http://www.leonardo-energy.org/webinar/experience-renewable-electricity-support-schemes-europe-%E2%80%93-best-practices-and-challenges
Which instruments should be chosen to support renewable electricity? What are their cost implications? Could renewables support be aligned across Europe?
These are some of the hot questions of the European policy debate. The webinar will give an overview of renewable electricity support schemes currently applied in Europe. Corinna Klessmann will present best practices, trends and challenges in renewable energy policy design, based on recent assignments for the European Commission.
Reproduction so what I would like to do today is to give you an overview on the recent experience with renewable electricity support schemes in Europe so on the one hand to look at what is the current status and also to look at what our recent trends and what to expect
From future guarding in the first rate excited looking first at where we are today we see that there is a great diversity of renewable electricity support schemes in the EU member states so some countries apply feed-in tariffs are the feet of premiums some quotas some tenders but what is especially
Remarkable is that many countries apply a combination of different instruments so the map of Europe is quite striped and that is also remarkable because until a few years ago there was based the map look basically blue or yellow so for many years there was a somewhat ideological debate going on on peed in
Versus quota schemes and what is the better support scheme and you could read a lot about that both in the scientific literature but also yeah and the in the policy debate in Brussels this was a highly debated topic as we look at the map today the picture looks more nuanced
We see member states have started to choose more tailor-made approaches and this would especially also be the case if we look at secondary support schemes that are not shown on this map yet so we only show the the dominant support instruments but of course also many member states still apply secondary
Instruments like Texas cent of investment grass and so on despite all this diversity we can also perceive some key trends in renewables policy design and also some converging trends which is interesting in the sense that it’s the long-term goal of Europe to come to a more unified European energy market and
I will today explore three major trends the first one being quota schemes losing ground the second one more and more countries use sliding sedum premiums or also called contracts or differences and third more and more countries experiment with tendering schemes so these are three trends that only concern the
Direct support schemes of course there’s many other trends by the closer look will actually give some insights on what is the reasons behind these trends first with first two of them so on the one hand quotas teams are losing ground and on the other hand more countries use
Sliding freedom premiums or contacts for differences as you already see from the map there’s yeah the countries that actually currently use quota schemes if also still for new installations are on the one hand Sweden which is one of the best practice example of a scroll of quota scheme and will continue to use
The scheme in the future then there’s UK but they actually announced they will phase out exporter scheme there is a Poland but again they announced they will double phase out the system Italy which some way vanished from the map I don’t know what is the technical reason
For this they also until about two years ago they were using quota schemes which still exists for existing plans but not anymore for new plants also they are phasing it out romania still continues to do so so and in the past davis was even more countries sorry i forgot of
Belgium who also has a mixture of of quota and fixed terrorist so what we see that while quota schemes were relatively popular in the past today more and more countries are abandoning those schemes and then second trends more and more countries introduced sliding feeding premiums or contracts for differences so
Either coming from crota schemes or coming from fixed feed-in tariffs usually and their countries that have yeah fairly recently introduced such themes are the Netherlands Denmark’s using already for longer time Germany starting 2012 the UK announced that they will move to a contract for different scheme
And so in in general there’s a certain trend towards those trends now in order to understand what what is behind those trends we will look at their yeah how those schemes are built up so first they say you might be aware that they said general differentiation our support
Schemes volume based or price based so do they give a volume and then the price is defined by some kind of market that’s the case for quota themes or is the price of the support is it predefined and that’s the case for feed-in tariffs and freedom premiums now looking at how
And by the way these are only production support instruments of course there’s also investment support but we don’t we don’t look at them and this presentation because they are not the main supporting students in Europe for for renewable electricity at the moment looking first at at the closer scheme on the right
What do we actually see we see in yellow how the electricity market changes over time and on the other hand in green how the green certificate price develops over the same period of time so basically the revenue from a renewable producer perspective is the mouth the revenues of it makes from
The from selling electricity plus the revenue from the green certificate market and as you can see both prices are fluctuating so there’s a risk from the from the electricity market and from the green certificate market now on the other hand looking for the left looking at the sixth feed-in tariff the fit
There we see this means usually a fixed payment per kilowatt hour is paid for guaranteed period let’s say 15 or 20 years in most countries and the renewables producer gets this payment no matter what the electricity prices so it actually doesn’t even see the electricity price it just gets this this
Feed-in tariffs over the full type but of course they’re still the electricity market price in the background so the difference between the market price as the support payment is pasted we are used by consumers or by their public budget but this is not visible to wear to the renewables producers now looking
At the middle at the freedom premium schemes there we have different variants on the left you see a sliding freedom premium scheme call also called the contracts for difference text there’s a tiny difference between those two so a sliding scheme basically sets of reference value similar to the
Feed-in tariff and then uses electricity market benchmark and then paste the support as a difference between the market benchmark and this constant support level and it’s still there renewables producer who will sell electricity on the market but it has a quite stable income or a very stable income if it doesn’t make mistakes
Because knows there will always be the difference it will repay the difference between this of us the fourth level and the market price and so in the end there will be a stable revenue and here’s a small difference between contract for difference in the sliding premium the convict for difference would actually
Also asked to pay back in times where the electricity market price is higher than the support level so where the yellow goes beyond the blue bar and in other support schemes it’s actually find that this extra what you can bake in the electricity market stays with the
Renewable producer so it’s he he’s lucky in that case so in a way this sliding freedom premium is a scheme that is from the revenue perspective quite similar to a feed-in tariffs very similar in fact but the major difference is that the renewables producer cells directly to
The market while in the case of feed-in tariff double the integration into the market is done added with operator there’s also other cases of food in premium schemes so in the middle you see a cabin floor system that’s what the past was applied in Spain so basically it means again the
Support payment is paid on on top of the electricity market revenues but there’s a cap and floor so if if prices drop very low then they cut the support payment doesn’t drop the lower yeah bottom price and if it’s very high the support payment doesn’t rise beyond the
Ceiling price so in that sense the the market risk from from the electricity market revenues is somewhat yeah hatched or limited to a certain extent by this this cabin floor in the support payment then in the middle on the right side you see the fixed feeding premium that’s in
A way the most simple but also the most risky type of a premium so it means a support payment is paid on top of the electricity market price no matter what the price is and this then results in quite fluctuating revenues for there with renewables producer
So summarizing this again we see on the right for the quota scheme you have a certificate market price risk and you have the full electricity market price risk and that makes sir makes the scheme to relatively risky scheme from a producers perspective so producers have to cope with those those to market price
Risks on the other hand in the case of the feed-in tariff on the very left there’s no market price risk at all it doesn’t even see the market price while in the case of a sliding or kept feeding premium system there’s this limited market price risk so it’s it produces
Exposed to this market price signals but the risk is limited while in a fixed feeding premium the producer is exposed to the full market risk but only to the electricity market risk and not too agreed certificate market risk and again as I mentioned before under the feed-in tariffs the integration into the
Electricity markets is done by a grid operator while in all other support schemes of the integration into the market is done by private actors so the renewables produce ourselves directly to the market quite often to to some kind of aggregate why are we talking about risk that much
Well in fact the level of risk exposure plays a very crucial role for the effectiveness and efficiency of renewable support schemes that’s the last lessons that we’ve drawn in in different studies over over the last year’s and you can you can read it in many publications and the the principle
Is quite simple so in a way if the Air Support Scheme limits risks and exposes their producer to a low level of risk then the investor has a high level of planning certainty it will be able to access Capital at at low cost so the financing cost of the investment will be
Well below and as a compliment also the required support level required from from the state budget or consumers will be lower and this is only looking at the cost per kilowatt hour reduces the yeah the required support level it makes support effect efficient similarly also this low risk approach also has an
Effect on the effectiveness of support so because there’s this high investor certainty more investors are attracted more are able to actually implement their projects and this leads to to a higher renewables growth if supports is sufficient to actually make investments viable of course is a precondition but
So we have analyzed that in many European projects I will cite a few later on for example the reshaping project where there was also indicator work comparing in quantitative terms the effectiveness and the investor progra quired yeah investor profit or efficiency for of supportive / per kilowatt hour and there
You can see that those countries with a low risk environment do much better than those countries with higher risk environment and it’s also as it’s a basic principle of financing you can also model that with a cash flow model and that’s what we’ve also done in one study for the European Commission and
The result was that risk mitigating support schemes can actually reduce the levelized cost of electricity and that’s the resulting support costs by up to thirty percent compared to a higher risk approach so this shows that risk mitigation is really a crucial issue of renewable support policy design yes and
This coming back to the trends we observed before also explains some of the trends we saw so because risk conscious support policies are generally more effective and efficient it limits the podcast to consumers also more and more governments pay attention to this fact and this was several governments
Declared that they think their quota schemes are too expensive for renewable support and that they believe they will be able to support renewals at lower costs with with risks with support schemes that expose producers to lower risk you have to say of course there’s no right or wrong you can also design
Closer schemes in a way that it’s more stable and reliable but as a general tendency you see that these schemes include a high level of risk and this is what main reason why several countries turned away from it and I think this is also especially relevant in the European
Context where we have a liberalised electricity market if you look for example at the US the the picture looks different because they are the renewable portfolio standards which are also quota schemes basically work relatively well but also the electricity market is is organized in a different way so yes no
Risk is a clear success factor of renewable support in Europe and the other hand it’s also clear that exposure to market risk has a value or may have a value so from a macroeconomic perspective someone has to take the risk either it’s a producer or society and a
Policy maker has to decide well who’s best fit to to take that risk and if risk exposure actually triggers optimized behavior so that the renewables producer adjusts supply it to to demand then this can also be be beneficial and this is one of the key arguments why several
Countries are in favor of exposing exposing Windows producers to market risks but still yeah not using the full risk but limiting that risk to a certain extent and in that sense a sliding freedom premium or contract for difference is seen as a good compromise between on the one hand revenue security
But on the other hand still exposure to to market price signals and also important role probably plays in this context that the European Commission has repeatedly called member states to to expose renewables to market risk and in that sense to move from fixed feed and terrorist of feeding premiums or other
Support seams with market exposure this whole issue is a bit broader because there is of course a discussion on well is this actually the right approach for supply driven renewables like wind and solar that cannot really easily adjust their their production but they they basically prove they produce when when
The wind blows and the Sun shines on the other hand this they are still some some flexibility for example to stop production in times of negative prices so this is a as a whole debate on going I won’t go into that but clearly the trends and I think that’s also based on
Their European Union’s logic of of having liberalized electricity market where producers should yeah participate in the markets and not use use a single buyer so there’s a clear trend wats tedium premium schemes and especially to those sliding freedom premium schemes of contract for differences that that clearly limit the revenue risk so this
Was the first two trends now looking at the third trend and that’s a quite quite interesting topic now in the policy debate in Europe countries are experimenting with tendering schemes probably people from other countries in the world might not find that so exciting because in some countries for example also developing into the
Country’s ten rings is used quite commonly but as a support scheme for renewables in liberalized electricity markets it’s something it’s something relatively new for Europe or there has been some experienced in in the past already in the late 90s which was not so successful so for several years
Tendering schemes were hardly applied in the EU with some notable exceptions of course for example France for a long time has has applied 10 days for for certain technologies but now we see tennis become more popular also than other countries so Italy which again vanished from the map here I don’t know why
Has introduced a tendering scheme I think last year so moving away from their quotas team Germany has announced that they will replace their feeding system eventually by by a tendering scheme at least they’re considering to do so the Netherlands are already operating a scheme which is a mixture of
A feeling premium with auction elements so a mix of a tendering and freedom premium scheme the UK announced that they will use auctioning for for the price setting in the contact for difference and also Poland announced that they might follow the Dutch approach and introduce a mix of our
Feedin and paneling scheme by the way the definition of tenders and options I won’t go into details there because there’s that many different designs but basically just for to give some fundamentals a tender is not really a support team by itself but it’s yeah how to say is kind of a selection procedure
To select qualified projects and which then can be combined with all other support schemes and the most common type is the combination with feed-in tariffs of feeding premiums so renewables producers participates in our in a tener just usually organized as an option so those click that offer the lowest price will
Be yeah we’ll have an advantage a days basically they’re they’re limited volume in there in the tender that that is available bidders can can offer their price and then at some point there’s a cut and then the successful bidders will receive support so either the support level they offered or the support level
Of the clearing price and those bidders who offered projects for a higher support costs they they will not be successful and not be considered so this shows that the support level is determined in the competitive procedure which requires by the way that the demand for support is greater than the
Tenets volume clearly otherwise there would be no scarcity or not no price competition and this is different from traditional feed-in tariffs or premiums where the support level is determined administrative Lee so by the ministry or some some agency or whomever they usually calculates or levelized cost of electricity for certain technologies so
They make estimations for a certain categories and technologies and then define define this price and this is then applies to to all to all renewals of that category and as we have seen in the past in Europe sometimes that works quite well but sometimes also that the
Support level is not well adjusted so either too high or too low if it’s too high then this will create a lot of windfall profit and can also lead to explosion of the market and high yeah cause to to consumers if it’s too low then nothing
Happens so no no win doubles plans are built so that’s one of the key challenges of administrative ly defined feed-in tariffs the premise and that’s where tenders are considered an interesting answer to to avoid that problem but of course tenders are not a simple answer to to that problem and
They again have their own challenges and opportunities and I would like to go now to some of those key key challenges and opportunities looking first at there at the opportunities a clear advantage from a policy makes perspective is that the maximum volume of renewable supported and that’s also the overall support
Costs are limited because you tender a limited volume so the problem that we saw in some feedin schemes for example for PV in Germany or Italy that really the market grew much faster than expected that couldn’t happen in RM in an option scheme another advantage as I explained before the support level is
Not determined by the administration but by the market because market actors submit their bids and through the competition between those bidders there’s also the potential to to lower the actual support costs because we Nobles producers have an incentive to to bit the lowest price they can possible and
The lowest price possible should ideally be there real production costs plasm yes a moderate profit that they need to to realize the project so in that sense ideally tendering authoring schemes could also help to bring down the support costs per technology and to discover what are the actual cost of
Those technologies which so far policymakers are just guessing on the other hand we also see that tengas have some significant disadvantages or let’s say challenges one key issue is that not all winning projects will be implemented so the implementation rate of off tenders like after all the successful
Bids that came out of a tender is lower is we are always lower than hundred percent and yes sometimes significantly lower so for example think in this I’m some data from from Brazil where only forty percent of the project that won the tender has actually been implemented
Even though this might are some of this might also be delays so maybe the figure increased in later years but basically it can actually mean that a lot less project implemented then tendered and from a policy makers press exit perspective that is a challenge because you have your policy targets especially in Europe
We even have binding targets for each member states how many renewables need to be reached and this is in that sense even though tenders provide a good control of the maximum number of all you mark installs they don’t really provide an indication of what is the minimum
Volume installed and that in that sense make it difficult to to steer renewables growth so this is one disadvantage and by the way how high the implementation rate is depends highly on on the one hand the pre qualification requirements and now they’re on the other hand on the
Penalties that are part of the auctioning system but these so if you it basically if you are asked for already well developed projects that are almost almost completed and can close to financial close and operation and then of course a chance that those project will be implemented is higher but on the
Other hand this also means high cost to the project developers so this brings me to a second challenge of auctioning schemes the higher risk for renewables producers compared to feed in tariffs or premium schemes that are defined administrative li and this higher risk also to some extent favoring bigger
Market actors and yeah basically there’s a risk on different levels so on the one hand you have the uncertainty when you prepare for for a tender because you don’t know if your project will be successful so there’s this uncertainty in that phase where you already have to spend money on
Pre developing your project then if the project is not successful in the in the tender then the project developer has fun costs because it invested in the project development before but won’t get support for the project on the other hand if you look at at projects that have been granted support then there’s
Still the challenge that they have to be implemented in time and if something goes wrong when the project would have to pay pay a penalty and this is also linked to a link to some risk of course it makes sense that there should be you should be penalties but they also yeah
Add a risk premium to to the cost off of the project developer finally there’s also some challenge with with a price setting in auctioning schemes so on the one hand we proceed we observe in some countries that bit us submit very low bit so very low prices which are
Actually below 0 s assumed to be below production costs and then this pushes other bidders out of the market and also doesn’t make it more likely that projects are are implemented so this is called under bidding also the winners curse plays a role here on the other
Hand they can also be strategic behavior then leads to very high bidder switcher high result too I mean those trends can be avoided but and this is of course a question is a easy solution how to do it yeah which brings me to the conclusions on the on
Tendering schemes in a way it’s too early to really conclude an overall best practice designed for for tendering our options teams in Europe because there’s limited experience and this this experience is quite mixed so probably further learning is required but we can already identify some sixaxis success factors for designing tendering schemes
Right and that is on one hand to adjust the tender design to the specific renewables market structure so know how many actors there are what are the project specific risks and then design the auction accordingly because the options are very sensitive to to market conditions so this is one important
Element another important element is to find the right balance between penalties and pre qualification requirements you increase their the implementation rate and on the other rate also comes at high cost so this is kind of allow time for testing evaluating and upscaling the tendering skills so the European
Commission in the draft state ID guidelines that will be published later this week seems to call for increased use of auctioning schemes which is yeah might not be a problem in the future but where you should be careful on under what conditions can they actually applied and do you already have enough
Experience how to do it so so much about tendering there’s of course other trends and challenges I cannot explore in this presentation because time is almost up so just to give you give you an idea and mention a few key topics that we are looking at in other projects so one
Problematic trend is of course that countries that are in economic crisis or have bad experience with renewables support that they have stopped their support schemes or change them attractively but on the other hand we still have renewable targets in Europe and so the question arises how to attract renewals investments in those
Countries under strong budgetary constraints and also how to phase out support in the future because in the in a way that’s the goal to reach the status where you don’t need to pay extra support removals so this these are questions that we are looking at in new European projects to watch 2030 it’s
Called another development which I wouldn’t call a trend yet but where we might see more activity in the future is the cooperation between member states so far there’s not much cooperation one has to say but some member states have said they want to look into the opening or
Partial opening of their support schemes so there the question would be how would that actually work in practice and also looking beyond 2020 what will be the role of cooperation we young 2020 after their current renewables directive is it possible to further align and cooperate between member states to make renewables
Support more European and finally a last question I would like to raise is of course we see that highest shares of renewables already impacts the electricity systems and markets you can see that all across Europe so for example price volatility is sometimes negative prices different export items
And so on and there the question again arises how to further align renewable support policies with the general power market regulations and policies so these are all questions and trends we could spend another few hours of web lectures but I would like to stop here here you
Find a list of recent publications that deal with the issue of renewables extra support in Europe where I would invite you to do further reading and if you have ever any question to me or my colleagues feel free to contact us thank you very much ok thank you thank you
Very much coreena for you with the presentation / interesting so let’s go now for questions and answers so allow me you