Renewable Energy Policy in Europe
By  Ms. Annemarije L. Kooijman-van Dijk
ECN, The Netherlands

Introduction

Renewable energy policy in Europe is driven by a range of motivations, most importantly concern for the environment and security of energy supply, but also for reasons such as employment creation and stimulation of local industry. The different national priorities and different national contexts have led to a range of different national policies to support the development of renewable energy technology and the development of a market for renewable energy.

Whereas for new innovative technologies policies focus on R&D and demonstration projects, for more mature technologies, such as wind energy, policies are aimed at development of the market for electricity from the renewable sources. Adapting the regulatory framework to remove barriers towards the deployment of renewable energy is an essential part of all policies. A range of policy instruments and measures are briefly discussed below.

R&D support

Direct support for research, development and demonstration is widely used to stimulate the development and market uptake of those renewable energy sources that are far from commercial implementation. Each country has its own R&D programme for renewable energy technologies. The EU itself also funds R&D activities. The 6th Framework Programme 2003-2006 has a budget of more than 700 million Euro for the promotion of renewable energy sources, and their integration into the energy system, storage, distribution and use for electricity, heat and transport.

Subsidies on investment and fiscal measures on investment

Investment subsidies can help overcome the barrier of a high initial investment. This type of subsidy is commonly used to stimulate the sales of less economical RE technologies. Investment subsidies are usually 20-40% of eligible investment costs. Some EU countries support renewable electricity by means of the fiscal system. Such support schemes include rebates on general energy taxes, lower VAT rates and fiscal attractive depreciation schemes.

Feed-in tariffs

Feed-in measures support the production rather than the investment. Feed-in policy schemes offer a combination of a (limited) purchase obligation plus additional measures to improve security on income: a fixed price or a fixed premium on top of the �grey electricity� price. The levels of guaranteed prices are commonly differentiated per technology to allow for differences in cost prices.

A feature of the feed-in tariff system that is especially valued by investors, is the security it can offer on income throughout the project lifetime. This implies that the impact of a feed-in system is largely dependent on the duration of the feed-in contracts.

An example of a feed-in system that has been very successful in generating investments in renewable energy is the German system. This is a detailed system, with different tariffs developing at different rates over time to match expected technology development over eight main technology categories. For example: for electricity generation from "clean biomass" with a size between 500kW and 5 MW, the 2003 tariff of 8,95 �cent/kWh will be reduced by 1% annually for new installations commissioned. Power producers are guaranteed a certain feed-in rate for 20 years after project start.

The success of the German feed-in system in generating investments in renewable energy has greatly increased interest in feed-in systems. The disadvantage of feed-in systems is that they do not force the market to reach an optimum in cost-effective implementation or cost reduction.

Bidding procedures

Bidding procedures can be used for investments, for subsidies or other forms of support on production (such as through feed-in-tariffs), or for other limited rights- such as sites for wind energy. Potential investors or producers have to compete for this support or right through a competitive bidding system. The criteria for judgement of the bids are set before each bidding round. For example in Spain, wind energy projects compete not only on basis of costs, but also on the basis of their technical quality, socio-economic impact, and geographic & environmental concerns.

The bidding system creates competition between suppliers, and is therefore expected to lead to a selection of cost effective projects. In order to maintain a differentiation in RE supply, the bidding may be differentiated in bands of different technologies and RE sources. This means that wind projects compete against other wind projects but not against, for example, biomass projects. The marginal accepted bid sets the price for the whole technology band.

Renewable Portfolio Standards (RPS)/ Quotas

An instrument that is gaining momentum is the Quota system, or a Renewable Portfolio Standard. The government sets the framework within which the market has to produce, sell, or distribute a certain amount of energy from renewable sources. The targets may or may not specify support for individual technologies. The obligation is imposed on consumption (often through distribution companies) or production. The quota are usually tradable, making use of certificates, to allow cost effective achievement of the quota.

Countries with an RPS in place are: UK, Sweden, Belgium, and Italy. In Poland an RPS system is under development, while Denmark postponed the implementation of its RPS system in 2003.

Certificates

Certificates by themselves are not a policy measure, but they serve as an instrument to accredit and register the production of renewable electricity and to facilitate trade. The term green certificate is commonly used to describe the system where separation occurs of electricity as a physical commodity, and its �green quality� emanating from the use of renewable sources. The �green quality� is incorporated in the green certificate, which is issued at the moment of production, and can be traded separately from the electricity.

Certificates are used in the Renewable Portfolio Standard and several other policy measures to support Renewable Energy. Demand may be voluntary, based on the customer�s willingness to pay for green electricity, or the government can imposed it. In the latter case, penalties are applied if the demand obligation is not met.

Certicates allow separation of the market for certificates from the electricity market

Governments are increasingly supporting the use of certificates to achieve renewable energy targets in a cost efficient manner: the market will select the lowest cost technologies and locations first. Policy schemes with certificates for renewable energy have been introduced recently or are under study in the Netherlands, Italy, UK, Flanders and Wallonia and Sweden. The Netherlands is the only country in the EU that has a green certificate system with voluntary demand.

According to the EC Directive on renewable energy, all EU Member States are obliged to have a system in place for �Certificates of Origin� for all renewable energy production by end 2003. These Certificates of Origin do not have to be tradable, but it is expected that they will facilitate trade wherever national law does not forbid this.

Ahead of the formulation of these Certificates of Origin, which may be defined by each country separately, a group of stakeholders (utilities, RE industry representatives, etc.) has developed a prototype green certificate and trading system for Europe, the Renewable Energy Certificate Trading System (RECS). This system advocates a standard certificate that can be traded in ONE certificate market across Europe, whether for voluntary or obligatory markets. It is to be expected that the RECS infrastructure will be used for the �Certificates of Origin� in countries where RECS has been established.

Negotiated Agreements

The government can increase commitment from the private sector by reaching an agreement to achieve certain targets with the relevant sectors. In the Netherlands, the involvement of the private sector through Long Term Agreements (MJA�s) is used in many policy fields. In the field of energy, the framework of the Environmental Action Plan committed all energy distribution and supply companies to stimulate energy efficiency and renewable energy. During the period of this Agreement (1991-2000) the utilities played a major role in increasing awareness and implementing local action plans for their customers, for example for insulation, high-efficiency boilers as well as the stimulation of renewables.

The regulatory and market framework

Regulations and procedures define the framework for the development and exploitation of renewable energy projects. Examples of crucial regulations are those for construction and access to the grid, and allocation of costs. The structure of the electricity sector as whole and the regulations governing it are historically commonly focussed towards centralised electricity generation. Besides the regulatory framework, aspects of the electricity market such as the structure of the market and the attitude of the main players and customers towards renewable energy are crucial in the development of the renewable energy market.

Final remarks

These are especially exciting times for renewable energy in Europe. The scale of implementation of renewable energy technologies is increasing fast, and can no longer be ignored as an essential part of the electricity supply. Further, the ongoing liberalization of the power markets in Europe creates risks for renewable energy on the one hand, but offers opportunities on the other. Risks are associated with increasing competition in which renewable energy will need to position itself. Policies need to be developed for a smooth transition of the RE sectors from a protected position (especially those technologies that are now largely supported through RD&D) into a competitive electricity market. On the other hand, new opportunities for renewable energy arise with increasing possibilities for electricity supply by independent and new parties, and sales to consumers with a free choice to select renewable energy�these opportunities must be recognised and seized now, by policy makers and market players hand in hand. v

References

A.L. van Dijk. "Renewable Energy Policies and Market Developments", ECN-C�03-029

The Renewable Energy Certificate System <http://www.recs.org>