of economies of scale and dynamic innovation that EU-wide internal renewable energy markets offer, will remain largely elusive. This report sketches a blueprint for harmonising national RE support at Union level. It rests on the outline of a theoretical framework for determining the optimal proportions of RES-E technologies in a generating capacity portfolio. The first step is the classification of RES-E technologies and the associated setting of targets.
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The RES-E market is composed of three tiers: 1. Cost-competitive technologies not eligible for policy support. 2. Modestly non-competitive technologies that may qualify for a generic Renewable Portfolio Standard (RPS) support system. This is to be complemented with a relatively modest support component of technology-specific Research, Development, and Demonstration programmes. 3. Truly non-competitive but promising technologies. The very promising ones should be supported by technology-class-specific RPSs. Public support should also include a major component of technology-specific RD&D programmes. Contingent on the Commission providing a convincing justification for the introduction of renewable fuels standards, the second step is to align the renewable fuels market with optimal targets for the RES-E market through the choice of appropriate renewable fuels standards. This would have to be based on a modelling exercise of the market for biomass-energy feedstock. If needed, determination of optimal (generic) renewable portfolio and renewable fuels standards would proceed in an iterative mode. Long-term targets would be periodically updated based on ex post-cost reduction performance measured against clearly defined ex ante targets. Fixed fungibility rules could formally link the markets of RES-E and renewable fuels. Such a link would make the proposed certificates for compliance in the RES-E programme also valid for the renewable fuels programme and vice versa. This would substantially dampen price volatility in the market for biomass-energy feedstock. In conclusion it must be said that - whilst current EU renewable energy programmes still show many design deficiencies - the pioneering role of the EU in the design of innovative RE support mechanisms is very commendable.
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1.
INTRODUCTION
1.1
Background
Energy is an essential input driving economic development. Therefore, in developed economies energy policies constitute an important component of overall regulatory frameworks shaping the commercial environment of the private business sector. With the ongoing deepening of economic integration and liberalisation of the internal market of the European Union, the coherence of the energy policy framework of the European Union and its Member States is a matter deserving serious attention. Official timetables have been agreed upon to liberalise the electricity and gas markets in EU Member States. As for renewable energy, though, at present the immediate focus of policy interventions at EU and Member State levels is on facilitating rapid market penetration. The introduction of a harmonised regulatory framework for creating an EU-wide level playing field in the renewable energy field has been given a lower priority so far. This report focuses on selected features of existing renewable energy policies within the European Union. Its main research questions are: • Should renewables contribute as envisaged by the European Commission to an adequate medium and long term energy supply security in the EU energy markets, the electricity and automotive fuel markets in particular? • Can the consistency and efficacy of the European renewable energy policy framework be improved?
1.2
Outline
The report is organised as follows. Chapter 2 reviews the broader perspectives for gauging the appropriateness of RE renewable energy policies, especially competitiveness of the EU economy; environmental protection and energy supply security. Chapter 3 focuses on EU renewable energy policy design over the last few years, which culminated in a Directive on the promotion of renewable energy (EU, 2001b). In Chapter 4, critical insight is provided into the consequences of deployment of biofuels as transport fuels to the extent the Commission envisages in the medium and long term. These digressions set the stage for addressing the aforementioned main research questions at stake. This is done in Chapter 5, which sketches a proposed blueprint for a harmonised framework of renewable energy support policies in the EU.
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2.
BROADER POLICY PERSPECTIVES
2.1
Introduction
This chapter presents some major overall energy policy considerations that are relevant for assessing renewable energy policy frameworks. The White Paper on an energy policy for the European Union (EU, 1995) sets out the broad principles underlying the design of energy policy in the EU. Energy policy must form part of the general aims of the Community’s economic policy based on market integration, deregulation, limiting public intervention to what is strictly necessary in order to safeguard the public interest and welfare, sustainable development, consumer protection and economic and social cohesion. Beyond those general aims energy policy must pursue aims that reconcile competitiveness, security of supply and protection of the environment. These aims should help to address central policy concerns such as job creation, greater efficiency in the general business environment, and protection of the environment. Therefore, the following three general EU policy objectives are considered most relevant to the design of energy policy: • Overall competitiveness • Security of energy supply • Environmental protection. The Energy Policy White Paper states that ‘energy policy must aim, wherever possible, to reconcile these objectives while being consistent… A future priority will be to ensure that in the long-term perspective the consistency of Community energy actions is maintained and where possible strengthened’ (EU, 1995: p.13).1 A key global environmental protection issue impinging on future energy policy design and implementation in the EU that can not be ignored is climate change. The EU has committed itself in the Kyoto Protocol to a GHG reduction target of 8% per annum in the period 2008-2012 relative to base year 1990, with an agreed differentiated target setting for its Member States, the socalled Bubble Agreement. The amendments agreed at CoP-6bis in Bonn prescribe that the EU and its Member States achieve their pertinent emission targets to a ‘substantial’ extent by ‘domestic actions’, supplemented by application of the three flexible instruments as defined by the Kyoto Protocol. These climate change policy commitments are poised to have a significant impact on policy actions within the European Union with respect to the areas of energy supply security and renewable energy development. Section 2.2 briefly discusses the overall competitiveness objective. Section 2.3 introduces EU policy approaches to energy supply security and perceived implications for renewable energy development as brought out by the Green Paper on this issue. Environmental protection is considered in Section 2.4, focusing on State aid to promote environmental protection technology, notably renewable energy technology. Section 2.5 comes up with concluding observations.
2.2
Improving overall competitiveness and market integration
Overall competitiveness is being promoted through liberalisation of the EU electricity and gas markets as well as by separation of energy production, transportation, and distribution activities. For fostering competitiveness of the EU economy and concomitant income and value added 1
Italics have been added by the author to stress the allusions to the ambiguities and harsh political realities hindering harmonisation of Member State policies at the level of the EU.
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creation, the promotion of one internal energy market at EU level is, or certainly should be, a prime consideration. The creation of one internal energy market has become all the more urgent after the introduction of the Euro in most Member States. This de facto entails co-ordination of monetary policies in these countries. Such policies can only be effective throughout the Euro Zone when the frequency and severity of asymmetric economic shocks within this area can be greatly reduced. For this - and at the same time enhancement of net benefits of monetary union to happen, the EU economy ought to move towards more complete integration (De Grauwe, 2000). Energy policy framework in the EU spans a myriad of regulations and measures at both the Union level and the Member State level. Hitherto, many regulations are left to Member State level under invocation of the subsidiarity principle. In accordance with this principle, policy decisions on issues with little cross-border impacts should be left to the appropriate State level or even sub-State level decision-making entities. However, as will be elaborated in Section 2.4 the subsidiarity principle often turns out to be at odds with policies fostering the full integration of the internal EU market and competition rules. This holds notably for renewable energy markets. In spite of ongoing liberalisation of European energy markets, fully integrated EU energy markets are still a far cry away. A case in point is the electricity market, two thirds of which is by now (legally) liberalised. Yet, intra-Community trade in electricity is still a low 13% of total electricity production. Poorly integrated cross-border transmission networks and poorly harmonised state regulatory frameworks appear to be major undercurrents. Fragmentation of the internal market for renewables-based electricity supply (RES-E) by the national regulatory frameworks of the Member States is a case in point. This issue will be further elaborated in Chapters 3 and 5.
2.3
Energy supply security
The general blueprint for EU policy on energy supply security is given in the Green Paper on energy supply security (EU, 2000a).2 The main points emerging from this Paper are: • The European Union will become increasingly dependent on external energy sources. Enlargement will not change the situation. • The European Union has very limited scope to influence energy supply conditions but the EU can intervene on the demand side: mainly by promoting energy saving in buildings and the transport sector. • At present, the European Union is not in a position to respond to the challenge of climate change and to meet its Kyoto Protocol commitments.3 The EU is poorly endowed with conventional oil and gas resources, while these are mostly expensive to harness. Accession of oil and gas rich Norway to the EU would only improve this situation to a limited extent. The endowment situation with respect to solid fuels is much better, yet extraction of these resources is not cost-competitive compared to coal from major external producers. The gradual phasing out of nuclear energy in several Member States will increase the Community’s energy dependency on extra-EU sources. Primary energy demand in the EU is poised to grow from year 1998 to 2030 by 11%, while the baseline growth projection of CO2 emissions by the EU from 1990 to 2030 is 22%. The EU has succeeded in reducing energy dependence from 60% in 1973 (the year of the first world oil crisis) to 50% in 1999. Yet, according to the projected baseline, Europe’s energy dependence will reach increasingly worrying levels (See Table 2.1). 2 3
This section draws on Lako and Jansen (2001: Chapter 2). Comments on the Green Paper on energy supply security submitted to the European Commission, have been summarised in European Union (2002).
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Table 2.1 Projected energy import dependency, baseline scenario; 1998-2030 [%] 1998 2010 2020 2030 EU 49 54 62 71 Europe-30 36 42 51 60 Source: EU (EU, 2000a).
Adopting a policy of geopolitical diversification has not been able to free the Union from effective dependence on the Middle East (for oil), Russia and Algeria (for natural gas). Unless specific measures are taken to diminish the dominance of the oil sector, especially in the transport sector, oil import dependence could reach 90% by 2020. The supply of gas in Europe risks creating a new situation of dependence. Geographic gas import diversification is presently quite poor with Russia and Algeria accounting for 41% and almost 30% of the EU’s natural gas imports. A number of Member States, and in particular most applicant countries, are entirely dependent on a single gas pipeline that links them to a single supplier country. The best guarantee of security of energy supply is to maintain a diversity of energy sources and supplies. Yet the future of the nuclear energy option is unclear. Five out of eight member states with nuclear power have now adopted or announced a moratorium on nuclear energy (Sweden, Spain, Netherlands, Germany, Belgium). The Green Paper on energy supply security stresses that EU must retain its leading position in the field of civil nuclear technology. In addition, this Green Paper makes the point that from an energy supply security perspective renewable energy production and use should be vigorously stimulated. The Green Paper states that a more harmonised Community framework on taxation on energy products is needed. Lack of harmonisation in energy taxation can lead to distortion of competition between member states and affects the unity of the internal market. Recently, after numerous previous attempts the Council of the European Union has been able to reach agreement on adoption of a draft Directive, proposed in 1997, on energy taxation. The envisaged Directive will broaden the taxation base from mineral oil products to all energy products and will set (generally quite low) minimum tariffs with provisions for exemptions (European Union, 2003). This very modest step towards fiscal harmonisation and internalisation of GHG pollution damages has been hailed as a major political step forward. Furthermore, the EU (greenhouse gas) Emissions Trading System is due to be up and running in 2005, which will be a significant further step towards internalisation in the EU internal market of GHG emission costs. The Green Paper on energy supply security (EU, 2000a) identifies two main policy priorities: • Controlling the growth of demand. Fiscal interventions in energy prices should remove distortions between alternative energy carriers and between Member States and make that energy prices will reflect real costs including environmental damage costs. Completion of the internal market will stimulate, among others, gas-to-gas competition. This, in turn, may lead to an uncoupling of the price of gas from the price of oil. Priority demand sectors for which the growth of energy use should be diminished are transportation (especially road transportation) and buildings. This can be done through stimulation of energy-efficient technology (regulation, certification, fiscal measures, and funding of R&D). • Managing supply dependence. The Green Paper suggests among others: - New renewables should be vigorously stimulated. Internalisation in the energy prices is warranted of the social costs of damage afflicted to the local and global environment by energy production and use. - Strengthen supply infrastructure networks with due regard for environmental impacts. Improve the interconnections between the electricity transmission networks between the Member States.
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Furthermore, the Green Paper sheds light on the role of technology development. Technology may contribute to achieving security of supply and to reduction of greenhouse gas emissions, in particular by improving access to indigenous energy resources, in particular renewable energy resources. In practise, technology development is mainly market driven: investment embodying new technology and most research into development of technology with promising commercial perspectives is sponsored by the business sector. Yet the Green Paper acknowledges that the public sector can have a crucial bearing on what the business sector perceives as commercially promising.
2.4
State aid for environmental protection technology
To foster a swift market-based penetration of intra-Community renewable sources of energy in the European Union the emergence of a creating a level playing field for European renewable energy suppliers is essential. This is to be ensured by Community-wide regulatory framework on State Aid. In 2001 the European Commission has promulgated Community guidelines for assessing whether aid administered by Member States for environmental protection is or is not compatible with the common market (EU, 2001a). These guidelines will cease to be applicable on 31 December 2007. The stated guiding principle in assessing aid for renewable energy, contained in the Community Guidelines on State Aid for Environmental Protection, is that the beneficial effects of such measures on the environment must outweigh the distorting effects on competition (Point 5)4. Explicit reference is made to the possibility of state aid for promoting the use of renewable sources of energy and combined heat and power production by way of tax exemptions or reductions (Point 24). ‘Where it can be shown to be necessary’ investment grants of the eligible costs5 in support of renewable energy up to 100% are possible (Point 32). Operating aid may be justified to cover the difference between the cost of producing energy sources and the market price for energy (Point 56). These forms of aid should result in an overall increase of renewable energy sources and not in shifts from one renewable energy technology to another or from one Member State with less favourable renewable energy incentives to another with more favourable state aid for renewable energy sources in place. Furthermore, state aid based on avoided external costs but not internalised in the pricing system is not allowed to exceed € 0.05/kWh. The Commission should be notified by the Member State concerned of this aid and re-notified every 10 years. It is then to the discretion of the Commission to determine on a case-by-case basis whether or not the support measures concerned are not in breach of any Community legislation and reach an approval/reject decision accordingly.
2.5
Conclusions
Renewable energy policies should be assessed in an integrative way on their potential contribution to the three main pillars of energy policy, that is (1) the competitiveness of the EU economy, (2) the security of energy supply and (3) environmental protection at local and global levels. Current renewable energy policies put the emphasis on facilitation of fast market penetration through ambitious target setting. Policies and measures recommended by the Green Paper on energy supply security (European Union, 2000a) fail to integrate, in a balanced and consistent way, the three key energy policy objectives in energy infrastructure investment decision frameworks. For example, the Green Paper sets the quite ambitious objective of 20% substitu4 5
Some details contained by the provisions of the Guidelines are presented in Appendix A. That is, the extra investment costs necessary to meet environmental objectives.
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tion of oil products by alternative fuels in the road transport sector by year 2020 with the dual purpose of improving energy supply security and reducing greenhouse gas emissions. How this percentage is arrived at is not stated. The Green Paper gives only little attention to the significant role inland renewable sources of energy can assume in reducing the future energy supply security risks to the European Union. The role for renewable energy in addressing the long-term challenges of Climate Change is evident. Moreover, the energy supply security risk mitigation potential of inland renewable energy sources should be considered as valuable bonus. These two aspects render strong justification for well-targeted public support to deployment of renewable energy.6 Yet, renewable energy policies should not be exempted from scrutiny to internal market and competition rules. It is unfortunate that the Community guidelines on State aid for environmental protection (EU, 2001a) leave ample room for ambiguous interpretations. Moreover, the Guidelines indulge in application of the subsidiarity principle with potentially disproportionate negative impact on cross-border Community interests. E.g., the Guidelines facilitated jurisprudence by the European Court of Justice condoning the protectionist generous German feed-in tariffs (ECJ, 2001).7 However, these tariffs might well divert substantial international investment flows in the renewable energy industries to German locations in competition with potentially lower cost production renewable energy industry locations elsewhere disadvantaged by less generous State aid facilities. In addition, investment flows are diverted from other German industries enjoying much less effective protection. These types of effects make the overall Community renewable energy goals harder attainable at higher welfare costs in the short and medium run. The current Community guidelines on State aid for environmental protection do not show the level of transparency needed to create a level playing field for the private-sector agents operating in the renewable energy field. As a result of hard-negotiated political compromises, too few choices are made in the Guidelines on allowable support mechanisms into the direction of EUwide harmonisation. For example, the Guidelines: • create much uncertainty and ‘red tape’ transaction costs for potential renewable energy investors by making access to incentives contingent on ‘determining [by the Commission] whether State aid may be necessary’, ‘where it can be shown [by the investor or his national government] to be necessary’, etc., • provide too much incentive towards mark-up costing practises and too little incentive towards unit cost reductions through procedures wherein the investor or his government has to show that a certain incentive ‘is necessary’, • leave too much discretionary power to governments to introduce distinct incentive systems, leading to the negation of sizeable economics of scale benefits that can be reaped by creating a genuinely internal market and reduce substantial economic welfare at Communitylevel (in proportion to the subsidy amounts granted),
6
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A challenging view on technology development, put forward by Michael Grubb corroborates this conclusion. Global conventional oil production may peak as early as 2020 and production of conventional natural gas resources in the second half of the present century. Michael Grubb (2001) therefore envisages a major task for the public sector as far as energy supply is concerned, i.e. to ensure that investment and innovation moves towards the ‘low carbon frontier’ instead of the ‘high carbon frontier’. The low carbon technology frontier refers inter alia to technological innovations leading to (more) use of renewable energy, hydrogen, methane, and reinjection of captured carbon into depleted fossil fuel reservoirs. The high carbon frontier stands for technology innovation that stimulates the fuller and longer-term use of coal (such as coal liquefaction), and of unconventional carbon deposits such as heavy oils, tars sands and oil shales. Moreover, Grubb et al. point to the positive spillover from technical change, that might be engendered by future environmental policies (Grubb, Köhler, and Anderson, 2002). Renewables-based electricity generated in other Member States does not qualify for application of German feed-in tariffs.
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•
do not prevent in a transparent way situations where an improper balance is struck between the economic interests of selected renewable energy lobby groups in a number of Member Countries on the one hand and the promotion of welfare at the Community-level on the other.
The wider Community interests would be served by a propitious evolution towards a genuine Union-wide internal market for renewable energy technologies. This would require the Commission to acquire and exert a stronger leadership role in reducing the scope for soft compromises in the subsequent regulatory process regarding renewable energy development. The next chapter provides some elaboration on this issue.
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3.
THE EU RENEWABLE ENERGY POLICY FRAMEWORK
3.1
Introduction
The current framework for policy making in the field of renewable energy production and use at the level of the European Union is brought out in the White Paper on renewable sources of energy (EU, 1997b) and the recent Directive on the use of renewable energy in the power sector (EU, 2001b). In this chapter a brief outline is presented of the current general framework on EU renewable energy policy making. The White Paper is set out in Section 3.2, while in Section 3.3 the Renewable Energy Directive is discussed. Some conclusions are presented in Section 3.4. The special issue of the promotion of biofuels is addressed in the next chapter.
3.2
The White Paper on renewable sources of energy
On energy supply security the Renewable Energy White Paper (EU, 1997b) states that: “Renewable energy sources are indigenous, and can therefore contribute to reducing dependency on energy imports and increasing security of supply. Development of renewable energy sources can actively contribute to job creation, predominantly among the small and medium sized enterprises, which are so central to the Community economic fabric, and indeed themselves form the majority in the various renewable energy sectors. Deployment of renewables can be a key feature in regional development with the aim of achieving greater social and economic cohesion within the Community […] The EU’s dependence on energy imports is already 50% and is expected to rise over the coming years if no action is taken, reaching 70% by 2020. This is especially true for oil and gas, which will increasingly come from sources at greater distances from the Union, often with certain geopolitical risks attached. Attention will therefore increasingly focus on security of supply. Renewable energies as indigenous sources of energy will have an important role to play in reducing the level of energy imports with positive implications for balance of trade and security of supply.” Hence, this White Paper envisages an important role for renewable energy in safeguarding energy supply security in the Community in the long run. The Renewable Energy White Paper states that Member States and the Community should formulate indicative targets to contribute to the ambitious indicative target of doubling the overall share of renewable in the Community by 2010. It sets an indicative objective of 12% for the contribution by renewable sources of energy to the total primary energy consumption within the EU by 2010 and contains a strategy and action plan to that effect. The stated indicative target compares to a share of renewable energy in total primary energy use in the EU of 5.0% in 1989 and 6.0% in 2000 (See Table 3.1 below).8
8
This data is based on Eurostat data. The latter source is adhered to for the sake of convenience: EU renewable energy policy targets are based on Eurostat data. Typically the ‘Eurostat Convention’ on energy statistics tends to indicate a lower contribution of RES to total primary energy supply than, e.g., IEA statistical conventions. Major reason is that Eurostat assesses primary energy contribution of primary electricity sources (e.g., hydropower, wind power) at its calorific value (1 kWh=3.6 MJ). IEA uses a much higher notional fossil-fuel replacement value to assess the primary energy quantity per kWh of primary electricity. This agency applies a standard rate, denoting the primary energy needed at a national fossil fuel conversion efficiency to generate a kWh of electricity, i.e. a multiple of 3.6 MJ.
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Table 3.1 Share of renewable energy sources in gross inland energy consumption and share of renewably-generated electricity in gross electricity consumption, EU-15; 1989-2000 Share RES in gross inland Share RES-E in gross inland Country energy consumption [%] electricity consumption [%] 1989 1995 2000 1989 1995 2000 Austria 24.4 23.2 23.2 74.2 70.6 71.5 Belgium 1.4 1.4 1.3 1.2 1.2 1.5 Denmark 6.5 7.5 10.8 2.0 5.8 17.1 Finland 19.0 21.4 23.9 29.6 27.0 28.5 France 6.9 7.7 6.8 13.5 17.9 15.0 Germany 1.6 1.9 2.9 4.4 4.7 6.8 Greece 5.0 5.3 5.0 5.4 8.4 7.7 Ireland 1.5 2.0 1.8 5.0 4.1 4.9 Italy 5.5 5.5 7.0 15.3 14.9 16.1 Luxemburg 1.5 1.4 1.6 2.3 2.2 2.9 Netherlands 1.1 1.2 2.1 1.3 2.1 3.9 Portugal 13.8 13.3 13.0 24.0 27.4 29.4 Spain 6.5 5.7 5.7 13.4 14.3 15.7 Sweden 24.4 25.6 30.7 51.7 48.1 55.3 United Kingdom 0.5 0.9 1.1 1.6 2.0 2.7 European Union 5.0 5.4 6.0 13.3 13.7 14.7 Source: EUROSTAT (2002b).
The 12% overall target is based on the most ambitious ‘Best Practice’ scenario of the ‘TERES II’ study, using SAFIRE9, an energy policy simulation model. The ambition level expressed in the overall White Paper target of a 12% contribution for renewable energy sources by year 2010 will be even enhanced by the impending entry of new Member States, ‘where RES is almost 10 non-existent’. The White Paper stresses, though, that this overall objective is a political, not a legally binding tool (EU, 1997: p.7). The target-like projections presented in the White Paper are reproduced in a slightly adapted format in Table 3.2 below. This document projects a growth in total primary energy supply for the EU-15 from 57 EJ in 1995 to 66 EJ in target year 2010, i.e. a growth of 1% per year. 11 Renewable energy would grow over the same period by over 6% per year from 3.1 EJ to 7.6 EJ. The White Paper envisages that the main contributions to the set indicative target for renewable energy use in year 2010 will be delivered by, notably, biomass-based energy (5.65 EJ), hydropower (1.28 EJ, 105 GW installed) and, much less so, wind power (0.29 EJ; 40 GW installed). Moreover, passive solar (energy-saving building design and retrofitting, e.g., southward siting of living rooms, high efficiency windows and solar facades, natural ventilation and window blinds) is projected to displace a substantial amount (1.47 EJ) of potential energy consumption. Yet the latter category is included in neither primary energy supply statistics under the Eurostat 9
SAFIRE stands for ‘Strategic Assessment Framework for the Implementation of Rational Energy’, a modelling tool developed by ESD. Information on SAFIRE and TERES II is not readily available on downloadable documents but is stored on two CD-ROMs. Documentation of the data base underlying the projection exercises and documentation of data sources used appears to be in for improvement. Given the important role this model has played in EU renewable policy making, more transparency in these respects is desirable. 10 Apparently, the White Paper refers to new renewables as traditional biomass- predominantly solid biomass for household heating and cooking - contributes a much larger share of total primary energy supply in the Accession countries than in the EU-15. 11 EJ stands for exa (=1018) joule, while GW denotes giga (=109) watt. Joule is the Système International (SI) derived unit of energy, while watt is the SI derived unit of power (capacity to convert energy). Energy measures such as toe (tonne of oil equivalent), tce (tonne of coal equivalent) and quads (quadrillion of British Thermal Units) do not adhere to the Système International and will, therefore, not be used here. Karbuz (2004) sketches problems created by the use of different units and conversion factors in world oil statistics. For example, he identifies 6 alternative conversion factors used to define the unit size of a toe.
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Convention nor IEA energy supply statistics. In spite of ranking solar PV (photovoltaic) as the top-seat RES grower, the White Paper projects an almost negligible quantitative role for solar PV on medium term. The same holds for marine energy in the medium run. Furthermore, both geothermal and solar thermal would make a modest contribution towards the EU renewable energy target. Some six years have lapsed since the publication of the White Paper. Recent RES-energy supply trends suggest that the White Paper indicative target of 12% RES contribution to total primary energy supply in the EU by year 2010 will most likely be under-achieved by a big margin. 12 Hitherto, with the notable positive exceptions of foremost wind energy and possibly also - if certainly to a lesser extent - geothermal, most renewable energy branches cannot live up to the high ambition level enunciated in the White Paper. The White Paper projections for year 2010 suggest that, among other renewables, biomass would contribute the lion’s share, 5.65 EJ or 8.5%, to total primary energy supply (See Table 3.2). Table 3.2 Projections of total primary energy supply and installed energy generation capacity in EU-15 by source, stated in the White Paper on renewable energy sources; 1995-2010 TPES TPES AAG TPES [EJ] a) [%] [% of total] Primary energy source 1995 2010 1995-2010 1995 2010 Base yr Proj. Base yr Proj. Non-RES Subtotal Biomass Hydro - Large - Small Wind Solar - PV - Solar thermal Geothermal - Electric - Heat Marine energy RES Subtotal Total P.M. Passive Solar
54.07 1.88 1.11 (0.97) (0.13) 0.01 0.01 (0.00) (0.01) 0.10 (0.09) (0.02) 0.00 3.11 57.18
58.65 5.65 1.28 (1.08) (0.20) 0.29 0.18 (0.01) (0.17) 0.22 (0.18) (0.04) 0.00 7.61 66.26 1.47
0.5 7.6 1.0 0.7 2.7 22.0 20.4 38.3 20.0 5.0 4.7 6.3 n.a. 6.1 1.0
94.6 3.3 1.9
0.0 0.0
0.2
0.0 5.4 100
Installed base (end-of-year level) 1995 2010 Base yr Proj.
88.5 8.5 1.9 92 GW 105 GW (82.5 GW) (91 GW) (9.5 GW) (14 GW) 0.4 2.5 GW 40 GW 0.3 0.03 GWp 3 GWp 6.5 mln m3 100 mln m3 0.3 0.5 GW 1 GW 5 GWth 1.3 GWth 0.0 11.5 100 2.2
Installed base AAG [%] 1995-2010 Proj.
0.9 0.7 2.6 20.3 35.9 20.0 4.7 9.4
a) Converted from Mtoe to EJ Legend: TPES: total primary energy supply (i.e. total inland primary energy consumption) EJ: exa joule = 1018 joule AAG: average annual growth proj. projected GW: giga watt = 109 watt GWp: giga watt peak GWth: giga watt thermal NA: not available Mtoe: million tonnes of oil equivalent = 0.04186 EJ Source: Adapted from (EU, 1997).
12
Among the numerous publications with renewable energy news special reference is made to informative updates on RES deployment in the EU and on specific renewable energy industry branches by EurObserv’ER (e.g. EurObserv’ER, 2002) and the Eurostat update (Eurostat, 2002b).
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For this to happen, biomass energy supply would have to increase by 3.77 EJ over year 1995’s level. The White Paper provides the following elaboration for this increment: • Biogas (methane gas obtained by anaerobic digestion of livestock manure, agro-industrial effluents, sewage treatment, landfills) 0.63 EJ. • Solid fuels (wood and agricultural residues) 1.26 EJ. • Energy crops dedicated to biofuels production (rape seed, sugar beet, etc.) 0.75 EJ. • Solid cellulosic energy crops (short rotation forestry, miscanthus, etc.) for heat and/or power 1.13 EJ.13 Recent trends suggest the following. The biogas ‘target’ will not be met, mainly because of a phasing out of landfills, subsequent to recently introduced EU legislation fostering waste incineration. Biogas production used for heat or electricity stood at 0.01 EJ (2304 ktoe) in 2000. The UK, a country with as yet a fair amount of landfills, is the leading country in the EU. The EU’s odd 100 million hectares of forested area yielded 1.98 EJ (47.3 Mtoe) of primary solid biomass energy in year 2000. EurObserv’ER (EurObserv’ER, 2002) deems 2.60 EJ (62 Mtoe) in 2010 achievable, an amount possibly on the optimistic side. Yet it is far below the 4.19 EJ (100 Mtoe) needed for meeting the White Paper target. The White Paper expectations of biofuels will not be met in spite of the recently adopted Renewable Fuels Directive (see hereafter). Production in 2000 stood at 0.03 EJ (191 kt ethanol and 700.6 kt biodiesel). The indicative target of the recently adopted Renewable Fuels Directive boils down to 0.73 EJ (17.48 Mtoe), comparable to the White Paper projection of 0.75 EJ (18 Mtoe). All in all, all indications suggest that biomass is set to lag behind the White Paper projections by a considerable margin. Hydro electricity accounted for 1.1 EJ (27 Mtoe) in year 2000 and is fairly well on track to achieve the White Paper projection for 2010, i.e., 1.2 EJ (28.8 Mtoe). By ultimo 2000, the installed base of small hydro amounted to an estimated 10.26 MW. The White Paper’s projection of 14 MW might not be achieved by a relatively small margin. Wind energy is on the way to deliver a major pleasant surprise. End 2001, the installed base was 17.5 GW as compared to 2.5 GW as per ultimo 1995. Given a continuation of the current fast growth trend, as per end 2010 some 85 GW might have been installed including offshore wind. This is well above the White Paper projection of 40 GW. Factors underlying this success include fast technological progress and stable generous price support regimes over a multi-year time span in some Member States, notably Germany, Spain, and Denmark. Hence, a contribution of wind energy of more than double the 0.29 EJ in 2010, as by the White Paper, appears a real possibility at present. Solar energy is quite unlikely to make the RES contribution, projected by the White Paper. Main reason is the implementation speed of solar thermal. End 2000, the installed base stood at 9.6 million m2 against 6.5 million m2 per end 1995. This is still way below the White Paper projection of 100 m2 by the end of 2010. Stop-go subsidy schemes and poor marketing campaigns in most Member States seem to withhold an accelerated implementation of this almost competitive technology. Driven by quite high investment and price subsidies in some Member States, Solar PV has hitherto been able to register impressive growth rates. Yet, this technology still makes a paltry contribution to the White Paper’s RES target. Moreover, this industry may be in the frontline of possibly impending cutbacks in RES subsidies under current tight public budget situations. At the end of year 2002, the installed base amounted to 0.4 GWp. This compares to an installed base per ultimo 1995 of 0.03 GWp and the White Paper projection of 3 GWp per end
13
Conversion technology routes to liquid fuels based on woody biomass are still in the technology development phase. Whereas woody biomass tends to be much cheaper than feedstock based on dedicated energy crops, such as rapeseed or sugar beet, conversion process costs of woody biomass are prohibitively high. In the decade after 2010, though, liquids based on woody biomass are expected to become cheaper than liquids based on starchy biomass or vegetable oils.
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2010. Even if the White Paper’s projection is realised, which appears highly unlikely at present, Solar PV would contribute just 0.01 EJ in year 2010. Geothermal may be in for a small pleasant surprise. The installed base of geothermal electricity amounted to 0.8 GWe per ult. 2000, compared to 0.5 GWe per ult. 1995. The 2010 White Paper projection of 1 GWe might be slightly exceeded. Also the geothermal heat production (heat pumps) might do somewhat better than projected. Therefore, a contribution of 0.25 EJ in 2010 compared to the White Paper projection of 0.22 EJ appears feasible.
3.3
Directive on electricity from renewable energy sources
Two years back the European Union issued the Directive on the promotion of electricity produced from renewable sources (EU, 2001b). This Directive sets out to create a framework that will facilitate, on the medium term, a significant increase in renewably generated electricity (RES-E) within the EU. It constitutes an important milestone in shaping the regulatory framework for RES-E generation in the EU. The RES-E Directive might even be a prelude to a possible future EU-wide harmonisation of regulatory frameworks at Member State level. Hereafter the main features of the RES-E Directive are outlined. The RES-E directive sets indicative targets for the share of RES-E in total electricity consumption at Union and Member State levels, broadly in accordance with the white Paper target fixed in 1997. The overall share of renewable energy sources in total primary energy supply in the EU is to reach 12% in year 2010, with in that year a renewable energy share in electricity consumption of 22.1%. The latter objective is broken down into a differentiated indicative (non-binding) percentage for each Member State as shown in Table 3.3 below.14 In the earlier Directive proposal by the Commission (European Union, 2000b), distinct Member State targets are given for the ones excluding RES-E based on large hydro (that is, hydro plants with a capacity exceeding 10 MW). This is because in accordance with the later proposal, large-hydro-generated electricity would count for the RES-E target but not be eligible for state aid. The EU and Member State targets for RES-E have been based upon a projection exercise with an energy policy simulation model, SAFIRE. In doing so, “the targets should collectively be compatible with the White Paper objective of doubling the contribution of RES to 12% of gross inland energy consumption by 201015 and [...] this should be reached by a joint effort based on technological and economic potentials in each Member State” (EU, 2000b: p.25). Following negotiations in the Council of the European Union16 on the Commission proposal, in the adopted RES-E Directive Portugal’s target was cut from 45.6% to 39%, Finland’s from 35% to 31.4% and the Netherlands’ from 12% to 9%. The Member States are to set, not later than one year after entry into force of the RES-E Directive (on 27 October 2001), national targets for the penetration of renewable energy in line with the suggested percentage and commitments made under the Kyoto Protocol. These targets should be updated every five years. Furthermore, the Member States have to publish annually a 14
These so-called (indicative) Renewable Portfolio Standards (RPSs) are stated in percentage points instead of absolute quantities. This makes sense, as during downturns of the business cycle power demand will grow less. This would then render these RPSs less burdensome to the economy (because of a lower total amount of ‘additional costs’) than is the case with absolute quantity targets, determined by assuming a ‘normal’ economic growth. Moreover, the same is true when additional demand-side management efforts will be made compared to an ex ante ‘medium case’ baseline scenario. 15 In 1995 this share was 5.4% and in 2000 6.0% (See Table 3.1). In preparation of the White Paper the level of RESE has been projected under an ambitious RE policy scenario, called ‘Best Practise’, to double from 337 TWh (i.e., a 14.3% share in total EU electricity consumption) in 1995 to 675 TWh (23.5%) in 2010. The slightly downward revised 22.1% target in the (draft) RES-E Directive was based on a higher projected overall power consumption level of 3,058 TWh, without changing the projected RES-E volume (European Union, 2000b: Appendix A). 16 In this case the Council consisted of Member State ministers with energy in their portfolio.
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RES-E performance monitoring report, including an overview of measures taken. If the nonbinding approach does not yield satisfactory results, the Commission will propose mandatory targets. The RES-E Directive provides for a broad definition of renewable energy. It includes hydro power (large and small), biomass (solids, biofuels, landfill gas, sewage treatment plant gas and biogas) wind, solar (PV, heat, thermal electric), geothermal, and marine energy (wave, tidal). General waste incineration has been excluded but the biodegradable fraction of waste can be considered as renewable. The contentious category biodegradable part of waste incineration ‘as long as the waste hierarchy is respected’ has been retained. This vindicated the position of Member States, such as the Netherlands, for whom biomass waste incineration is a relatively important renewable energy source, in spite of compelling environmental arguments against inclusion of the latter category.17 Furthermore, large hydropower (generated by facilities in excess of 10 MW) is also included. It appears, however, to have been tacitly agreed that large hydro will count for meeting set targets but will not be eligible for support measures.18 This would be the case in spite of the absence of an explicit statement to that effect in the approved Directive. Peat was finally excluded from the adopted taxonomy of renewables. Table 3.3 Targets for year 2010 of the share of electricity from renewable energy sources in total electricity consumption as stated in the RES-E Directive [% in total electricity consumption] RES-E RES-E excl.large hydro 1997 2010 1997 2010 Actuals Target Actuals Target Austria 72.7 78.1 10.7 22.1 Belgium 1.1 6.0 0.9 5.8 Denmark 8.7 29.0 8.7 29 Finland 24.7 31.5 10.4 21.7 France 15 21.0 2.2 8.9 Germany 4.5 12.5 2.4 10.3 Greece 8.6 20.1 0.4 14.5 Ireland 3.6 13.2 1.1 11.7 Italy 16 25.0 4.5 14.9 Luxemburg 2.1 5.7 2.1 5.7 Netherlands 3.5 9.0 3.5 9.0 Portugal 38.5 39.0 4.8 21.5 Spain 19.9 29.4 3.6 17.5 Sweden 49.1 60.0 5.1 15.7 United Kingdom 1.7 10.0 0.9 9.3 European Union 13.9 22.0 3.2 12.5 Source: European Union (2001b, Appendix and 2000b, Appendix A) for the total targets and European Union (2000b, Appendix A) for the targets excluding large hydro.
17
Waste streams should not be subsidised, otherwise recycling would be discouraged. If the environmental impact of waste incineration is less than, e.g., landfills, the latter option should be made commercially less attractive through, e.g., imposing (higher) surcharges before their total phase-out. Moreover, determining the biodegradable part of municipal waste on a mass (weight) basis may lead to undesirably distorted assessment results. (WWF/CNE, 2001; and personal communication with Rob Bradley). 18 The Community Guidelines on State aid for environmental protection (EU, 2001a) does not include large hydro nor the biodegradable part of waste incineration under its definition of renewable energy (see ibid, Point 6). This would suggest that these categories would not be eligible to State aid under conditions pointed out by these Guidelines.
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Governments are allowed to continue their own support scheme for ‘at least’ seven years after a possible Commission proposal towards a harmonised Community framework is accepted. The Commission may propose a harmonised Community framework in an evaluation report of Member State RES-E support systems, due no later than 27 October 200519. The at least seven years transition is shorter than the one (at least 10 years), proposed by Germany and Denmark with a view to shielding their respective support schemes based on feed-in tariffs.20 The latter countries succeeded, though, in preventing the immediate introduction of a cost-effective Community-wide approach, which would have been (more) consistent with the goal to create a genuinely internal electricity market.21 Member States are to have introduced ‘guarantees of origin’ by 27 October 2003 at the latest. Such certificates should ensure that the origin of electricity generated in their respective territories from renewable energy sources, including from 10 MW + hydro power plants, can be guaranteed throughout the EU according to objective and non-discriminatory criteria. Member States are not required 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 obligation.22 Yet the guarantee of origin requirement can be seen as denoting an preparatory step towards possible introduction of a Community-wide scheme of tradable renewably-generated electricity certificates, i.e., tradable green certificates (TGCs) in EU parlance. Demands on the information requirements to be carried with a guarantee of origin are limited. It shall: (i) specify the energy source from which the electricity was produced, specifying the dates and places of production, and in the case of hydroelectric installations, indicate the capacity, (ii) serve to enable producers of electricity from renewable energy sources to demonstrate that the electricity they sell is produced from renewable energy sources within the meaning of this Directive. Better access is to be provided to electricity distribution networks, including streamlining and expediting authorisation procedures at the appropriate administrative level. Charges for the connection costs of new producers and related grid reinforcement costs should be published. They should be objective, transparent and non-discriminatory and due account should be taken of the benefit embedded generators bring to the grid. Where appropriate, Member States may require transmission and distribution system operators to bear (part of) the RES-E connection and grid reinforcement costs. When dispatching transmission system operators should give priority to RES-E plants to the extent possible. Member States are to report on actions taken to improve grid access no later than 27 October 2003. Major milestones towards implementation of the RES-E Directive are shown in Table 3.4.
19
This report should also contain recommendations on best practices on administrative procedures on feed-in authorisation and other grid access issues (see last paragraph of this section). 20 Some analysts interpret the transition period in the RES-E Directive to relate to existing RES-E installations only (e.g. Huber et al., 2002). However, in the Directive there is no clear reference to that effect. See preamble Recital 16 and Par. 4 (2) sub point (e). 21 See ‘First draft directive rejected after German and Danish lobbying’: www.platts.com/features/greencertificates/eudirective.shtml In the meantime, Denmark has announced a policy paradigm shift from feed-in tariffs towards a support mechanism based on Renewable Portfolio Standards. 22 Opponents to tradable certificates had their way in strongly influencing the wording of recitals 10 and 11 of the preamble to the Directive (European Union, 2001b). For example, the statement ‘It is important to distinguish guarantees of origin clearly from exchangeable green certificates.’ (ibid, Recital 11). If the EU is to move towards a genuinely integrated internal electricity market, such statements are in for a significant adjustment in a possible amendment after the evaluation report of the Commission of RES-E support systems due in October 2005 or earlier.
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Table 3.4 Some milestones on the road of implementing the RES-E Directive up to 2010 27 October 2002
-
27 October 2003
-
27 October 2004
-
27 October 2005
-
31 December 2005
-
31 December 2010
-
MSs to publish a first report specifying national indicative RES-E targets for the next 10 years. Report to be updated every five years. Deadline for transposition of the Directive by MSs. MSs to publish a first report on implementation measures and progress. Report to be updated every two years. MSs to ensure that the origin of RES-E ‘can’ be guaranteed (by GOs). MSs to publish a report evaluating regulatory & administrative barriers and discrimination regarding RES-E production, including grid access issues. Commission to publish a first report on RES-E implementation progress and on the consistency of MS with EU RES-E targets. Report to be updated bi-annually. Commission to present a well-documented report on the experience gained with the application and co-existence of different RES-E support mechanisms. To be accompanied, ‘if necessary’, by a proposal for a Community RES-E support framework meeting some stringent specific subsidiarity requirements. Commission to present a first summary report on the implementation of the RES-E Directive. Report to be updated every five years. MSs to have achieved their national RES-E target for year 2010
Source: (EU, 2001b). Adapted from (WWF, 2003: Table 1).
3.4
Concluding observations
The RE White Paper and the RES-E Directive justify the promotion of RE (and RES-E specifically) on account of: • security and diversification of energy supply, • environmental protection, • social and economic cohesion.23 The former two reasons correspond with two of the stated three main objectives of EU energy policy making. However, the last point is completely at odds with the objective to foster the competitiveness of the EU economy. Supporting distressed rural regions or remote locations by way of stimulation of (broadly not competitive) renewable energy at Member State level or a fortiori at Community level is economically very inefficient. Appropriate tailor-made support programmes at sub-regional level should be designed to address the ‘social and economic cohesion’ issues with greater avail and cost-effectiveness. Social and economic cohesion benefits, to the extent applicable, are secondary benefits of renewable energy development but should not provide a justification for renewable energy stimulation at macro level. Intervening developments indicate that the RE target of 12% in 2010 will not be achieved by a wide margin. The contribution by wind power is likely to be larger than projected by the RE White paper (1.07% of total primary energy use within the EU-15 in 2010). Conversely, the corresponding projected share of biomass (8.27%) appears to be overly optimistic. If not timely addressed, the welfare losses due to existing market distortions in the renewable energy sub-sector are poised to rise in step with the increasing penetration of renewable energy itself. Refer e.g. to the open-end character of the feed-in tariffs and, e.g., the disproportionately high feed-in tariffs and investment support presently granted in some Member States to notably 23
See, e.g., Recital 2 of the RES-E preamble.
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generators using expensive RES-E technologies. Without any doubt subsidy levels by way of feed-in tariffs and investment support policies boiling down to 400 €/MWh or more in some countries may cause the PV market to record high double-digit annual growth rates. Yet: • It is doubtful as to whether market stimulation technology through very high price and investment subsidies of grid-integrated PV - a technology still very remote from commercial viability - really speeds up its commercial viability. Moreover, good alternatives exist for direct market support to technologies such as grid-integrated PV (See e.g. Section 5.3). • From a professional marketing point of view, positioning PV grid-integrated panels in the market as a standardised mass product appears inordinately early to date. Yet strong price and investment support leave PV panel producers that want to maintain market share little leeway in the countries concerned. It precludes the opportunities to them for cashing in the producer surplus when their products would have been positioned in the top of the market as luxury goods with a ‘green’ image. • Less cost-effective RES-E subsidies, poised to take on mounting proportions, can hardly be sustained budget-wise, especially on longer term and at the bottom of macroeconomic business cycles.24 Hence, the risks of drastic policy changes and subsequent spells of distress to the industry concerned increase along with rising subsidy streams. • An alternative allocation of a large part of the subsidy streams concerned to cost-effective market development of renewable energy technologies that are already nearing commercial viability would increase the share of renewables in energy supply and mitigation of GHG emissions far more cost-effectively. Moreover, resultant negative impulses to welfare and employment at macro level in the short and medium run would be reduced or even reversed. The EU guidelines on, inter alia, renewable energy regulatory framework should leave much less room for state-level specific incentive policies. Notably country-specific feed-in tariffs may lead to trade and investment diversions from countries and technologies with relatively mild incentives to the ones with relatively strong ones. Consider, e.g. the recent relocation of PV manufacturing capacity by Shell Solar from the Netherlands and Portugal to Germany and Spain. The RES-E Directive makes some small steps towards Community-wide harmonisation of the renewable energy regulatory framework. For example, the introduction of mandatory guarantees of origin for electricity claimed to be produced from renewable energy sources. However, the Directive fails to specify that for proving RES-E consumption recourse is to be had to these very guarantees of origin. Inclusion of such provision would immediately bestow market value to these certificates. An even more far-reaching reform toward reaching a truly Internal Market would be the insertion of another level-playing-field promoting provision. That is, the choice of the applicable Member State support framework is to be the prerogative of the owner of eligible GOs. To put it differently, in the eligibility criteria for any Member State’s RES-E support system there should be no discrimination between the Member States of origin. The upshot would be that ‘generous’ support systems were to be disproportionately much called upon to provide their support incentives to RES-E producers in other less generous Member States. In turn, this would give a big boost towards truly unifying the Internal Market and work out effectively against fragmentation and distortion of the level playing field among RES-E producers in different Member States.
24
In year 2002 subsidy-eligible German RES-E producers received € 2.2 billion. With subsidised RES-E deliveries to the grid of 24.8 TWh, the average feed-in rate in 2002 can be put at 88.2 €/MWh. This compares, e.g., to an average wholesale electricity price for that year of 22.5 €/MWh (base load rate) and 33.5 €/MWh (peak load rate). In 2002, total RES-E in Germany amounted to 45.0 TWh, that is 8% of total power supply. The feed-in compensation per kWh of electricity consumption amounted to 0.48 ct/kWh. Based on a moderate RES-E growth scenario under current open-end regulations, subsidised feed-in compensation is projected to increase in Germany to € 5.0 billions in 2010 (with net additional cost rising to € 3.3 billions, equal to 20% of total German power generation cost). Assuming that these subsidy policies would be continued, the feed-in compensation per kWh of electricity demand were to rise correspondingly to 1.00 ct/kWh (Schiffer, 2003) (Mock, 2003).
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Unfortunately, hitherto the Commission has not provided the guidance needed in setting a harmonised GO information content standard and harmonised GO tracking systems. Nor does the RES-E Directive unequivocally mandate coverage of all RES-E production in the EU by GOs; it only mandates issuance of GOs at the request of RES-E producers. The risk is quite high that Member States will define different GO content standards and put in place incompatible GO accounting systems. In turn, this is to unnecessarily increase the dead-weight costs of crossborder transfers and reduce opportunities for cross-border trades. GOs could quite well serve as tradable certificates and as electricity label for environmental disclosure25, if the harmonised information content would allow for that. Therefore, GOs have potentially a lot of monitoring and verification applications such as regulatory compliance (mandatory renewables quota, mandatory co-generation quota, mandated environmental disclosure, etc.); eligibility (feed-in tariffs); the veracity of the green products that voluntary green power programmes sell, especially whether their suggested environmental additionality holds true (Jansen, 2003). In conclusion, an early intervention by the Commission is in order towards harmonising GO administrative systems and mandating full RES-E or, preferably, full electricity coverage. In due time the GO system should be subsumed under a generic electricity labelling system. The information attributes, which an electronic label is to carry, should be extended correspondingly. Generic electricity labelling is mandated in Art. 3(6) of the recent Directory concerning common rules for the internal market in electricity (EU, 2003c). It can be considered to include information on, inter alia: • unit emissions of pollutants such as GHGs, SOx, NOx, VOC, • unit nuclear waste generation, • co-generated useful heat, • plant location; and to address additionality issues, • the average year of plant commissioning per technology with, where relevant (e.g., hydro, biomass) a further breakdown into capacity categories. These extensions can be achieved electronically at low unit cost, while the value of the corresponding information disclosure to policy makers and electricity consumers is high. Evidently, monitoring and verification cost increase with the amount of information recorded. Yet it should be realised that the latter efforts often have to be expended anyhow to ensure compliance with existing regulations. To the extent that this is the case, these monitoring and verification costs would not be additional. Moreover, systematic coverage will markedly increase the reliability of the results of monitoring and verification. Fully harmonised and comprehensive issuance of a combined GO/REC/electricity label would avoid much duplication of efforts. Furthermore, there will be no discriminatory administrative certificate cost for RES-E compared to electricity from fossil fuels and nuclear. Moreover, the administrative costs per MWh of electricity generated can be kept very low by introduction of compatible national internet-based tracking systems of electricity labels to be operated by the Transmission System Operators (TSOs) concerned. Each label would be a unique serialised electronic record. Any legal entity should be entitled to open an internet-based electricity labels account with its TSO. There could be a parallel electronic EU Registry for any labels transfer or just for intra-EU cross-border label transfers. Great advantages of such a system include the convenience of low-cost compliance verification, effective avoidance at low cost of double counting, and low transfer costs. Double counting may, for example, occur when a certain MWh of RES-E generates both a claim to the applicable feed-in tariff in the Member State of origin and a claim to the RES-E attributes by a retail electricity supplier in another Member State with a RPS system.
25
The new Directive concerning common rules for the internal market in electricity (EU, 2003b) requires generic electricity labelling to be implemented by 1 July 2004.
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If both the RES-E producer and the retail electricity supplier concerned would have to proof their respective claims by submission of valid relevant labels, double counting can easily be avoided at low administrative cost because of the uniqueness of the serial label numbers. Low label transfer cost facilitates the creation of a liquid EU-wide labels-trading market and the generation of RES-E where unit costs are lowest. However, the latter benefits are being foregone at present as the RES-E Directory in place fails to prescribe that relevant RES-E labels originating from one Member State can be applied for meeting RES-E target of another Member State. As already argued in the previous chapter, the harmonisation of state-level renewable energy stimulation frameworks is urgently needed from the perspectives of the overall competitiveness goals and a consistent internalisation of environmental externalities. Yet the Renewable Energy Directive makes EU-wide harmonisation of incentive systems for renewable energy technologies a medium-term or rather long-term possibility: ‘at least’ seven years away. On the other hand, the present ‘wait and see’ approach enables the Commission to review and compare the pros and cons of the distinct national stimulation approaches. Observations, in line with the last one of the previous chapter, regard the process of target setting. A serious omission of EU renewable energy policy setting is the lack of integrated policy assessment underlying target setting. RES-E targets have been decided upon on ad hoc political negotiations based on ‘black box’ results from simulation models for renewable energy implementation, such as SAFIRE, assuming rather ambitious renewable energy implementation scenarios under stringent environmental constraints. This is done without proper regard to optimal reconciliation of overall energy policy goals. Furthermore, there is no proper alignment with stimulation policy for other forms of renewable energy than RES-E. Investors in renewable energy technology applications need stable long-term policy frameworks, some 15-20 years ahead. Hence, as soon as possible targets for 2020 should be defined, while in, say; year 2006 targets for 2025 are to be defined on a rolling-over process basis (in year 2011 targets for year 2030, etc.).
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4.
EU POLICIES ON BIOFUELS FUELS FOR TRANSPORTATION
4.1
Introduction
This chapter sets out and reviews the communication from the Commission on alternative fuels for road transportation and on a set of measures to promote the use of biofuels (EU, 2001c). This communication expounds current policy views by the Commission on how to reduce the dependency on oil in transportation and proposes a roadmap for market introduction of biofuels. The core of the communication is the proposed Biofuels directive (EU, 2001d). Recently, following reconciliation between the Commission and the European Parliament the renewable Fuels Directive could be enacted (EU, 2003b). This chapter starts with an overview of Union-wide instruments to reduce oil dependency in transportation (Section 4.2). The renewable Fuels Directive and its underlying original proposal by the European Commission are set out in Section 4.3. The chapter is concluded with a review of the Renewable Fuels Directive.
4.2
Instruments to reduce the dependency on oil
Instruments to reduce the dependency of the transport sector on oil relate to demand-side management and to fuel substitution. The Commission (EU, 2001c) considers the following main options: • A CO2 emission target of 120 g/car km for new (passenger) cars by 2010 at the latest. European, Japanese, and Korean associations of automobile manufacturers (ACEA, JAMA, KAMA) have committed themselves to achieve a maximum CO2 emission of new cars of 140 g/car km (ACEA by 2008, JAMA and KAMA by 2009). The Commission seeks to bring down the latter target by 20 g/car km, among others through covenants based on intensive consultations with branch organisations of car manufacturers and favours a strong European drive in car fuel efficiency. Recent trends indicate, though, that these associations are facing difficulties in meeting their agreed targets. Over the period 1995-2001 ACEA, JAMA, and KAMA achieved a reduction in CO2 emissions per km of about 1.9%, 1.5% and 0.9% per year respectively. In 2001 the average emissions of new cars of ACEA, JAMA, and KAMA members sold in the EU stood at 164 g/km, 179 g/km and 186 g/km respectively. JAMA hopes to achieve about 170 g/km in 2003, while KAMA sets out to reach this rate by 2004. Unlike EU regulation with respect to other polluting vehicle emissions, the Commission has not yet announced the introduction of CO2 emission norms. Other instruments not yet considered by the Commission in the face of strong opposition from the powerful lobby of European car manufacturers is the introduction of a CO2 differentiated wealth tax on automobiles and car speed limits at EU level. In the UK the former instrument appears to be quite effective (European Union, 2002b; Harmsen et al., 2003). •
Tax differentiation in favour of alternative fuels. This instrument is presently applied inter alia in some member states, including France and Austria, to favour domestic production of, notably, biofuels. Application of this instrument is limited for reasons of the general surveillance mandate of the Commission on the existence a competitive internal market. Moreover, serious budgetary problems facing several Member States may constrain the future use of this instrument. In order to provide for a more general framework on the basis of Article 93 of the Treaty of Rome, a proposal for amendment of Directive 92/81/EEC (EU, 2001e) is included in the communication on alternative fuels (EU, 2001c).
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The proposed amended Directive allows Member States to reduce excise duties in proportion to the percentage of biofuels incorporated in the fuel or end product. The higher the percentage of biofuels, the greater the value of potential reduction in excise duty on the end product. In March 2003, in an issue-linking negotiation deal this amendment was approved by the Council (European Union, 2003a). •
Supporting non-food agriculture. In international trade negotiations the trading partners of the EU are exerting increasingly strong pressure against the current EU Common Agricultural Policy. Moreover, the imminent expansion of the European Union could further swell the already soaring subsidy flows to the EU agricultural sector.26 These developments prompted the Council to set ceiling subsidies to food crop agriculture to be funded by the EU budget at € 43 billion/year. Moreover, but for effective lobbying by ‘the Green Front’ there would appear to be little room for extending EU subsidies to new agricultural activities outside the purview of the Common Agricultural Policy.
•
Setting minimum shares for alternative fuels with regard to transport fuels sold. This is the main instrument the Commission sets out to use to promote the production of biofuels, as laid down in the proposed Biofuels Directive (European Union, 2001d). For other alternative fuels no mandatory or indicative shares are being proposed. Regarding fuel substitution, the Commission stakes mainly on biofuels, natural gas (CNG), and hydrogen/fuel cells and envisages the following scenario, dubbed by the Commission herself the ‘optimistic development scenario’ (see Table 4.1).
Table 4.1 Percentage point shares of alternative fuels in total automotive fuel consumption in the EU under the ‘optimistic development scenario’ of the European Commission Year Biofuel Natural gas Hydrogen Total 2005 2 2 2010 6 2 8 2015 7 5 2 14 2020 8 10 5 23 Source: European Union, 2001d.
4.3
The Directive on the promotion of biofuels and other renewable fuels for transport
‘Biofuels’ stand for liquid or gaseous fuel for transport produced from biomass. They may be ‘pure’ biofuels for dedicated vehicles or ‘blend’ fuels in such a proportion that they can substitute conventional motor fuels without affecting car performance. For example, ethanol can be blended with gasoline without problems with as much as 15-20% alcohol by volume (IEA, 2001). In the EU the main biofuels are currently biodiesel and, less so, bioethanol and its derivative ETBE (ethul-tertio-butyl-ether). This contrasts with Brazil and the USA, where bio-ethanol is the dominant biofuel. The most used agricultural crops to manufacture biodiesel are rapeseed (colza) and much less so sun flower, while bioethanol can be made from, among others, sugar beets or cane and cereals (wheat, barley, corn). The energy applications compete to a major extent with food applications for these crops. Bioethanol can also be made from cellulosic biomass, with as feedstock agricultural or forest residues such as straw and wood waste, or woody crops like switchgrass and short rotation coppice. (IEA, 2001; van Thuijl, 2002; van Thuijl et al., 2003). Before tax, biofuels are currently appreciably more expensive than conventional fuels. The explanatory memorandum to the originally proposed Biofuels Directive (European Union, 2001d) states that biodiesel costs approximately € 0.50/liter to manufacture, while replacing 1 liter of 26
Subsidies to agriculture presently financed from the EU budget amount to € 43 billion per year, which is half of the total EU budget.
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conventional diesel requires 1.1 liter of biodiesel.27 Mineral diesel costs (net of tax) some € 0.20-0.25/liter.28 These figures suggest that pure biodiesel is on the order of 120-175% more expensive.29 As long as blending at a uniform standard rate is not mandatory, high excise reductions in proportion to the percentage of blending are necessary to make biofuels competitive. Mandatory blending at a uniform rate would enable financing the additional costs in a neutral way for the public Treasury. This would be effectuated by passing on the additional costs to the car drivers in the form of a higher price and, at the same time, a lower performance per litre of (blended) motor fuel. The originally proposed Biofuels Directive lays down an obligation on Member States to ensure that as from 2005 a minimum share of transport fuel sold on their territory consists of biofuels on the basis of an agreed schedule. The Commission would be entitled to adjust this schedule on the basis of evolving experience gained. The Member States were to produce an annual report on measures taken to reach the annual targets. Before the end of 2006 the Commission would examine the need for mandatory blending of biofuels into petrol and diesel in order to meet the targets for biofuels in the transport sector. The Commission proposed the following biofuel standards (minimum amounts of biofuel consumption as a percentage of sold automotive fuels, see Table 4.2). Table 4.2 The targets for biofuels consumption stated in the initial Commission proposal for a Renewable Fuels (Biofuels) Directive Of which as a minimum in the form of blending [%] Year [%] 2005 2 2006 2.75 2007 3.5 2008 4.25 2009 5 1 2010 5.75 1.75 Source: EU, 2001d.
The Commission was forced to relinquish the minimum requirements in subsequent amended proposals, following interventions by the Council and negotiations with the European Parliament. Moreover, the Council did not accept the mandatory nature of the proposed minimum biofuels requirement, because of the uncertainties on feedstock supply capacity and equity considerations (differences in per capita arable land endowments between Member States).
27
This (gross) ratio does not include the fuel input necessary to produce the energy crop material and to convert it into biofuels. 28 This is equivalent to €/t 238-298. The price base is not clear, e.g. spot price or ex tax retail prices. The price base is quite relevant in making a fair comparison with the costs of biofuels. Also for the latter it should be clearly stated whether it concerns unit costs ex bio feedstock conversion plant or unit costs delivered at motor fuel service stations. 29 In a slightly dated study Vollebergh (1997) presents an analysis on the (strikingly large) gap in social costs of French biofuels compared to the ones for reference fuels in terms of ct per km (per km in order to allow for differences in fuel efficiency). His outcomes are: Fuel efficiency Total Gross Environmental Total Social Cost [litre/km] Private Cost Cost Diesel: -RME from rapeseed 0.072 3.3 0.5 3.8 -Diesel from oil 0.096 7.0 0.9 1.6 Gasoline: -Ethanol (wheat) 0.104 5.9 0.8 6.7 -Ethanol (sugar beet) 0.104 5.1 0.6 5.7 -Gasoline from oil 0.083 8.5 1.0 1.9 Note: amounts converted from FFct into ct at the exchange rate: € 1 = FF 6.5595 Source: Vollebergh (1997: p.37-38, Table 14).
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After an intensive negotiation process, the Commission and the European Parliament agreed in March 2003 on the text of the final Directive. The Directive on the promotion of biofuels and other renewable fuels for transport, referred to as Renewable Fuels Directive hereafter, was dated 8 May 2003 and enacted (published in the Official Journal of the European Union) on 17 May 2003. The Renewable Fuels Directive obliges Member States to set national indicative targets for minimum penetration rates of renewable fuels, i.e. indicative Renewable Fuels Standards (RFSs) in their respective automotive fuel market. The Directive encompasses not only biofuels but also other renewable fuels, e.g., renewables-based hydrogen. The following two reference values are mentioned: 2% and 5.75% for milestone years 2005 and 2010 respectively. No reference values for intervening years are given. Member States should ensure compliance with the relevant Community legislation on emission standards and impose specific labelling at sales points when blends contain more than 5% biofuels. Member States have to report annually, before 1 July each year, to the Commission on the progress made with implementation of the Renewable Fuels Directive in their respective country. In their first report, member States shall indicate their RFS targets for ‘the first phase’ (presumably 2004-2005) and in the report covering the year 2006 their RFS targets for ‘the second phase (presumably 2006-2010). Any differences with the reference values for milestone years 2005 and 2010 should be motivated by arguments such as poor resource endowment and alternative use of biomass energy. Member States have to transpose the Directive in their respective legislation by 31 December 2004 at the latest. The Commission has to produce an evaluation report by 31 December 2006 at the latest and every two years thereafter. The evaluation report will address, inter alia, the cost-effectiveness of measures taken, the economic and environmental aspects of further penetration of renewable automotive fuels, the sustainability of land use practices of energy cropping, and GHG emission reduction effects.30 Based on the evaluation results the Commission is entitled to propose adaptation of the system of targets contained in this Directive, e.g., making targets mandatory ‘in the appropriate form’. Some milestones of the RF Directive are shown in Table 4.2.
4.4
A review of the EU renewable fuels policy
The Renewable Fuels Directive requires certain indicative national targets and suggests a nonmandatory Renewable Fuel Standard for renewable fuels of 5.75% of the demand for automotive fuels in 2010. As by this year production of other renewable fuels than biofuels will still be negligible, the indicative RFS mentioned in the Directive concerned would warrant a production in the EU-15 of some 733 PJ (17.5 Mtoe)31 or 21,3 Ml32 of mineral fuels replaced in 2010. This would imply additional costs of biofuels in the EU-15 in year 2010 in the order of € 6.4 to 7.5 billions (ct 0.30-0.35/litre replaced fuel).33 These costs have to be borne by the Treasury of the Member States in the form of excise revenues forgone or, alternatively, by the car drivers.34 30
Art. 4 (e) while alluding to climate change mentions specifically the assessment of the impact of renewable fuels on CO2 reduction instead of the reduction of greenhouse gases. Certainly methane and nitrous oxide should be included in the required assessment. 31 As at least six definitions of tonne of oil equivalent (toe) do co-exist (Karbuz, 2004), the use of Système International units in official EU publications is recommended. Mtoe 1 (IEA definition) = toe 106 = PJ 41.868 = J 41.868 × 1015. 32 This conversion ratio is based on the assumption that the shares of ethanol and biodiesel in biofuels production in the EU remain the same over the period 2000-2010. In year 2000, these shares amounted to 17% and 83% respectively in terms of energy content. 33 The assumed unit additional cost range is based on information provided in the Commission document, that is € 0.30-.35/litre replaced fuel (European Union, 2001c). An IEA document puts the cost of producing biofuels at two to four times higher than for gasoline or diesel. Another lead that the biofuel costs assumed by the Commission are on the low side is given by the tax exemption granted in France to ethanol and biodiesel of € 0.50/litre and € 0.35/litre respectively (IEA, 2001: p.142). 34 The last option is only possible in the case of uniformly mandatory blending.
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Table 4.3 Some milestones of the RF Directive up to year 2010 30 June 2003 • MSs to submit first report on: - implementation measures taken - national resource allocated to biomass production for nontransport energy applications - share of RF in transport fuels in previous year - any exceptional conditions regarding supply of oil & oil products. • First report to contain indicative national targets for ‘the first period’ (2003-2010?). Report to be updated annually. 31 December 2004 • MSs to transpose the RF Directive. 31 December 2005 • MSs to achieve their national RF target for year 2005 (reference value 2% for 31 December 2005). 31 December 2006 • Commission to draw up an evaluation report on progress made in the use of RF in the MSs. Report to be updated bi-annually. 30 June 2007 • MSs to submit fifth annual report on implementation measures taken, etc. Should contain indicative national targets for ‘the second period’ (2010-2020?). 31 December 2010 • MSs to achieve their national RF target for year 2005 (reference value 5.75% for 31 December 2010). Source: (EU, 2003b).
The prospects of cost reductions of biofuels relative to the ones for competing mineral fuels appear fairly modest (IEA, 2001). Increasing competition for scarce land between energy crops, feed crops, nature conservation/restoration, and the encroaching built and transport infrastructure area will be reflected in rising feedstock prices. Technological progress and economics of scale in biofuel conversion processes may more than offset increasing feedstock collection and storage costs but the resulting net cost reduction potential would seem rather subdued. This with the possible exception of woody-biomass-based ethanol, but the underlying technology is still in a development stage. Due allowance should be made for the possibility of serious underrating of increasing feedstock costs in a number of techno-economic studies in the event of stringent mandatory RFSs such as in the first Commission proposal (EU, 2001d).35 Main reasons stated by the Commission to support biofuels (EU, 2001d) are: (i) security of supply considerations (practically 100% dependency of the transport sector on oil) and (ii) biofuels contribute to mitigation of GHG emissions. Moreover, energy cropping ‘would help to create new sources of income and to maintain employment in rural areas’. The explanatory memorandum (EU, 2001c) alleges that ‘this will have a general beneficial impact and also tie in better with enlargement.’ Given the ambitious targets proposed by the Commission, the lion’s share of the biofuels has to be produced through intensive energy cropping. A small share can be obtained from biomass waste or the biodegradable fraction of waste. 36 The explanatory memorandum to the first Commission for a Biofuels Directive (European Union, 2001d) assumes that for the EU-15 in the medium run a set aside land area (mandatory fallow land for EU food crop growers) of 5.6 million ha might be dedicated to energy cropping. Depending on the crop, this would yield 4-15 Mtoe. The 5.6 million hectares assumed land area available for energy cropping compares to a total agricultural land area in the EU-15, which stands at present at some 134 million ha 35
An overview of - what may turn out to be overly optimistic - cost reduction potentials for various biofuel technologies projected by some recent techno-economic studies is given by Thuijl et al (2003: p. 36, Table 2.6). 36 The scope for using biomass waste (e.g. spent cooking oil in the food processing industry) for biofuels appears modest. The Commission mentions a maximum of 3 Mtoe of used oils and fats, compared with a projected demand for motor fuels in year 2010 based on trend extrapolation of 304 Mtoe (European Union, 2001d).
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(COPA/COGECA, 2002). Even if the set aside land area is to be eligible for energy cropping37, the produce is bound to fall notoriously short of meeting the requirements of the ‘reference value’ of 5.75% in year 2010, enunciated in the Renewable Fuels Directive. This with the exception of 100% dedication of all set aside land to sugar beet cropping for ethanol production (see Table 4.4 below). It appears quite ambitious to warrant at least 4% of available agricultural land for new pre-subsidy low return applications such as energy cropping in the face of many competing land uses. In the absence of renewable fuels standards with uniform mandatory blending this would require sizeable new agricultural subsidy schemes coupled with large tax preferences to producers of biofuels. Moreover, a large and effective publicity campaign targeting all stakeholder groups along the biofuels supply chain would have to be launched. The figures presented in Table 4.4 point at the great difficulties the EU will face in sourcing domestically the huge biomass feedstocks needed. The alternative would be to condone massive outflows of foreign exchange (including for over half subsidy transfers) in order to attract the necessary volumes of feedstock imports from extra-EU producers. In turn, this would further increase rather than reduce the dependency of the EU on imported energy sources and increase GHG emissions from bulk haulage over large distances. Table 4.4 Projections of land requirements in the EU-15 for meeting the indicative renewable fuels reference value of 5.75% in year 2010 for distinct energy crops Energy Land Crop yield Biofuel Biofuel yield content requirement Crop [t/ha] [l/t feedstock] [l/ha] [GJ/ha] [GJ/kl] [× 1000 ha] Sugar beet 66 Bio-ethanol 100 6600 139.9 21.2 5231 Wheat 7 Bio-ethanol 350 2450 51.9 21.2 14090 Rapeseed 3.2 Biodiesel 409 1309 42.9 32.8 17044 Source: author’s projections based on information and assumptions in Enguídanos et al. (2002 a, 2002b), van Thuijl et al. (2003).
To date, the only truly comprehensive study on the employment impact issue on behalf of the Commission has been carried out by ECOTEC (ECOTEC, 2003). In the framework of this study an as such apparently appropriate input-output model method (RIOT) has been applied to assess employment and value added impacts of RES promotion policies in the EU-15. However, the model outcomes provide an implausibly rosy medium-term picture. The one scenario, with broadly rather optimistic assumptions made on the future trajectory of additional costs of a number of major renewable energy technologies, especially biomass technologies, constitutes a major underlying factor. Moreover, a contentious assumption explaining a large part of the projected positive employment impacts is that the expansion of biofuels feedstock occurs without displacing employment in conventional agriculture. These assumptions - based on the TERES II study with the SAFIRE model9- lead to model outcomes, which appear to grossly underrate the negative indirect effects of RES stimulation. Even the positive sign of the medium-term total employment impact (661 thousand full-time job equivalents for the EU-15 in 2010) does not seem to be robust, because of the great sensitivity of the outcomes to assumptions such as the ones referred to above. A comprehensive study such as the aforementioned one, but with several plausible underlying scenarios, could have yielded more meaningful results. The dependence of the fast growing transportation sector on oil is a major energy supply security concern indeed. A comprehensive package of effective and efficient policy measures has to be implemented to address the demand side and the supply side of this issue. An example of an effective and efficient measure, already mentioned in Section 4.2, are the consultations with the car manufacturers to engage this industry branch to substantially boost the carbon efficiency of 37
The option to use mandatory set aside land for subsidised energy crops is highly contested in WTO negotiations by the Cairnes group of EU trading partners, who take strong issue with the EU agricultural protection policies. Recent Commission proposals relinquish the set-aside option and suggest a € 45/ha subsidy for land used for energy cropping instead (EU, 2002c: 22).
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their products. Another effective and efficient measure, but not popular in countries where the car industry represents a strong special interest group, is a high tax on cars strongly differentiated by carbon efficiency. On the supply side, the current additional costs of CNG or LPG appear to be modest. In contrast, the additional costs of biofuels are substantial. A much more effective and efficient contribution to the goal of energy supply security is to re-channel subsidy cash flows to energy efficiency improving and renewable energy technologies, that are close to commercial feasibility or which have much better prospects for cost reductions. Note that such technologies may include biomass-based ones for combined power and heat production (Harrison, 2003). Let us now consider the GHG reduction argument. Net CO2 savings of biodiesel are around 2 to 2.5 tCO2 per 1000 litre of substituted conventional diesel. This is achieved at additional costs on the order of € 300-350. Hence, information presented by the Commission (European Union, 2001c and 2001d) suggests that the CO2 reduction costs are in the €/tCO2 120-175 range. In this assessment the Commission does not even allow for the substantial emissions of (greenhouse gas) N2O from rapeseed growing. Most other relevant sources arrive at higher pre-N2Oemissions GHG reduction cost estimates. 38 This renders biofuels a very expensive GHG reduction option indeed. From the perspective of GHG emission reduction, biofuels for power generation would still be an expensive option but notably more cost-effective than the biofuels for transportation option (Kampman, 2003). Moreover, the environmental impact of energy cropping to the extent required for meeting the 5.75% RF target in year 2010 is likely to be negative. This negative impact is due to occur on several scores: groundwater and soil contamination through the release of fertiliser chemicals and pesticides, as well as bio-diversity. The Commission documents (EU, 2001c; EU, 2001d) appear to downplay these negative effects. Many times over, reference is made to ‘sustainable farming’ and ‘multifunctional land use practices’. However, the enormous quantities of biofuels required to achieve the targets proposed by the Commission in combination with the scarcity of agricultural lands cannot but exert significant additional environmental stress on these lands, compared to the ‘without’ (automotive biofuels stimulation) situation (Jonk, 2002). Take for example the RME case: the cultivation and processing of rapeseed is so energy-intensive that the effective reduction in net CO2 emissions would be at most 45%, according to a study by the German Federal Environmental Agency quoted in AK (2002). By contrast, in many instances, alternative usage of low-productivity fallow land for afforestation and tourism could bring in alternative rural income and employment, while fostering biodiversity and GHG mitigation (carbon sequestration and secondary biomass from sustainable forest management) at much lower if any additional costs at all.
4.5
Concluding remarks
The arguments initially presented by the Commission in favour of the - in terms of targets - very ambitious specific support framework for automotive biomass fuels are less convincing. They are dubious (employment generation; eco-friendly land use promotion) or rather weak (fostering energy supply security; GHG reduction) at best. Moreover, as set out above, the biofuel feedstock supply capacity in the EU is surrounded by high uncertainties. In conclusion, it is prudent indeed that the adopted Renewable Fuels Directive prescribes to gain adequate implementation experience before considering the imposition of mandatory renewable fuels standards. Before doing so, the Commission should make a better case for providing specific support to automotive renewable fuels, notably biofuels. Uncertainties to be addressed include the scanty unit cost data for biofuels applicable to largescale production volumes and net-back values of biomass feedstocks in alternative applications. 38
For estimates of additional cost per tCO2eq. and further references, see among others (Jonk, 2002; Henke et al., 2003).
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Moreover, a number of promising technological routes, such as the production of bio-ethanol based on woody biomass, have yet to transcended the technology development stage. This renders the assessment its cost reduction potential rather difficult.
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5.
A BLUEPRINT OF A HARMONISED AND COHESIVE POLICY DESIGN
5.1
Introduction
This chapter reviews prevailing national support systems for renewably generated electricity in the EU.39 Subsequently, it presents the contours of a proposed long-term EU renewable energy policy support framework with a focus on renewably generated electricity and renewable fuels. The proposed harmonised framework is aimed at a coherent optimisation of the contribution of renewable energy to minimising both the overall social costs of energy services and the risks of long-run energy supply constraints, whilst improving the certainty that environmental policy goals sanctioned by the EU will be met. Future renewable energy support framework(s) in the EU policy design will no doubt be based on political compromises after typically long negotiation processes and may well deviate from the design outlined below. Yet, given flexibility in ‘political feasibility’ for the distinct Member State negotiators in carving out the long-run design, blueprints such as the one below may assist political practitioners in giving due consideration to overall welfare maximising considerations. In Section 5.2 current renewably generated electricity (RES-E) support models are briefly reviewed. The dominant ones are either based on preferential feed-in tariffs (FITs) or on renewable portfolio standards (RPSs). In Section 5.3 a case is made for future EU policy making on RES-E into the direction of a well-designed harmonised RPS system. In Section 5.4 it is proposed that the EU will go for harmonised renewable fuels (RF) support system, based on a feasible standard for mandatory blending. Moreover, interactions between RF and RES-E markets are considered. A formal link between the respective support frameworks is proposed. Section 5.5 is concerned with optimal target setting and with the setting of time frames that suit the needs of investors in the renewable energy value chains. Concluding observations are made in Section 5.6.
5.2
National regulatory frameworks for direct market support
Support frameworks to stimulate renewable energy development are quite divergent among Member States. They typically consist of a wide range of support instruments, often applied in a renewable energy technology (RET) specific way: • Direct market support. Regulatory support to directly accelerate market development for producers of renewable energy carriers (e.g., RES-E, renewable fuels). Notably, this can be done by way of market price support (feed-in tariffs; fiscal stimulation) or market volume support (renewables portfolio standards; RES-E tenders) as will be further explained below. • Investment support. Investment costs of many RETs are still quite high. The public sector may chose to foster market development of certain RETs by way of investment subsidies, tax facilities (accelerated depreciation, tax credits, etc.), or ‘green’ financing facilities at subsidised interest rates. • RD&D. Technology research and development to improve cost and reliability performance, as well as demonstration projects to familiarise target users with the technologies concerned. • Public information campaigns. Campaigns to inform the general public or specific target groups about the features, benefits, and constraints of certain less widely known RETs.
39
National support frameworks for renewable fuels are still in a fledgling state and will be based on the EU Directive on renewable fuels, already dealt with in the previous chapter. See especially Sections 4.3 and 4.4.
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Although investment support may still be important for relatively expensive technologies, a tendency can be discerned in support shift towards direct market support to the detriment of investment support. This relates to: (i) removing the strain on public budgets: under certain conditions the additional cost of price support regulation can be passed on to end users, (ii) mixed experience with investment support: supporting the installed base instead of the generating output can lead to undesired effects, such as overstating name-plate capacity and substandard operating performance.40 Currently four major types of direct market support for RES-E generating technologies in EU countries exist, viz.: Feed-in tariffs (FIT) support systems. Feed-in tariffs are preferential technology-specific tariffs mandated by the regulator and guaranteed for a specified period, typically 5-1five years. FIT are granted to domestic generators of RES-E for the electricity they feed into the grid of the Member State concerned. Generators of as such eligible RES-E, feeding their production into the electricity grid of another Member State are excluded from benefiting from the FIT system concerned. FIT, fixed per generator, may be periodically revised for new vintages of RES-E plants. FIT systems have a track record of some two decades and are well established in the EU. Countries currently applying FIT include Germany, France, Spain, the Netherlands, Greece, Portugal, Denmark41 and Luxemburg. In Germany, Denmark, and more recently Spain, especially windpower-based electricity generation has received an impressive boost from favourable FIT. Under a FIT system, the additional costs of eligible RES-E (relative to non-preferential electricity) are borne by the national Treasury or by (predominantly captive) electricity consumers. For example, in Germany the FIT transfers are being passed on to the power consumers on a pro rata basis, albeit with large tariff contribution discounts for energy-intensive industry. Generic renewables portfolio standard (RPS) support systems. A RPS is a requirement for consumers or their retail suppliers (or, alternatively, electricity generators)42 to source a minimum percentage of their electricity consumption from eligible renewably-generated electricity. This support mechanism is relatively new. Worldwide, RPS systems are rapidly spreading. RPS systems have recently been introduced in, among other areas, Australia, Japan, and in at least 14 U.S. states. To add flexibility to parties with a RPS obligation and to reduce their compliance costs, a parallel system of ‘Tradable Green Certificates’ (TGCs, i.e., tradable renewably-generated electricity certificates) can be introduced to certify eligible RES-E and to verify compliance with the RPS
40
This experience was gained with respect to wind turbines in the Netherlands (in the 1980s) but also in non-EU countries, e.g., India (Rajsekhar et al., 1997). With respect to rooftop-mounted PV panels, irregularities with investment subsidies have been reported in the Netherlands recently. 41 The Danish government has announced that it is preparing for a transition from a FIT to a RPS support system, although its implementation appears to be uncertain. 42 Most countries opting for RPS, have chosen a midstream/downstream variant with the RPS compliance obligation assigned to electricity consumers or their suppliers (electricity distribution companies). So far, only Italy has opted for an upstream RPS system, imposing the RPS obligation on power generators or importers. The administrative cost advantages of an upstream variant for RPS are much less trivial than, e.g., in the case of a GHG emissions trading system. Contingent on design details, in the former case (RPS systems) as distinct from the latter (GHG emissions trading systems), the difference in the number of affected parties between the two variants may be relatively small. Moreover, in many EU countries there is large support base among consumers for promotion of RESE. Hence, a system that puts the RPS obligation on the demand side might be more readily politically feasible, as in this case the affected parties (retail suppliers) have to make due allowance for the preferences of their clients. A practical issue when opting for a demand-side RPS system, is that in defining the standard an adjustment factor has to be applied for transmission and distribution losses, to ensure equivalence with EU goals for RES-E. The latter specify that a certain percentage of the primary energy supply requirement (‘gross inland energy consumption’ in EU parlance) associated with total inland power demand is renewably generated. It seams that legislators in downstream RPS jurisdictions are not fully aware of this issue.
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regulation (Langniss and Wiser, 2003).43 The administrative unit cost of a TGC tracking system can be kept very low per MWh of electricity by making it a web-based electronic platform. Under competitive conditions 44, a tradable TGC system can ensure minimum RPS compliance costs. Affected parties in areas with high marginal RES-E costs will source their TGC requirements in areas with lowest marginal costs, engendering by way of arbitration a trend towards equalisation of the TGC price across the whole support system area and, consequently, a trend towards minimisation of overall system compliance costs. This assumes a complete separation of the certificate and electricity markets, i.e. the absence of physical delivery requirements.45 If also the electricity market across the system area is completely liberalised and integrated, there will be a corresponding RES-E price equalisation trend. Recently the following EU countries have adopted a RPS system: the UK, Belgium (Flanders, Wallonia), and Sweden. Finland has a voluntary green pricing system in place, akin to a RPS system. RES-E tendering support systems. Under this system the government awards by way of tenders power purchase contracts for a certain aggregate volume of eligible RES-E per tender to RES-E project developers who submit the lowest kWh ask price. After the demise of RES-E tendering in France and the UK, Ireland remains the only country applying this support mechanism. Recently, the UK shifted from a tender-based system to a RPS system. Main reason was the low efficacy of the former tender system in promoting RES-E. Furthermore, the French government has announced that it replaced its wind-power tender programme, Eole, by a feed-in tariff system. Tender systems to buy a certain quantity of eligible RES-E tend to have a relatively modest RES-E stimulation impact, because these do not provide certainty to RES-E project developers that their efforts to develop the project will be redeemed. Furthermore, the quantities tendered depend on short-term ad hoc decision making. This political risk increases uncertainty to project developers. Moreover, profit margins will be squeezed anyhow if a reversed auction procedure is opted for. In the latter procedure the successful bidders obtain a purchasing power agreement on the basis of their ask price rather than the clearing price at which the last MWh for tender is traded. Except for the highest successful bidder, ask prices of awarded bidders will typically be lower than the tender clearing price. Fiscal stimulation of RES-E. The basic idea of fiscal stimulation is to increase the attractiveness of RES-E deployment by providing exemptions or rebates on certain indirect taxes (e.g., an energy tax) as a function of the quantity of eligible RES-E produced or consumed. Currently, fiscal stimulation is applied in the Netherlands46 and Finland. The Dutch policy of fiscal stimulation of RES-E demand implies that small electricity consumers (or rather the retail electricity suppliers) can get a partial exemption from REB, a tax on electricity (and gas) consumption to the extent that their consumption is renewably generated.
43
It should be borne in mind, however, that the notion that TGCs would be part and parcel of an RPS system, is a widespread misunderstanding. Incorrectly so the value of a TGC is often portrayed as denoting the value of ‘the greenness’ of the underlying RES-E quantity. Renewably-generated electricity certificates (certificates of origin) can be used for a range of applications, for instance, as an administrative tool to facilitate a FIT support system and for disclosure purposes. (Jansen, 2003). 44 That is, a liquid certificate market with low transaction costs in the absence of parties with strong market power. 45 Under current EU State-aid Guidelines (EU, 2001a) and related jurisdiction, Member States are still capable of imposing physical delivery requirement in the case of RES-E imports, before these become eligible to national support benefits. This is borne out by the case of The Netherlands, a country having physical delivery regulation in place. Policy makers may be enticed to introduce such requirements so as to put up a non-tariff trade barrier against foreign RES-E imports (in a bid to improve the competitiveness of domestic RES-E producers) and, at the same time, to conduct a ‘beggar thou neighbour’ policy concerning pollutant emissions. If - even after introduction of the physical delivery requirement - the marginal generation costs abroad of eligible RES-E are much lower than in the country concerned, this protection measure will stimulate substitution of electricity imports for domesticallygenerated power. In turn, pollutant emissions will be avoided in the country applying the physical delivery requirement, as compared to the without (physical delivery requirement) case. 46 The Dutch government has announced that fiscal stimulation will be phased out altogether by January 2005. Feedin tariffs will be increased commensurately.
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The Dutch experience indicates that fiscal stimulation of RES-E demand has, inter alia, the following disadvantages: • the associated large windfall transfers of tax rebates from the public budget to retail suppliers of imported eligible RES-E, their (foreign) generators, and other operators in the RES-E value chain47, • the inherent absence of certainty to meet the set RES-E goal rather than significantly underor overshooting it at correspondingly large environmental and/or societal costs, • the blurring of market signals on the willingness to pay for RES-E through price interference by fiscal rebates to the RES-E value chain, • the system seems less effective in generating additional RES-E production48. For policy makers in most Member States, these disadvantages appear to outweigh in importance the main advantage, associated with the initial Dutch system of strong fiscal demand stimulation. That is, it created a ‘green electricity market’ (demand for RES-E) in a way as effective and with higher cost-effectiveness (because of less technology-specific biases among RES-E technologies49) than a typical FIT system. A remarkable corollary of the Dutch system was that it created a fledgling EU-wide market for TGCs.50
5.3
Harmonising RES-E support
Before making a comparative analysis of direct market support systems one crucial question is in order. Should major policy efforts be expended to achieve an integrated European RES-E market? Currently a phased liberalisation of the national power and gas markets of EU Member States is ongoing. Aim of these major market reforms is to stimulate competition on the European energy market place that is to result in downward pressure on the power and gas prices in Europe. In turn, low prices in these vital markets will improve the overall competitiveness of the European economy. Moreover, as was already argued in Section 2.2 the success of European Monetary Union, which culminated in the introduction of the Euro, hinges to a large extent on 47
Exclusion of RES-E generators located in other Member States from benefiting from fiscal stimulation is prohibited by EU internal market regulations. Oddly enough, this is not the case with stimulation through feed-in tariffs. This relates to the rather lax interpretations of the Community Guidelines on State aid for environmental protection (European Union, 2001b), allowed by jurisprudence by the European Court of Justice on this issue (ECJ, 2001). The court judgement negates the purview of Article 92 (1) (now Art. 87 EC (1)) of the Treaty stating that any aid granted by a Member State distorting (threatening to distort) competition by favouring certain undertakings, in so far as it affects trade between Member States is incompatible with the common market. The argument used by the Court is that feed-in tariffs do not involve any direct or indirect transfer of State resources to undertakings (generating RES-E in the jurisdiction concerned) and do not constitute State aid within the meaning of Article 92(1) of the Treaty (See ibid, recitals 60 and 66). Moreover the argumentation of compatibility with Article 30 (now Art. 28) of the Treaty seems weak. In Recital 71 it is admitted that feed-in tariffs are capable, at least potentially, of hindering intra-Community trade. Furthermore, Art. 5 of the EC Treaty (now Art. 10 EC) states that:’…[Member States] shall abstain from any measure which could jeopardise the attainment of the objectives of this Treaty.’. Yet The ECJ deemed that environmental protection would make feed-in tariffs compatible with Article 30 (recitals 74-77). The latter consideration foregoes the option to remove the potentially hindering of intra-Community trade while at the same time respecting environmental protection, arguing that a RES-E certificate tracking system in each Member State is essential (but not yet in place; ibid, Recital 80). It should be remarked that the wording of the judgement’s ruling: ‘…In the current [italics added] state of Community law of the electricity market, such provisions are not incompatible with Article 30 of the EC Treaty…’ suggests that future legislative amendments mandating a comprehensive and harmonised GO system could trigger a change in this ruling. 48 This argument might hold in the short run: the Dutch fiscal stimulation system has provided windfall profits to mainly existing free-riding foreign RES-E producers, their Dutch utility clients, as well as Dutch and German Transmission System Operators. Yet if this system would be continued, in the long run it were to trigger additional demand, as eligible technologies would be more profitable. Another issue is to which extent this effect is offset by political risk perceptions among potential RES-E investors: the Dutch government has built a notorious reputation among project developers for the frequency of regulatory changes regarding the Dutch RES-E support framework. 49 Some technology-biases were introduced in the eligibility criteria. For example, small hydro was excluded from support eligibility for protectionistic reasons: in The Netherlands the hydro power potential is very small. 50 This is rather an indication of RES-E protectionism at the national level abounding in the EU to date than one of a RES-E market in the Netherlands that is completely open to competition from generators in other Member States.
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the synchronisation of business cycles throughout the territory of the EU (and especially the Euro zone). This synchronisation is an important pre-condition for the effectiveness of coordinated economic growth and stabilisation policy. Fragmented markets, shielded from competition from other Member States, are a serious cause of asymmetric macroeconomic shocks. It, therefore, stands to reason that the Commission strongly pushes liberalisation and integration of the EU energy markets. The share of RES-E in the increasingly important electricity market is officially indicated to rise substantially to 22% of the whole power market in year 2010 and even to higher relative levels thereafter. Hence, in the process of liberalisation of the electricity market, the RES-E market cannot be excluded from European harmonisation in a market-based way. Harmonisation would create a liquid and transparent RES-E market, enabling to reach RES-E targets at much lower costs. In the currently fragmented RES-E market, the risks of diversion of trade and investment flows are high. This would have unfavourable welfare implications for the Union at large. For example, in the absence of RES-E market integration it may happen that markets with lower marginal costs but less favourable RES-E incentives in place would need to remit financial transfers to markets with higher marginal costs but more favourable incentives in place in order to comply with set targets. This begs the question which support model should be used for EU-wide harmonisation. In designing appropriate renewable energy support frameworks, allowance should be made for distinct unit cost characteristics of renewable energy technologies. In ascending order of marginal production cost51 per MWh of electricity, the following main categories of RES-E generating technologies will be distinguished: 1) Cost-competitive technologies not eligible for policy support. The marginal cost of electricity generated by the technologies included in this category is comparable or lower than is the case for electricity generated by conventional sources. May currently include large hydro and, arguably (see Section 3.3), the biodegradable part of waste incineration. 2) Modestly non-competitive technologies that may qualify for a generic Renewable Portfolio Standard (RPF) support system. This is to be complemented with a relatively modest support component of technology-specific Research, Development, and Demonstration programmes. The marginal cost of electricity generated by the RETs included in this category is higher than is the case for electricity generated by conventional sources within a certain pre-set band. The additional unit cost would over a significant part of their respective supply curve not exceed, say, € 50/MWh.52 Depending on siting, such technologies include small hydropower, a wide spectrum of biomass-based technologies, onshore wind power and near-shore wind power.53 3) Truly non-competitive but promising technologies. The promising ones should be supported by specific RPFs. The support should also include a major component of technologyspecific RD&D programmes. This category is comprised by the remaining RES-E technologies to the extent that they are qualified as ‘promising’ regarding their potential to join the first category in the longer term. They are characterised by additional unit costs exceeding the aforementioned limit. They include proven expensive technologies (e.g., buildingintegrated crystalline PV technologies) and technologies in the technical development phase. 51
Long-run marginal cost, making allowance for operating cost and for cost of future expansion of generation capacity. 52 This cost criterion may be altered contingent on unit cost developments and by average wholesale electricity prices on major power exchanges in the EU. 53 In the medium term, the additional marginal cost of offshore wind power may move downward enough for this technology to join the league of technologies nearing competitiveness.
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In this section, most attention is paid to second-tier technologies, encompassed by the category modestly non-competitive technologies. Hereafter an analysis is presented of the most appropriate main support mechanism for these technologies from a societal perspective. In the latter part of this section, appropriate support frameworks for third-tier technologies (truly noncompetitive but promising ones) are discussed. The fiscal stimulation of RES-E demand (Netherlands) and RES-E tenders (UK, France) have demonstrated a poor track record, for instance in terms of efficacy to generate additional RES-E production.54 Therefore, and given current national RES-E policy trends, only two contenders have emerged for a possible EU-wide harmonised direct market support system for RES-E, that is, a harmonised FIT system and a harmonised RPS system. In the remainder of this section, a comparative assessment is made of these two alternative support systems. For comparing the pros and cons of RES-E market support mechanisms, Menanteau et al. (2003) propose four assessment criteria: • impact on stimulation of RES-E generation, • impact on net overall cost to society at large, • impact on reduction of costs and prices, • impact on innovation.55 Given a situation where high additional RES-E costs have to be reconciled with other public policy objectives, achieving quantitative RES-E targets rather than sheer quantitative RES-E stimulation as such is what ought to matter to policy makers. Therefore, hereafter the impact on certainty of target achievement will be used as the first criterion instead of impact on RES-E stimulation, while the other three criteria will be retained. Feed-in tariffs in the face of a relatively flat RES-E supply curve will have either a strong or a poor stimulation impact on RES-E depending on the commercial attractiveness of pre-set rates. RES-E model simulations indicate that especially in the larger Member States supply of RES-E is typically rather elastic. Hence, FITs may readily overshoot or undershoot pre-set policy goals. In contrast, under competitive market conditions shaped by well-designed and enforced regulations, RPS models will achieve RES-E activity levels close to long-run RES-E activity goals. Adequate RPS compliance monitoring and enforcement will ensure almost 100% compliance of affected parties, as the regulatory framework will render non-compliance commercially unattractive. Given ambitious targets, overshooting (undershooting) will only be attractive in the short run when banking (borrowing) is allowed and the discounted cash flows of projected future sales of tradable RES-E certificates will more (less) than make up for current additional costs of RES-E production in excess of current targets. Yet in the absence of extreme climate conditions, a well-designed RPS system will ensure certainty of proximate achievement of longrun RES-E targets. This stands in stark contrast to FIT systems.56 Several analysts of renewable energy policy claim that the FIT model has a proven track record of ‘efficiency’ (e.g., Menanteau et al, 2003: p. 806). In doing so, reference is made to the fast expansion of wind-power generation in Denmark, Germany, and Spain. In fact, so far experimentation with RPS systems has been much less and has started much more recently. Yet, the example of Texas indicates that the RPS model can facilitate expansion rates of wind power 54
The rate of capacity utilisation of existing RES-E power plants remaining the same, the adjective ‘additional’ refers to power production from those RES-E facilities, the commissioning of which has - directly or indirectly - been triggered by the support mechanisms concerned. 55 Menanteau et al. (2003) mainly compare the feed in tariff model with the now almost defunct tender model while giving the RPS model a rather cursory treatment. Instead, the comparison hereafter focuses on harmonised feed-in tariff models with harmonised RPS models. 56 This statement holds if the regulator does not have perfect foresight on a consistent basis.
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comparable to the ones that would be obtained by application of feed-in tariffs. With one essential difference: RPS systems can enable to do so in a much more efficient way, i.e., at much lower additional unit costs (Langniss and Wiser, 2003).57 Also the early results with the new U.K. RPS scheme are encouraging. Given ambitious targets and a relatively flat RES-E supply curve, a well-designed RPS system will ensure lowest overall compliance costs to affected parties. Certificate trading will tend to equalise the marginal compliance costs of each affected party. The trend towards equalisation will be brought about because affected parties in high-cost RES-E production areas will tend to be net importers of (eligible) RES-E certificates. Following the introduction of certificate trading, RES-E producers in high-cost areas will tend to curtail their aggregate production expansion commensurately. This will bring down marginal RES-E costs in these areas. By contrast, potential RES-E producers in low-cost areas will tend to produce more than affected parties in their areas need and export surplus certificates. At the same time, as explained in the previous section RPS system provides the highest certainty of target achievement. These two factors combined58 make that well-designed RPS systems will perform superior to FIT systems regarding the societal cost criterion. As for the FIT system, the tariffs have to be set attractively to ensure that the RES-E activity goals will not be undershoot at the risk of serious overshooting. Moreover, in a market governed by an open-end regulated price policy and guaranteed demand, there is no price competition between RES-E suppliers. Hence, under a feed-in system RES-E activity goals will typically only be met at appreciably higher societal costs.59 Regulated by a RPS system, both RES-E equipment suppliers and RES-E producers have a strong profit incentive in cutting costs as much as possible. What is more, they have no vested interest in providing upward-biased cost information to the programme compliance authority. Under a FIT system only the former but certainly not the latter phenomenon holds: RES-E trade associations will tend to present as inflated cost levels as reasonably possible when the public regulatory authority engages in negotiations (‘consultations’) with the former. As a result, entrenched special interests groups will fight hard to retain attractive feed-in tariffs that are slow to follow actual cost-reducing technological developments. Moreover, in order to serve the interests of RES-E producers in creating asymmetric information conditions vis-à-vis the public sector and not to spoil their sales opportunities, RES-E equipment suppliers will tend to co-opt with RES-E producers in not divulging financial transaction details. Furthermore, a wealth of economic literature exists demonstrating that the very absence of competitive production conditions fails to encourage producers - in casu RES-E producers - to improve overall production efficiency (X efficiency) and to develop competitive advantages with the same diligence as producers operating under competitive conditions. Therefore, RPS systems will typically outperform FIT systems on the cost and price reduction criterion. 57
Complementary incentives make comparisons more complex. In the case of Texas, the output-based federal ‘production tax credit’ played a significant stimulating role in addition to the state RPS system. Yet also in Germany, Denmark, and Spain, complementary stimulation measures are being used such as investment tax credits or subsidies. 58 A harmonised FIT model also meets the first criterion in a technology-specific way, i.e. equalisation of marginal costs (up to the level of the preferential tariffs). Yet inefficient technology biases are introduced favouring generation with technologies that capture the highest preferential tariffs. Moreover, most if not all feed-in tariffs are likely to exceed the average wholesale electricity price by a higher margin than the certificate price for Tier 2 technologies under RPS. The certificate price results under competitive market conditions in contrast to FIT (see also next paragraph). 59 In theory, FIT systems may arrive at lower average RES-E costs; even when the total quantity of generated RES-E equals or surpasses the target. This could be the case when in a situation of a relatively steep RES-E supply curve FITs of technologies close to competitiveness are set above the electricity wholesale price by a small margin. This would then contrast with higher equilibrium prices under ambitious RPS schemes. In practise, under asymmetric information conditions renewable energy lobbies tend to be quite successful in pushing for FITs with handsome profit margins. Moreover, the absence of competition under FIT systems engenders less efficient production practices than under competitive market conditions. Absence of competition typically translates into FITs appreciably above the wholesale price of electricity, also for technologies that are close to market competitiveness, such as onshore wind in areas well-endowed with wind resources. Prevailing FIT tariffs in countries with a FIT system are a case in point. See also the next two paragraphs.
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Likewise, RES-E equipment suppliers have to compete harder on price in a RPS market with ambitious targets than in a feed-in tariffs market. Some analysts claim that the higher producers’ surplus under a FIT model compared to a RPS model (and higher certainty of attractive profit margins) would encourage operators under the former model to innovate more (Menanteau et al., 2003). However, this claim is borne out neither by fact nor theory. The higher producers’ surplus under FIT systems benefits primarily the RES-E producers and much less their equipment suppliers. RES-E producers and, consequently, their equipment suppliers have to ardently search for cost-reducing technology for their short-term survival under competitive conditions with more price transparency shaped by RPS frameworks. Conversely, under the typically more inert FIT systems turnover periods of technology vintages can be much longer before becoming obsolete. Therefore, innovative conditions for RES-E equipment suppliers appear to be at least equally well, if not better under a RPS model with ambitious RES-E goals than under a feed-in tariff system with similarly attractive tariffs. Moreover, introduction of long-term frameworks and minimum certificate price provisions60 can reduce the investor uncertainty on profit margins under RPS systems. Recent variants of the FIT model introduce tariffs declining over time and regionally differentiated, broadly reflecting regional energy potential differences.61 Rates of decline over time are chosen so as to allow for cost-reducing technical progress (‘descending the learning curve’). Moreover, declining rates will reduce the inert character of FIT systems and hence stimulate cost-reducing innovation. Therefore, proponents of recent variants of this model claim that this will lead to a convergence in impacts with well-designed RPS models. The gap between the, as argued, inferior criteria scores of well-designed FIT models with welldesigned RPS models may indeed narrow, but will certainly not be completely closed. For one thing, the shape of technology learning curves cannot be foreseen with certainty. Hence, even the most recent variants of the FIT model can not prevent under- or overshooting of the RES-E goals. What is more, the shape of learning curves is influenced by the very choice of support model. Implementation of a FIT model, instead of a RPS model, does not stimulate competition among RES-E producers and tends to fragment the EU RES-E market. Absence of costreducing competition may result in a slower adoption of cost-reducing technology. Moreover, the political economy of FIT systems is less favourable. Feed-in tariffs create strong special interest groups, which may lead to lower rates of tariff decline than desired by the regulator from an overall societal perspective. Regional differentiation of FIT within a certain technology class has two major aims. Firstly, such tariffs are targeted at skimming ‘wind fall’ location-related rents from project developers. This, in turn, would improve the cost-effectiveness of FIT models. Secondly, these rates are set to stimulate a more balanced regional distribution of RES-E investments. This would relax implementation problems in high potential areas and, consequently, increase the practical feasibility of achieving ambitious targets. However, the various generic disadvantages of FIT models do also hold for the first perceived beneficial aim of this specific variant. Such disadvantages include information asymmetry between project developers and the public sector, creation of special interest groups, and lack of price competition. What is more, regional tariff differentiation violates the conditions to move towards harmonisation of the support system leading to inefficient investment and trade diversion. The latter disadvantage in countries applying regional FIT zoning can be observed most ostensibly along the borderlines of different tariff zones. By relocating an eligible plant situated just inside a lower FIT zone, over a very small distance to a location just into a higher FIT zone with roughly the same energy potential, a project developer can capitalise on a locational FIT rent.
60 61
As, e.g., included in the design for the Swedish and the proposed Danish RPS system. See, e.g., Sambeek et al. (2003) for the case of onshore wind power technology.
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The second perceived advantage, reduction of implementation constraints, holds indeed as long as no effective implementation policies are in place, e.g., related to siting of onshore wind power projects. This issue should be tackled by intensification of policies to relax problems with authorisation procedures, rather than by regional tariff differentiation. Another regional issue is power balancing in regions with a high penetration rate for intermittent RES-E sources, e.g. a high share of wind-power-based RES-E. This issue has to be tackled by strengthening the local grid and inter-regional grid interconnection infrastructure. Transparent and fair rules for cost sharing of attendant costs should be in place. In the margin, congestion of power infrastructure because of intermittent supply - will then be reflected in an efficient way in RES-E costs. This, in turn, will stimulate in a market-based way regional diversification of intermittent RES-E power generation. A ‘generic’ RPS model can be applied to second-tier RES-E technologies, characterised by unit generation cost levels ranging to a limited extent above the ones for competitive fossil-fuel based technologies. But how to treat promising yet expensive RES-E technologies such as gridintegrated PV? These need tailor-made support measures at societal costs, commensurate with their long-term cost-reduction prospects. Given ex ante ignorance on the nature of the long-term technology winners and losers and risks of ex post less desirable technology lock-ins, diversification should be an important consideration in defining the set of technologies that would qualify for tailor-made support. Furthermore, the budget made available for these activities would have to be justified, monitored, evaluated, and periodically adjusted on well-founded, transparent cost-reduction targets. The RPS model is very well capable of providing tailor-made market development support. Take, for example, grid-integrated PV. Based on official cost reduction targets, technologyspecific targets could be set, permitting electricity generation by grid-integrated PV to expand by, say, 19% per year. This will enable this technology class to double its output in four years. Likewise, the installed base will double in (approximately) five years if average conversion efficiencies improve in relative percentage terms by 4% per year. At a projected progress ratio of 80%, the unit cost of PV-based electricity will then have to be reduced by 20% in five years time.62 Suppose this percentage is the targeted cost reduction. An ex post check of the development of a general (producer) price index, the wholesale electricity price and the price of a PVbased RES-E certificate enables a quick verification as to whether this target will have been achieved after five years time. Based on revealed cost reduction performance, budget and goals for succeeding periods can be adjusted accordingly. The RPS model is very well capable of providing tailor-made market development support. It can be applied in three alternative ways (Verbruggen, 2004): • a unified RES-E certificates market + tailor-made supplementary support (FIT, investment support), • a unified RES-E certificates market , differentiating the number of certificates per MWh by RES-E technology, • segmentation of the RES-E market in classes of RES-E technologies with broadly common cost properties, with a specific target for each segment.
62
A specific RPS which boils down to an estimated volume increase by 19% annually will lead in a well-designed RPS programme to a virtual doubling of the generating output of the technology concerned in four years (1.194 ≈ 2). If conversion efficiency of the technology increases by 4% per year, it then takes approximately five years to double the installed capacity ({1.19/1.04}5 ≈ 1.96). Hence, if the cost-reduction target would be based on a progress ratio of 80%, PV-based RES-E generating cost would have to come down by 20% over (approximately) a 5year time period. The progress ratio indicates the development of the unit price of equipment embedding a new technology when the cumulative sales volume (cumulative capacity installed) doubles. It is an engineering economics concept very popular among technology transition management analysts. The scientific base, though, for using fitted values of progress ratios for unit cost projections can be questioned (see Appendix C). Yet the example above brings out the convenience of using projected values of the progress ratio for setting cost-reduction targets.
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Provided the market segments are not so small as to make for players with significant market power in their respective certificate markets, we recommend the third way. Using technologyclass specific targets for market development of third-tier technologies offers some great advantages over alternative models. Firstly, the funds required for market development can be projected fairly well given the specific RPS target, recorded values for technology-class-specific RES-E certificates (after some experience has been gained), along with projected cost reductions. This stands in stark contrast to open-end support models, such as FIT and investment subsidies. Secondly, under competitive conditions the price information from the electricity and certificate markets provides reliable information on the marginal costs of the technology concerned. This is brought about by the liquidity that can be achieved in the large EU market and the competition between technology-class-specific RES-E producers that is stimulated by the RPS model concerned. Thirdly, this model is not tailor-made to the dominant technologies to date within a certain technology class (e.g., crystalline as distinct from amorphous Silicium PV technology) but stimulates level-playing-field competition among distinct technologies in the technology class concerned. A simplified schematic representation of our proposed RPS framework is depicted in Table 5.1. It is remarked that the generic RPS for all second-tier technologies and the specific RPSs for increasingly less competitive technology classes would have to embody all proposed direct market support to the technologies concerned. Moreover, under the proposed RPS framework it is recommended to provide no additional RES-E capacity investment support. This will create a genuine EU-wide level playing field among the respective RES-E producers associated with each respective RPS. Moreover, consequent transparency of MWh price formation per associated technology-class bands will yield more impartial feedback information to regulatory authorities for evaluation of actual cost-reduction performance relative to pre-set targets. In addition, this price transparency under competitive conditions among likes will provide strong economic incentives for cost-reducing innovations. Additional public support to promising noncompetitive RES-E generating technology should be put in the domains of RD&D and public information campaigns. The latter instruments should be focussing especially technologically immature or proven expensive technology with clear pre-set cost-reduction targets.
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Table 5.1 Stylised representation of the proposed harmonised RPS support system with two specific standards Generating portfolio share RES-E [% of gross inland electricity consumption] technology Base year Target year Segment class Descriptiona) (actuals) (standards)b) Tier 1 1 Competitive p10 p T - pST 0 0 Tier 2 2 Modestly non-competitive p2 p2 = pST - p3T - p4T 0 c) Tier 3 p3T 3 Promising but far from p3 competitiveness p40 p4T 4 Promising but further from competitiveness than Class 3 pST= p2T+p3T+ p4T Sub-total 2-4 pS0= p20+p30+ p40 tiers 2&3 pT Total 1-4 p0 Legend: p = portfolio share Lower-case indices refer to the RES-E technology class; S: sub-total of supported RES-E technologies; no lower-case index: RES-E total Upper-case indices refer to the applicable year Notes: a) Competitiveness refers to ability to compete in the market for central grid electricity. b) Italics printed standards are primary standards, while non-italics printed standards are derived ones. Tier 1 standard is a non-regulatory target share based on the idea that possibilities for capacity expansion (large hydro power) are limited, while the other primary standards denote regulatory ones. Supported RES-E (tiers 2 and 3) could be assigned a regulatory standard instead of total RES-E (tiers 1-3). A regulatory standard for total RES-E is in line with the non-mandatory standards of the RES-E Directive. It implicitly stimulates also Tier 1. Yet if ex ante implementation barriers for additional Tier 1 capacity are overestimated less Tier 2 capacity may become installed than desired. c) The choice for only two technology classes with each a specific RPS is arbitrary and was made just for ease of exposition.
Complete harmonisation warrants imposing the RPS at the highest regional level, i.e. at Community level. This stimulates EU-wide generation of RES-E at locations where marginal costs are lowest. In turn, the latter phenomenon will set in motion a trend towards EU-wide equalisation of marginal costs with minimisation of total additional costs of RES-E support at EU level. In contrast, additional national targets may hinder optimal RES-E generation patterns across the EU territory. Why will not only RES-E exporters but also RES-E importing Member States benefit from complete harmonisation? Granted EU policies to improve high-voltage interconnection infrastructure are being implemented, all EU countries will benefit from improved energy supply security through meeting ambitious RES-E targets at lowest costs. In this respect, it is remarked that by year 2010, the additional costs of achieving the indicative targets set in the current EU regulatory framework to the EU-15 economy range on an annual basis from € 11 to 29 billion for renewably-generated electricity.63 Moreover, by making the power sector more renewably based, other sectors will be able to meet set GHG emission targets at lower abatement costs, as their aggregate emission allowance is positively affected.
63
These values are based on ADMIRE-REBUS scenario runs (Uyterlinde et al, 2003). The upper value relates to a cost-effective intensification of current support systems to meet national RES-E targets along with modestly increasing prices on electricity wholesale markets (continuation of existing overcapacity in the power sector and a negligible carbon premium). The lower value is based on a scenario of a completely harmonised support system along with substantial price rises on the electricity wholesale markets (sharp reduction in generating overcapacity and a significant carbon premium). The transition from meeting targets with intensification of current support systems to Union-wide harmonisation of RES-E support is projected to reduce total RES-E support expenditure in the EU-15 by at least € 4.4 billion in year 2010.
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RES-E related activities in exporting Member States would tend to get a stronger stimulus than in net importing ones. Yet the overall productivity of importing country economies will also gain. Besides, the latter will be able to enhance comparative advantages in other economic activities and share in improvement of overall welfare increase as a result.
5.4
Harmonising and integrating the RF support framework
The Directive on the promotion of biofuels and other renewable fuels (European Union, 2003b) set indicative renewable fuels standards (RFSs) for two years, i.e. 2% and 5.75% for years 2005 and 2010. As reviewed in the previous chapter, achievement of these targets would be onerous for public budgets and/or for car owners/operators. Moreover, as current penetration of renewable fuels (biofuels) on the EU automotive fuel market being on the order of 0.3%, achievement of these targets seems highly unlikely because of feedstock problems. Only massive imports of renewable fuels or feedstocks from countries such as Brazil or Cuba could relax feedstock supply constraints. This would seem at odds with energy supply security considerations. Hence, the decision reached to make the targets of the RF Directive indicative pending the evaluation report by the Commission due in 2006, makes sense. It enables the EU to gain more practical experience on the bottlenecks and costs of biofuels stimulation policies. Nonetheless, current political commitment to biofuels stimulation is very strong, as external pressure on the EU to reform the Common Agricultural Policy is mounting. Hence, it can be expected that some RF support framework or the other, possibly based on scaled-down targets, will remain in place after the Commission has reported the results of its evaluation. The author’s position is that if - and only if - in her impending evaluation reports the Commission can make a good case for mandatory RFSs, the design of a regulatory framework for implementing such standards should be made. This RFS framework would have to anticipate the impact thereof on the RES-E market. In preparing a more definite design of RF support policies, issues to be dealt with, apart from revised target setting, include: • Should revised more realistic targets be made mandatory? • Should these apply at EU level in a harmonised way or be formulated at Member State level, allowing for equity considerations? • Should these be based (partially or fully) on blending? • Should a formal relationship be introduced between the RF and RES-E markets? The remainder of this section will address these issues. In Section 4.4 it has already been set out that implementation of ambitious RF targets will entail high additional fuel costs. Hence, it would seem imperative that the RF support system to be introduced in the EU meets the societal criteria of effectiveness and efficiency with respect to RF penetration targets. In other words, there should be a relatively high certainty of meeting set targets (without substantial under- or overshoot) and the associated additional costs should be as low as possible. Effective and efficient implementation warrants harmonisation of the RF support framework with mandatory targets at Community level, fully based on uniform blending rates, adequate compliance flexibility, and effective compliance enforcement. In the ensuing paragraphs the reasoning leading to this position will be put forward. Mandatory targets with a credible compliance regime are essential to achieving effectiveness of the support system. Setting the target at Community level without differentiation by Member State with inclusion of a quota trading mechanism creates a level-playing field for the affected entities that have to meet the RFS obligation and facilitates the cost-effectiveness of the support system. A quota trading mechanism can best be handled by introducing tradable renewable fuels certificates (RFCs) per unit of automotive fuels in terms of calorific value. Each certificate with
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a unique serial number would indicate, among others, the fuel type, the origin, and the issuing date. Evidently, tradability requires a credible certificate tracking system and harmonisation of contents of the RFCs for automotive fuels. In the case of blending, separate certificates have to be issued for each constituent pure fuel, making up the blend.64 For containing the administrative costs, the best option would be an upstream system, imposing the compliance obligation on automotive fuel producers (i.e. mainly oil refineries) and importers.65 During each true-up period, affected parties would have to produce RFCs, covering all automotive fuel production and imports during the preceding compliance year. Moreover, the required number of RFCs should meet the RFS obligation. In the absence of unexpectedly severe renewable fuel feedstock problems, ambitious but realistic targets and a credible compliance regime (adequate measurement, monitoring, verification, and non-compliance penalty regime) will ensure the virtual absence of non-compliance. For achieving cost-effectiveness, the RFS obligation has to be completely achieved on the basis of mandatory blending. Mandatory blending ensures the economies of scale necessary to achieve the highest cost reductions in the production of RFSs. Furthermore, as distinct from a situation without mandatory blending it permits a reduction of the strain on public budgets at the expense of end users of automotive fuels.66 This, in turn, enhances the fiscal feasibility of an EU RF programme, reduces the administrative burden and is in line with the polluter pays principle. Some Member States may wish to continue or expand experiments with dedicated fleets on renewable fuels. These experiments would then require tailor-made fiscal facilitation and be performed on a voluntary basis, on top of the compliance requirements of the proposed EU RF programme. This would do justice to the subsidiarity principle without unduly increasing the additional costs of meeting the biofuels targets within the EU support framework. Cost-effectiveness also requires imposition of the RFS at the highest regional level, i.e. at Community level. This stimulates production of renewable fuel feedstock at locations where the marginal costs are lowest. In doing so, a lot of attendant administrative problems are avoided. For example, differentiating the RFS by Member State would exacerbate current problems for retail outlets of automotive fuels near borders caused by cross-border price differentials.
64
In issuing certificates of biofuels, safeguards have to be introduced against diversions into use as chemical feedstock as against use for automotive fuel. 65 An upstream system could lead to the diversion of biofuels to other applications than automotive fuel. Yet the question can be raised whether the diversion issue should be given much prominence: also in other applications biofuels will tend to replace fossil fuel based energy carriers. A safeguard should be introduced that RF-based power producers cannot obtain RFCs and RECs at the same time. This can be done, for example, by defining RFbased RES-E a first-tier RES-E technology, not eligible for direct market support. Furthermore, mandatory blending would go a long way towards solving the diversion issue. 66 In the absence of mandatory blending, different blends of RFs and fossil-fuel-based liquids may appear on the market. Only by way of fiscal support (tax rebates) or by - administratively even more complex - price equalisation schemes, hybrid RFs can then be made competitive.
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Adequate system flexibility should be included to address feedstock volatility. Design elements to do so include: • certificate banking, whether or not with some limitations,67 • strongly limited certificate borrowing, • no trade barriers against imports from extra-EU producers, • a limited reserve requirement for renewable fuel feedstock could be contemplated with a proper weighing of the attendant stocking cost disadvantages, • integration with the proposed EU RPS programme. Ultimately the future EU support systems on RES-E and RF have to be integrated. The reason is that once an ambitious RF programme will be implemented, dramatic interactions can develop between the RES-E and RF markets. For example, biomass-based RES-E technology is represented relatively well in the lower ranges of the EU RES-E supply curve. Therefore, without formal linking, compliance with stringent RF targets can bring about a severe upward shift of the latter curve. As a result, the societal costs of compliance with RES-E objectives might become prohibitively expensive. Moreover, it can work both ways: very ambitious RES-E objectives may render meeting RFS onerous. In order to cushion these kinds of interactions, consideration should be given to introduce formal fungibility rules between the respective certificates of each system. The cushion effect of linking can be illustrated by the case of very ambitious RF targets. Through the formal linking of the RES-E and RF certificate markets affected entities of the RF programme will become net buyers of RECs (generic RES-E certificates: encompassing RES-E from second-tier RES-E generating technologies) and use these for RF programme compliance. This will mitigate extreme price hikes of bio-feedstocks and biofuels through much more moderate price increases on the RES-E certificates market, stimulating additional generation of nonbiomass RES-E. Conversely, at times of bumper bio-energy plantation harvests biomass-based renewable fuels and biomass-based RES-E will then replace non-biomass-based electricity. This would be the case, because on balance affected parties in the RES-E programme were to buy relatively cheap RFCs (renewable fuels certificates) to meet part of their compliance commitments. In the process, this would mitigate price drops with regard to bio-feedstock and biofuels. The ‘exchange rate’ could be the result of a process of balanced consultations with relevant RES-E and RF trade associations, based on expert inputs. Evidently, RES-E associations would have a vested interest in an exchange rate that emphasises the value of RES-E certificates in terms of RF certificates, whereas the negotiation stakes for biofuels chain representatives would go into the opposite direction. Major underlying objectives for renewable energy support policies may serve as point of embarkation for deriving a conversion rate between RES-E and RF certificates. These are notably: • contribution to affordable cost of energy services over a long-term time frame, • contributing to energy supply security by replacing fossil fuels and, optionally, nuclear energy, • reduction of greenhouse gases. These objectives have quite different implications for the derivation of a conversion ratio. If a REC stands for 1 MWh of electricity sourced from a generically supported RES and a RFC would represent 1 GJ calorific value of pure biofuel (bio-ethanol), distinct conversion ratios can 67
Schaeffer and Sonnemans (2000) recommend limited banking to avoid strategic behaviour to drive up prices (hoarding) and limited borrowing as flexibility facilities. It would seem, though, that the enormous size of the EU market and the likely development of derivative markets would very much reduce the scope for strategic behaviour. A good example of an environmental commodity scheme, where unlimited banking works quite well is the SO2 Allowance Trading programme, run by U.S. EPA. On the other hand, certificate borrowing would have to be strongly limited to curb intentional non-compliance behaviour. Also, if not administratively too cumbersome, deposit requirements for borrowing could be considered for introduction to discourage such behaviour (Huber, et al., 2002).
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be derived rate, as brought out in Appendix C. Table 5.2 shows the conversion ratios derived in Appendix C. The derived values are quite diverging, as are the distinct underlying objectives. If one would apply a simple overall mean value one would end up with a conversion ratio of 14.3 if enhancing energy supply security would be interpreted in terms of impact on replacement of fossil fuels. Should the latter be interpreted in terms of replacing both fossil fuels and nuclear energy, a simple overall mean value of the RFC-REC conversion ratio would be 16.3. It goes without saying that a myriad of composite values can be compiled if unequal weights would be used. Evidently, proposals for reference values should be based on credible research. Furthermore, policy makers may have reasons to adjust this rate. They might, e.g., be inclined to revise proposed rates in downward direction to push renewable fuels and, consequently, mitigate social distress resulting from impending reforms of the EU’s Common Agricultural Policy. Yet politically motivated adjustments from proposed plausible reference values should be contained, so as to avoid overly strong disturbances in the RES-E and RF markets. Table 5.2 Derived values of the conversion ratio between renewable energy certificates and RES-E certificates Derived conversion factor Criterion used [# Renewable fuels certificates No. Description per RES-E certificate] 1 Impact on additional costs 0.33 2a Fossil fuels replaced 5.72 (in terms of primary energy supply) 2b Impact on fossil fuels and nuclear energy 11.71 replaced (in terms of primary energy supply) 3 GHG reduction impact 36.99 Source: Appendix C.
5.5
Optimising standards for RES-E and renewable fuels
As already discussed, market forces cannot be completely relied upon for market development of renewable energy. Various forms of ‘market failure’ occur, including: • Inadequate allowance for differential supply-security risks (price volatility risks) of distinct energy sources by private sector actors in the energy sector. Underlying factors include is the conventional practice by power utilities to discount all projected future cash flows, at a single (inappropriate) discount rate,68 even where some of the cash flows have significantly higher price volatility. • Private-sector time preferences in favour of short-term profit making that are too strong from a societal point of view, and that unduly favour expense-intensive technologies. • Inadequate allowance by private-sector actors for long-term differential cost-reduction potential of distinct energy conversion technologies. • Inadequate diversification opportunities for private sector actors in the energy sector, because of the lumpiness of discrete investments, which thereby favours expense-intensive technologies. • Inadequate internalisation in the current pricing system of environmental standards aspired by EU policymakers to mitigate environmental damages, including the ones potentially deriving from human-induced disturbances of the global climate system.
68
See Awerbuch (2003) on potential flaws entering in conventional levelised cost calculations that use a uniform discount rate for future costs.
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In the preceding sections, it has been proposed to design long-term market-based frameworks for the promotion of renewably-generated electricity and renewable automotive fuels. Mandatory and ambitious targets were proposed as a necessary pre-condition to develop these markets at a socially desirable speed. The adjective ‘ambitious’ stands for targets which would not have been achieved in the absence of the support framework and which imply (perceived or real)69 additional financial costs to be borne by end-users and/or public budgets. Market-based frameworks are being proposed to reduce and eventually remove additional costs. Arguments to provide public support to renewable energy technology relate to instances of market failure enumerated above and include notably: (i) containing future overall energy costs, (ii) energy supply security, and (iii) environmental protection. As reviewed in Chapters 3 and 4 above, the methods used to formulate targets for the RES-E and Renewable Fuels Directives respectively have overly focused on acceleration of market development of renewable energy technology. They were found wanting in integration of major energy policy and overall socio-economic policy concerns. Current policies in place are insufficient to achieve EU RES-E targets set. This holds a fortiori for the EU renewable fuels targets. In target setting with respect to the RES-E contribution to the generating portfolio mix, due allowance should be made for: • Cost-effectiveness per distinct technology, both current unit cost as future projections based on credible assumptions on cost dynamics (e.g., progress ratios, price risks of major technology cost components) for renewable and competing energy technologies alike. • Cost data making adequate allowance for major quantifiable externalities, such as costs of compliance with local and global air pollution targets adopted and/or to be adopted by the EU. Environmental constraints should be translated into projections of marginal abatement costs per unit of electricity. • Efficient portfolio risk-return ratios. • RES-E implementation constraints under projected RES-E policies. Apart from the last consideration, Markowitz’s portfolio theory from modern finance theory can be used to determine optimal time-framed bands for the share of RES-E in the EU’s generating mix (Awerbuch, 2000; Awerbuch and Berger, 2003; Berger, 2003). In doing so, for each major power generating technology projections of unit costs and cost volatility per major cost item would be made. In discounting future cash flow projections of generating costs, due allowance will be made for price (volatility) risk, cost-reducing technological advances, and inclusion of costs of environmental damages to an extent compatible with preferences of EU policy makers. Based on projected unit costs and volatility co-variation patterns, ‘efficient’ (i.e., optimal) portfolios of generating assets can be determined, reconciling policy concerns on generating power at least cost, energy supply security and environmental protection. Under current conventional energy system cost calculations, inadequate allowance is made for notably energy supply security concerns. For the EU, being a major importer of fossil fuels, these concerns would seem to have a high political urgency (EU, 2000a). Considerations on risk aversion and implementation constraints will narrow down the band of optimal RES-E targets along the efficient frontiers of generating portfolios for reference target years to a small interval, from which the average value can be retained as recommended target. Rational portfolio selection approaches can help to substantiate in a consistent way increasing targets for certain renewable energy technologies with on the one hand possibly higher ex ante unit costs, but on the other lower price risk profiles. 69
Real additional costs may be less due to inadequate price risk provisions in establishing the discount rate for distinct projected cash flows. Fossil fuel costs tend to be discounted too strongly, as their systematic risk (co-variance of price changes with portfolio changes) tends to assume very low and even negative values. That is, fossil fuel assets tend to co-vary hardly in a positive way and may even be negatively correlated with the portfolio of generating assets. A major undercurrent is the negative correlation between fossil fuel prices and macroeconomic growth (Sauter and Awerbuch, 2002). Consequently, typically a lower discount rate would be required for transforming projected future fossil fuel cash flows into present values than the ones appropriate for renewable energy related cash flow projections. See also first bullet point in previous paragraph.
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Awerbuch (Awerbuch, 2000) has applied the portfolio theory to the U.S. case with a simplified portfolio of three generating technologies. In an extension to EU generating mixes, Awerbuch and Berger (Awerbuch and Berger, 2003; Berger, 2003) have extended the model to 11 technologies and several cost components. To further enhance the practical value of portfolio theory applications for energy policy makers: • The portfolio basket of technologies has to be extended further, notably with respect to RES-E technologies. • Environmental constraints need to be introduced. • Allowance has to be made explicit for implementation speed constraints and risk aversion preferences. • Allowance has to be made for ignorance with regard to projected parameter values such as technological progress, notably for analysis of generating portfolios in the long run (Stirling, 1994; Stirling, 1999). Given a feasible RES-E target rate adopted by policy makers, backed up by an adequate regulatory framework in the compliance area, projections of resulting marginal RES-E costs can be made. The associated projected RES-E marginal supply curve can help in determining the maximum feasible net back value of the feedstock for generating marginal biomass-based RESE electricity. This, in turn, can be fed into a model for projecting biomass energy feedstock supply. The model should duly account for feasible land use (change) patterns. Subsequently, biomass feedstock availability for producing biofuels can be established. This will assist in formulating a realistic renewable fuels standard (RFS), with feedstock net-back values in biofuel applications compatible with the ones in RES-E applications. A policy choice for higher RFS standards warrants iterative runs for the aforementioned procedure in order to project optimal RPS rates for which the biomass energy feedstock market would achieve equilibrium. Evidently, formal linking of RES-E and RF markets or not will affect the outcomes significantly. As set out in Section 5.4, absence of formal linking will increase price volatility in both markets.
5.6
Concluding observations
Our analysis in this chapter has pinpointed at the urgency to achieve harmonisation of the RESE market support systems of the EU Member States. Furthermore, it was found that a welldesigned RPS programme would be the appropriate model for EU-wide harmonisation. This model is most likely due to outperform any FIT model on all four criteria contemplated here, viz.: • impact on certainty of achieving RES-E targets, • impact on net overall cost to society at large, • impact on reduction of costs and prices, • impact on innovation. However, only a well-designed RPS regulatory framework can deliver on its promises.70 Very essential design elements include (Nader, 2000; Wiser and Langniss, 2001; Langniss and Wiser, 2003; Schaeffer and Sonneveld, 2000; Jansen, 2003; Verbruggen, 2004): • A long-term framework (as elaborated in the next paragraph) with ambitious but achievable mandatory targets. The framework should give clear signals to project developers over an adequately long period for making informed investment decisions. The targets should be ambitious, i.e. stricter than would have been achieved anyway in the absence of the framework programmes concerned. • The framework should be transparent in assigning clear compliance commitments to welldefined entities. The definition of affected parties should not give rise to competitive biases, e.g., through selective exemptions. 70
The same is recommended for a convincingly justified renewable fuels standard programme.
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•
• •
•
• •
The framework should make due allowance for differences in cost characteristics of RES-E technologies. In differential treatment by way of segmentation of the RES-E generating technologies a prudent balance should be struck between divergent cost characteristics and keeping the system simple, manageable, and market-based. The eligibility criteria for renewable energy technologies should be clear and credible. The criteria for second-tier technologies should not so lenient as to compromise on the level of ambition of the targets. There should be a credible certification and certificate tracking system in place, ensuring that eligible certificates surrendered for compliance will not be re-used for whatever other application. That is, each unique eligible certificate can be consumed only once for one particular application only. For example, the tracking system should obviate the possibility of submission of the same eligible electricity label (RES-E certificate) for compliance with a RPS programme and as evidence for meeting the requirements of a voluntary green power programme at the same time. The unit penalty for non-compliance should be set a priori and be sufficiently high as to make non-compliance under a wide range of ‘normal’ scenarios commercially unattractive. Hence, only under abnormally unfavourable supply conditions it should be commercially rational for companies to contemplate to discontinue efforts to be in full compliance in the reconciliation period concerned. Under such circumstances, the penalty rate would function as a safety valve in the form of a price cap. The programme regulations should pre-empt any room for ex post negotiation with the programme authority in establishing the noncompliance penalty. The programme should allow for adequate flexibility in ensuring compliance by allowing quota trading and other measures (See, for example, suggested flexibility features in a RFS programme to address the feedstock volatility in Section 5.3 above). Throughout the programme area uniform eligibility criteria should hold, while certificates eligible for compliance and issued in one sub-area (Member State) should also be valid in other programme sub-areas.
It is recommended that any harmonised RPS and/or RFS programme will be defined for four five-year periods ahead: • Before the programme start, fixed mandatory targets are set for the final years of the first three periods and intervening years, while indicative targets are set for the years of the fourth programme phase ahead, based on published assumptions regarding technology cost dynamics. • In the fourth programme year, the programme will be evaluated by the Commission with special attention for programme performance on pre-set criteria and intervening developments on cost dynamics parameters. The programme evaluation will yield proposed mandatory targets for the fourth programme period and indicative targets for the fifth period. In programme year five these results will be further negotiated with the European Parliament and Council. • The same timetable and procedure will hold for defining non-compliance penalties and guaranteed minimum sales revenue for tradable certificates of support-eligible RES-E. The aforementioned procedure will then be repeated each five year onward on a rollover basis. Complete harmonisation warrants imposing the RPS at the highest regional level, i.e. at Community level. This stimulates generation of RES-E EU-wide at locations where marginal costs are lowest. In turn, the latter phenomenon will set in motion a trend towards EU-wide equalisation of marginal costs with minimisation of total additional costs of the EU RES-E programme. In contrast, additional national targets may hinder optimal RES-E generation patterns across the EU territory.
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Support systems for RES-E and biofuels should be integrated. In this chapter, a method has been presented how this can be effectuated. Yet this still leaves out certain biomass-based heat applications. Ultimately, the overall EU renewables support framework should cover all biomass-based applications.
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6.
AN AGENDA FOR REGULATORY ADJUSTMENT
Renewable energy technology targets should closely reflect their net contribution to the main overall policy goals. Supply security and environmental considerations appear to persuasively favour policies to promote production and use of renewable energy in the European Union. What is still missing however is a comprehensive analysis including considerations on strengthening the macroeconomic performance of the EU economy, on which to base quantitative EU targets for renewables, renewables-based electricity, and biofuels. Notably the justification to date by the Commission of the current indicative targets for biofuels is weak. Another issue to be addressed is the interactions resulting from efforts to meet these targets concurrently. The most important finding of this chapter is that much more attention needs to be given by European policy makers to speed up the regulatory progress towards creating a genuine internal market for renewable energy at EU level. The welfare losses due to existing market distortions in the renewable energy sub-sectors, are poised to take on increasingly big proportions. Current support interventions at Member State level work against the Internal Market. Not least by empowering the lobbies of special interest groups that resist the opening up of domestic markets. Moreover, accelerated deployment of renewables does not come as a free lunch. In the EU-15 the additional costs of achieving the indicative targets set for year 2010 will annually range from € 11 to 29 billion for renewably-generated electricity and on the order of at least € 6 to 8 billion per annum for the stimulation of biofuels. To these amounts the annual cost of RD&D programmes and all associated administrative costs have to be added. Regional problems within Member States would have to be addressed by integrated regionspecific development policies. A market-distorting sector support system in a national or supranational framework denotes a blunt, inefficient policy instrument for achieving ‘social cohesion’ in poor or remote areas. For that reason, the use of renewable energy support as an instrument at (supra-) national level to promote social cohesion may well destroy aggregate welfare and employment. Although the contribution by renewables to social cohesion form an as such valuable co-benefit of accelerated penetration of renewable energy, the aforementioned consideration make social cohesion less appropriate to serve as one of the objectives for renewable energy support at national or Union-level. This should be taken into consideration if and when, for example, the current RES-E directive will be amended. In this respect, lessons learned from the Common Agricultural Policy should also be taken to heart when it comes to the justification of specific support at (supra-) national level for biofuels. The Commission should conduct thorough and credible analysis of the impact on EU-wide income and employment, resulting from alternative regulatory frameworks to provide market support to renewables. So far, the macroeconomic impact of these regulatory frameworks has been estimated in what seems to be a biased way in Commission-sponsored research and communications concerned by the Commission. This has been based on one single policy scenario that assumes a quite fortuitous de-bottlenecking of existing implementation barriers within a stringently carbon-constrained business environment. The analysis should also include policy scenarios that are less favourable to the economics of renewables, entailing higher additional costs to reach set deployment targets. Besides, the aggregate income and employment implications of alternative EU RES-E policy frameworks to achieve set EU RES-E targets should provide a major input to the evaluation report by the Commission, due October 2005.
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Such alternative frameworks should include: • intensification of current RES-E support systems in place in the Member States, • EU-wide harmonisation of RES-E support systems by way of uniform feed-in tariffs cum RES-E capacity investment support, • harmonisation by way of a three-tiered Community-wide RPS system as outlined in the previous chapter. A focal issue of regulatory attention in the near future is amendment of regulation on electricity labelling and Guarantees of Origin. It is an essential pre-condition for pre-empting a consolidation of current fragmented RES-E markets, that Guarantees of Origin will be introduced comprehensively in a harmonised way, or rather be replaced by a comprehensive system of mandatory electricity labels. The information carried by electricity labels should allow labels of eligible RES-E to function as tradable RES-E certificates in potentially segmented RES-E markets. major factors underlying RES-E segmentation are regulation (such as the recommended 3-tiered RPS system) and consumer preferences expressed by paying voluntary premium prices (green power programmes). Furthermore, submission of eligible electricity labels should be made mandatory as evidence for obtaining any form of RES-E support within the EU. These amendments with regard to the existing RES-E Directive (EU, 2001b) and the Directive on the internal market in electricity (EU, 2003c) would not only remove an important factor underlying the current institutional lock-in of current fragmentation of the EU RES-E market.71 It is a very critical precondition to eventual harmonisation. An important co-benefit of implementing these proposed amendments is that monitoring of RES-E support trends can be substantially improved.
71
The judgment of the EJC to condone market-distorting feed-in tariffs has been based, among other things, on the absence of a comprehensive system of ‘certificates of origin for electricity produced from renewable sources, capable of being the subject of mutual recognition…to make trade in that type of electricity both reliable and possible in practice’ (EJC, 2001: Recital 80). The current RES-E Directive does not prescribe introduction of a GO system in harmonised and comprehensive way. These two factors enable Member States with (non-harmonised) feed-in tariff systems to continue resisting market-based harmonised RES-E support systems by introducing nonharmonised and non-comprehensive GO systems. See also Footnote 47.
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European Union (2001a): Community guidelines on State aid for environmental protection. OJ C 37. Brussels. February 2001. European Union (2001b): Directive of the European Parliament and of the Council on the promotion of electricity produced from renewable energy sources in the internal electricity market. 2000/0116 (COD). PE-CONS 3648/01. ENER 104/ ENV 411/ CODEC 803. Brussels. August 2001. European Union (2001c): Communication...on alternative fuels for road transportation and on a set of measures to promote the use of biofuels. COM(2001) 547 final. 2001/0265(COD). 2001/0266(CNS). Brussels. November 2001. European Union (2001d): Proposal for a Directive of the European parliament and of the Council on the promotion of the use of biofuels for transport. COM(2001) 547 final. 2001/0265(COD). 2001/0266(CNS). Brussels. November 2001. European Union (2001e): Proposal for a Council Directive amending Directive 92/81/EEC with regard to the possibility of applying a reduced rate of excise duty on certain mineral oils containing biofuels and on biofuels. COM(2001) 547 final. 2001/0265(COD). 2001/0266(CNS). Brussels. November 2001. European Union (2002a): Communication from the Commission to the Council and the European Parliament: Final report on the Green Paper ‘Towards a European strategy for the security of energy supply’. COM(2002) 321 final. Brussels. June 2002. European Union (2002b): Monitoring of ACEA’s, JAMA’s, KAMA’s commitment on CO2 Emission Reduction from Passenger Cars (2001). Final Reports COM(2002) 693 final. Brussels. June 2002. European Union (2002c): Mid-Term Review of the Common Agricultural Policy. COM (2002) 394 final. Brussels. July 2002. European Union (2003a): Results of meeting of Economics and Finance Ministers, Brussels, 20th March 2003 - Taxation. Press release MEMO/03/64. Brussels. March 2003. European Union (2003b): Directive 2003/30/EC of the European Parliament and of the Council on the promotion of the use of biofuels or other renewable fuels for transport. Brussels. May 2003. European Union (2003c): Directive 2003/54/EC of the European Parliament and of the Council concerning common rules for the internal market in electricity and repealing Directive 96/92/EC. Brussels. June 2003. Eurostat (2002a): Eurostat yearbook 2002. The statistical guide to Europe. Data 1990-2000. Luxembourg. Eurostat (2002b): Renewable energy sources statistics in the EU, Iceland and Norway. Data 1989-2000. Luxembourg. Geller, H. (2002): Energy Revolution: Policies for a Sustainable Future. Island Press. Washington, D.C. Grauwe, P. de (2000): Economics of Monetary Union. Oxford University Press. Fourth edition. Oxford (UK). Grubb, M. (2001): Who’s afraid of atmospheric stabilisation? Making the link between energy resources and climate change. Energy Policy. Vol. 29, pp 837-845. Grubb, M., J. Köhler, and D. Anderson (2002): Induced Technical Change and Environmental Modeling: Analytical Approaches and Policy Implications. Annu. Rev. Energy Environ. Vol. 27, pp. 271-308.
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Harmsen, R., P.Kroon, J.R. Ybema, M.S. Jespersen, J. Jordal-Jørgensen (2003): International CO2 policy benchmark for the road transport sector. Report ECN-C-03-001. ECN/COWI. Petten/Copenhagen. February. Harrison, J. (2003): Micro CHP in rural areas - opportunity for biofuels. Renewable Energy World, Vol.5, No.5. September-October. pp. 139-141. International Energy Agency/AFIS (1999): Automotive fuels for the future. The Search for Alternatives. Paris. International Energy Agency (2001): Saving oil and reducing CO2 emissions in transport. Options & Strategies. Paris. Jansen, J.C. (2003): ‘A green juwel box?’. Environmental Finance. Vol.4, No.5. March. p.27. Kampman, B.E., et al. (2003): Biomassa: tanken of stoken? CE Report. CE. Delft. July (in Dutch). Karbuz, S. (2004): Conversion factors and oil statistics. Energy Policy. Vol. 32, pp. 41-45. Henke, J.M., G. Klepper, J. Netzel (2002): Steurbefreiung für Biokraftstoffe: Ist Bio-Ethanol wirklich eine klimapolitische Option? Kieler Arbeitspapier Nr. 1136. Institut für Weltwirtschaft. Kiel. November (in German). Henke, J.M., G. Klepper, N. Schmitz (2003): Tax Exemption for Biofuels in Germany: is Bio-Ethanol Really an Option for Climate Change? Paper prepared for the International Energy Workshop at IIASA. Laxenburg, 24-26 June. Huber, C., R. Haas, T. Faber, G. Resch (2002): Efficiency criteria for promoting electricity generation from renewables. Energy Economiscs Group, Vienna University of Technology, Vienna. International Energy Agency (2002): Renewables in Global Energy Supply. An IEA Fact Sheet. Paris, November 2002. Jonk, G. (2002): On the use of biofuels for transport. European Environmetal Bureau (EEB) background paper. EEB, Brussels, March, 2002. Langniss, O., R. Wiser (2003): The renewables portfolio standard in Texas: an early assessment. Energy Policy. Vol. 31, pp. 527-535. Menanteau, P., D. Finon, M-L. Lamy (2003): Prices versus quantities: choosing policies for promoting the development of renewable energy. Energy Policy. Vol. 31, pp. 799-812. Mock, T. (2003): Belastungen fűr die energie-intensive Industrie durch neue fiskalische Instrumente. Ehrfarungen aus der Aluminiumbranche. Energiewirtschaftliche Tagesfragen, Vol. 53, No. 5. May. pp. 302-306 (in German). Nader, N. (2000): The hazards of implementing renewables portfolio standards. Energy & Environment. Vol.11, No.4. pp.391-405. Rajsekhar, B., F.J.L. van Hulle, J.C. Jansen (1999): Indian wind energy programme: performance and future directions. Energy Policy. Vol. 27, No. 11, pp. 669-678. Sambeek, E.J.W. van, H.J. de Vries, H.J.T. Kooijman (2003): MEP-vergoeding voor windenergie op land. Report ECN-C-03-050, ECN, Petten. May 2003 (in Dutch). Sauter, R., S. Awerbuch (2002): Oil price volatility and economic activity: a survey and literature review. Draft IEA research paper. IEA, Paris. 25 September. Schaeffer, G.J., J. Sonnemans (2000): The influence of banking and borrowing under different penalty regimes in tradable green certificate markets. Results from an experimental economics laboratory experiment. Energy & Environment. Vol.11, No 4. pp 407-422.
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Scheer, H. (2002): The Solar Economy. Renewable Energy for a Sustainable Future. Earthscan Publications Ltd. London/Sterling, VA. Schiffer, H-W. (2003): Deutscher Energiemarkt 2002. Energiewirtschaftliche Tagesfragen. Vol.53, No.3., March. pp.168-179 (in German). Sijm, J.P.M. (2002): The performance of feed-in tariffs to promote renewable electricity in European countries. Report ECN-C—02-083. . Netherlands Energy research Foundation, Petten, November 2002. Stirling, A. (1999): On the Economics and Analysis of Diversity. SPRU Electronic Working Paper Series. Paper No. 28. Thuijl, E. van (2002): Grootschalige toepassing van biobrandstoffen in wegvoertuigen. Report ECN-I--02-008. ECN, Petten, August (in Dutch). Thuijl, E. van, C.J. Roos, L.W.M. Beurskens (2003): An overview of biofuel technologies, markets and policies in Europe. Report ECN-C--03-008. Netherlands Energy research Foundation, Petten, January 2003. Turkenburg, W.C. et al. (2000): Renewable energy technologies. Chapter 7 in: UNDP (2000): World Energy Assessment. Energy and the Challenge of Sustainability. UN Department of Economic and Social Affairs and World Energy Council, New York. Uyterlinde, M.A. et al. (2003): Renewable electricity market developments in the European Union. Final Report of the ADMIRE REBUS project. Report ECN-C--03-082, forthcoming. Verbruggen, A. (2004): Tradable green certificates in Flanders (Belgium). Energy Policy, Vol.32, pp.165-176. Vollebergh, H. (1997): Waste-to-Energy in the Netherlands and Biofuels in France. Research Memorandum 9703. OCFEB, Erasmus University Rotterdam. Williams, B. (2003): Peak-oil, global warming concerns opening new window of opportunity for alternative energy sources. Oil & Gas Journal, pp.18-28, August 2003. Wiser, R., O. Langniss (2001): The Renewables Portfolio Standard in Texas: An Early Assessment. Report LBNL-4917. Lawrence Berkeley National Laboratory, Berkeley, November. WWF/CNE (2001): Why waste incineration must be kept out of the draft renewables directive. Open letter to Members of European Parliament. Brussels, June 2001. WWF (2003): On the implementation of the European renewables directive. Progress Report. Brussels, October 2003.
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APPENDIX A
MAIN FEATURES OF THE COMMUNITY GUIDELINES ON STATE AID FOR ENVIRONMENTAL PROTECTION
Essential provisions of the Community Guidelines on State Aid for Environmental Protection72, related to renewable energy, include: • Under Article 6 of the EC Treaty, environmental policy objectives must be integrated into the Commission’s policy on aid controls in the environmental sector, in particular with a view to promoting sustainable development (EU, 2001a: Point 3). • The Commission’s approach consists in determining whether, and under what conditions, State aid may be regarded as necessary to ensure environmental protection and sustainable development without having disproportionate effects on competition and growth (ditto, Point 5). • The costs associated with protecting the environment should be internalised by firms. Instruments the Community has to use to achieve this to the extent possible include regulatory instruments such as mandatory standards, voluntary agreements, and economic instruments (Point 10). • State aid may in certain specific conditions be used as a temporary second-best solution by encouraging firms to adapt to standards or to improve on standards or to undertake further pollution-reducing investment (Point 18). • In some cases, exemptions from or reductions in taxes granted to firms in particular categories in order to avoid placing them in a difficult competitive situation are acceptable for a period of time up to 10 years, after which re-notification of these measures to the Commission is warranted (Point 23). This applies in particular to the use of renewable sources of energy and combined heat and power production. It should be certain, that such aid is not in breach of other provisions of the Treaty or secondary legislation (Point 24). • Investments to promote renewable sources of energy are one of the Community’s environmental priorities and one of the long-term objectives that should be encouraged most. They qualify for state aid of 40% of eligible costs, while renewable energy installations serving all the needs of an entire community may qualify for a 10% bonus on top of the 40% basic rate. Where ‘it can be shown to be necessary’ investment grants in support of renewable energy up to 100% of eligible costs are possible (Point 32). • Eligible costs are the extra investment costs necessary to meet the environmental objectives. For renewable energy, eligible investment costs are normally the extra costs borne by the firm compared with a conventional power plant with the same capacity in terms of the effective production of energy (Point 37). • Operating aid for the production of renewable energy will usually be allowable under these guidelines (Point 54). • Aid may be necessary in particular where the technical processes available do not allow energy to be produced at unit costs comparable to those of conventional sources (Point 55). • It may be justified in order to cover the difference between the cost of producing energy from renewable energy sources and the market price of energy. When studying cases, the Commission will take account of the competitive position of each form of energy involved (Point 56).
72
See European Union (2001a).
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Options for granting operating aid for renewable sources are: 1. Compensation for the difference between the production cost of renewable energy based power concerned and the market price of power. This should then relate to plant depreciation only. However, the aid may also cover a fair return on capital if Member States can show that this is indispensable given the poor competitiveness of certain renewable energy sources. Account should also be taken of any investment aid granted to the firm in question in respect of the new plant (Point 59). 2. In the case of biomass, operating aid exceeding the amount of investment may be acceptable where Member States can show that the aggregate costs borne by the firms after plant depreciation are still higher than the market prices of the energy (Point 60). 3. Member States may grant support for renewable energy sources by using market mechanisms such as green certificates or tenders (Point 61). This provided that Member States can show that (i) such support is essential to ensure the viability of the renewable energy sources concerned, (ii) does in the aggregate not result in overcompensation for renewable energy and (iii) does not dissuade renewable energy producers from becoming more competitive. After ten years of authorisation, these systems will have to be assessed whether the support measure needs to be continued (Point 62). 4. The Commission must be certain that the aid does not give rise to any distortion of competition contrary to the common interest. It should result in an overall increase of renewable energy sources and not in a simple transfer of market shares between renewable energy sources. Member States may grant operating aid to new plants producing renewable energy that will be calculated on the basis of the external costs avoided. These will be calculated on the basis of the difference between, on the one hand, the external costs produced and not paid by renewable energy producers and, on the other hand, the external costs produced and not paid by non-renewable energy producers, when producing the same amount of energy. At any event the amount of the aid granted on this basis to the renewable energy producer, must not exceed € 0.05 per kWh. Furthermore, renewable energy producers must reinvest any amount of aid received that exceeds the one resulting from Option 1 (Point 63). 5. Member States may still grant operating aid if its duration is limited to five years, starting with 100% of the ‘extra costs’ falling in a linear fashion to zero by the end of the fifth year or, alternatively, by no more than 50% of these costs during five years (points 45 and 46).
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APPENDIX B
APPLYING LEARNING CURVES FOR TRANSITION MANAGEMENT
In designing support frameworks for renewable energy technologies, managers of public-sector research funds seek to undertake effective ‘technology transition management’. The basic idea is to minimise the present value of additional cost of supporting commercially immature technologies over the time needed before these technologies become cost-competitive. Support can take on various forms, notably RD&D subsidies, investment support and direct market support (volume support, price support) by public funding and strategic cross-subsidisation by private firms. A currently popular approach for transition management can be captured by the idea of ‘descending the learning curve’. Experience curves (learning curves) describe how unit cost (that is, unit generating capacity cost or unit energy cost) declines with cumulative production. Cumulative production stands for the accumulated experience in producing and employing a technology. A key feature of these curves is that unit cost is supposed to decline by a constant percentage point rate with each doubling of cumulative production. Suppose that this rate is held to be 20% then the so-called progress ratio is taken to be 80%. The theoretical base for this approach would seem to be rather weak: • Past experience with cost reductions is likely to be a poor predictor of the future. Typically, if public-sector interventions are not widely divergent (potentially) successful technologies/products will show a sort of S-shaped market penetration pattern. Initially, prices will reflect relatively high unit cost and the comparative advantage of innovative firms in their ability to differentiate products. Even in relatively homogeneous energy markets it is possible under effective marketing to find buyers of expensive but perceived environmentally benign renewable energy technologies at commercial terms. At the time of rapid commercialisation prices will come down disproportionately fast under competitive pressures. Once the standardisation and saturation phase is reached, price reductions will typically be disproportionately slow. This relates, among other factors, to the existence of limits to economies of scale. These limits vary widely among technologies though. • Cost information on commercially immature technologies is utterly unreliable. The absence of highly competitive market situations will make firms involved in their development reluctant to render their real unit cost public-domain information. Typically, firms active in strongly government supported technology development have reasons to overstate real cost so as to discourage potential competitors to enter the market and to exploit asymmetric cost information to entice higher levels of support. At any rate, the market situation is quite relevant for the reliability of cost information. Furthermore, substantial changes in product development over time may beg the question, which products should be compared in price over time with possibly varying response interpretations among analysts. • The results of fitting learning curve statistics are rather sensitive to system boundaries. Using different levels of aggregation affect the speed of doubling. Sheer time-dependent factors will have a different impact as a result. Besides, different market circumstances corresponding to different system boundaries will make a difference. For example, generating costs for non-competitive RES-E technologies may come down slower in countries with protectionist support policies (e.g., feed-in tariffs) and/or other less market-based RES-E support policies (e.g., investment subsidies) than in countries with market-based RES-E support policies. This point tends to be overlooked by analysts deeming its supposedly ‘dynamic efficiency’ an advantage of FIT support systems over alternative ones (Sijm, 2002; Menanteau et al., 2003).
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Yet, projections of learning curve parameter values are very helpful for periodically monitoring and re-balancing public RD&D and price support portfolios. This under the proviso that base year information is reasonably reliable. If an immature technology over-performs, relative to a target progress ratio, it might be considered to increase its share in the portfolio of support allocations. The opposite holds for under-performing technologies.
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APPENDIX C DERIVATION OF A CONVERSION RATIO BETWEEN RES-E CERTIFICATES AND RF CERTIFICATES C.1
Keys to determine the conversion ratio between RECs and RFCs
A REC (Renewably-generated Electricity Certificate) serves as proof that: • a unique quantity of electricity equal to 1 MWh is generated by means of an eligible (second-tier) renewable with source with the attributes specified by the certificate, and • it has not been consumed elsewhere. One RFC (renewable fuels certificate) serves as a proof that: • a unique quantity of eligible renewable automotive fuel with a calorific value on a pure basis of 1 GJ and with the attributes specified by the certificate has been sold to targeted end users in the renewable fuels programme area, and • it has not been consumed elsewhere. Criteria for determining equivalence keys to be applied to the EU-15: 1) equality of additional costs, 2) equal replacement effect with regard to imported fuels with security of supply risk a) replacement of fossil fuels b) replacement of fossil fuels and nuclear, 3) equal GHG reduction impact.
C.2
Assumptions
Equality of additional costs The additional costs of biofuels are assumed to be 30 ct/liter. The calorific value of one liter of pure biofuels (0.75 l biodiesel, 0.25 l bio-ethanol) is 29,9 MJ/l. The additional costs of ‘generic’ RES-E (second-tier technologies) are assumed to be 3 ct/kWh. Supply security risk Assume one GJ of pure renewable fuels replaces 0.4 GJ of gasoline and 0.2 GJ of diesel fuel. Use the primary energy supply of fuels with supply security risks to determine the key(s). Use latest EU electricity generating portfolio and assume no change in baseline situation. Use latest EU conversion efficiency rates and assume no change in baseline situation. GHG reduction impact Use IPPC guideline figures. Assume in production of renewable fuels no other GHGs than CO2 are released. This assumption could be adjusted in future elaborations.
C.3
Determination of certificate conversion ratio
Criterion 1: Equality of additional costs One Renewable Fuels Certificate stands for a quantity of pure biomass of: 1 GJ ~ 33.4 liter
Additional costs: Additional costs of one REC:
[€/RFC] 10,03 30,00
Resulting conversion ratio (RFCs per REC): 0.33.
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Criterion 2a: PES of fossil fuels replaced One Renewable Fuels Certificate stands for a quantity of TPES of crude oil replaced of: Efficiency*) TPES [GJ] 0,2 GJ diesel oil 0,92 0,22 0,4 GJ gasoline 0,92 0,43 Total 0,65 One REC stands for a quantity of TPES of fossil fuels replaced of: EU-15 power supply Efficiency [%, year 2002] Electricity: fossil-fuels-based 48,7 47 Electricity: nuclear-based 35,8 33 Electricity: renewables-based 15,5 na Total excluding nuclear
TPES [MWh] 1,04 1,08 na
TPES [GJ] 3,73 3,91 na 3,73
Resulting conversion ratio (RFCs per REC): 5,72
Criterion 2b: PES of fossil fuels and nuclear energy replaced One Renewable Fuels Certificate stands for a quantity of TPES of crude oil and nuclear replaced of: Efficiency*) TPES [GJ] 0,2 GJ diesel oil 0,92 0,22 0,4 GJ gasoline 0,92 0,43 Total 0,65 One REC stands for a quantity of TPES of fossil fuels and nuclear energy replaced of: EU-15 power supply Efficiency TPES [%, year 2002] [MWh] Electricity: fossil-fuels-based 48,7 47 1,04 Electricity: nuclear-based 35,8 33 1,08 Electricity: renewables-based 15,5 na na Total including nuclear
TPES [GJ] 3,73 3,91 na 7,64
Resulting conversion ratio (RFCs per REC): 11.71
Criterion 3: GHG reduction impact One Renewable Fuels Certificate stands for a quantity of GHG reduction [tCO2eq.]: kgCO2-eq/GJ kgCO2-eq 0,2 GJ diesel oil 73 14,60 0,4 GJ gasoline 73 29,20 Total 43,80 One REC stands for a quantity of TPES of fossil fuels and nuclear energy replaced of: EU-15 power supply Efficiency kgCO2-eq/MWh kgCO2-eq [%, year 2002] Electricity: fossil-fuels-based 48,7 47,0 450,00 1.620,00 Electricity: nuclear-based 35,8 33,0 Electricity: renewables-based 15,5 na Total 1.620,00 Resulting conversion ratio (RFCs per REC): 36,99
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Simple composite conversion ratios Using Criteria 1, 2a (fossil fuels only), 3: 14,3 Using Criteria 1, 2b (fossil fuels+nuclear), 3: 16,3
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