Comprehensive Evaluation of European Renewable Power Programs

COMPREHENSIVE EVALUATION OF EUROPEAN RENEWABLE POWER PROGRAMS

Kate Buczek, Siqi Han, Tanvi Umarje

Dr. Lincoln Pratson, Faculty Advisor

April 26, 2016

Masters project submitted in partial fulfillment of the

requirements for the Master of Environmental Management degree in

the Nicholas School of the Environment of

Duke University Table of Contents Executive Summary ...... 5 Key Findings ...... 5 Introduction ...... 6 Methodology ...... 7 European Union Overview ...... 8 Germany ...... 9 Market Overview ...... 9 Regulatory System ...... 9 Market Structure ...... 10 Policy Instruments and Financial Incentives ...... 11 Economic Impact ...... 13 Technology ...... 16 Infrastructure ...... 17 Social Impact ...... 18 Spain ...... 20 Market overview ...... 20 Policy instruments ...... 22 Financing ...... 23 Economic impact ...... 25 Technology ...... 26 Infrastructure ...... 28 Social Impact ...... 29 United Kingdom ...... 30 Market Overview ...... 30 General Market Structure ...... 31 Policy Instruments ...... 34 Financing ...... 36 Economic Impact ...... 37 Technology ...... 39 Infrastructure ...... 42 Social Impacts ...... 43 Discussion: Lessons learned from the European Experience ...... 44 Lesson 1 Policy Design is important to support renewable generation ...... 44 Lesson 2 Subsidies boost renewable growth. But someone has to pay for it...... 44

Lesson 3 Conventional utilities: Mind the profitability and innovation gap...... 46 Lesson 4 Market Design Comparison ...... 48 Lesson 5 Grid Integration ...... 49 Implication to U.S...... 52 Conclusion ...... 53

Table of Figures

Figure 1 Share of Renewable Energy in Gross Final Energy Consumption and 2020 Target by Country .. 8 Figure 2 "Big Four" Energy Production Portfolio ...... 10 Figure 3 Electricity Generation in Germany 1990 - 2014 (TWh) ...... 12 Figure 4 Levelized Costs of Electricity in Germany in 2013 ...... 14 Figure 5 Monthly average power price at the spot market ...... 15 Figure 6 Stock Share Price (€) of RWE AG ...... 16 Figure 7 Electricity Generation from Renewables in Germany 1990 - 2015 (TWh) ...... 16 Figure 8 Electricity Generation by Source, 1973 - 2014 ...... 20 Figure 9 Market share of electricity generation ...... 21 Figure 10 Costs and revenues in the Spanish electricity system, 2005 – 2013 ...... 24 Figure 11 Change in Annual Demand for Electricity ...... 25 Figure 12 Annual and cumulative wind energy in Spain ...... 27 Figure 13 Cumulative installed solar capacity in Spain ...... 27 Figure 14 UK Electricity Mix (2014) ...... 31 Figure 15. Proportion of Energy Generated by the Top Energy Providers in the UK ...... 33 Figure 16 Scotland Renewable Electricity Generation (GWh) 2000- 2012 ...... 34 Figure 17 UK Electricity Generation by Source and Policy Influence ...... 36 Figure 18. UK Utility Price Components for Retail Consumers 2007-2014 (Ofgem) ...... 38 Figure 19 Current Tariff Choices for Retail Consumers in the UK ...... 38 Figure 20 Renewable Energy Installed Capacity in the UK (IRENA) ...... 39 Figure 21 All UK Electricity Generation Compared by Fuel ...... 39 Figure 22. Global Horizontal Irradiance (GHI) UK ...... 40 Figure 23 Installed Wind Farms as of December 2014 ...... 41 Figure 24 Germany EEG Surcharge 2000 - 2016 (ct€/kwh) ...... 45 Figure 25 Electricity Price versus Wind & Solar Installed Capacity in EU Countries (2014) ...... 46 Figure 26 Electricity generation at E.ON’s Irsching Gas power plant (2011 vs. 2012, in MWh) ...... 47 Figure 27 EU Energy Market and Renewable Energy Support Schemes (Agora) ...... 48 Figure 28 Necessary expansion and restructuring of the German electricity grid ...... 50

Executive Summary

Since the early 2000’s, Europe has shown a commitment to goal setting that mitigates climate change and increases renewable energy generation. Climate change policy recognizes the need to reduce greenhouse gas emissions and promote the efficient use of resources to maintain global environmental and health standards. Many of the top renewable energy generating countries are found in the EU, and contribute to overall climate change goals. As three countries in the top 15 of global renewable electricity generation1, Germany, Spain, and the United Kingdom have experienced challenges throughout the process toward a renewable energy future. Widespread global integration of renewables can build upon lessons learned from this focused analysis of these three countries that differ across economic standing, government commitment to renewable generation, availability of resources, and electricity market structure. The level that market structure, policy impacts, country economics, technology status, and social impacts contribute to successful renewable energy integration with the traditional power market structure for Germany, Spain, and the UK will provide an evaluation framework for other countries looking to incorporate greater levels of renewable energy in the grid.

This project looks into the technologies, policies, and grid impacts of renewable energy integration in Germany, Spain, and the United Kingdom. The historical successes and challenges are evaluated to determine best practices and market initiatives in the renewable power sector. This analysis aims to understand how successful the market penetration of renewables has been, and how the grid capacity could accommodate all the electricity generated by wind and solar.

Key Findings Primary lessons learned from this in depth look into the electricity systems in Germany, Spain, and the UK involved:

1) Policy design flaws,

2) Subsidies creating more generation but increased costs,

3) The need to close the gap between conventional generation and innovation,

4) Market design to best capture wholesale energy prices and meet capacity, and

5) Flexibility of the grid to successfully integrate higher capacities of variable energy resources such as wind and solar.

These lessons can then be applied to other electricity markets in the EU and globally that wish to make renewable energy strategy a more integrated element of energy policy moving forward.

Introduction

Movement in the renewable energy industry can be dated back to the 1970’s when a major energy crisis hit the world. The subsequent economic downturns highlighted the need for an energy source that was more secure and reliable in terms of abundant availability. During the 1970’s, a few countries in Europe—for example, Germany and Spain—created favorable markets for renewable energy by driving economies of scale and early technological innovations and advances. Dating back to the period when climate change and environmental impacts of industrial emissions were being realized, Europe was at the forefront emphasizing the need to mitigate climate change and adopt greener technologies. In the early 2000’s the majority of local governments did not consider the potential role for renewables in their energy supply, but due to the firm regulations and policies implemented by the European Union, renewables have achieved high shares of penetration in the electricity sector. The European Union regulation focused on mandatory grid connection, priority dispatch for renewables and incentives that helped encourage local value creation.

The overarching goal of this report is to document the successes, challenges and the lessons learned from the renewable energy market initiatives for three countries in the European Union (EU). The report will look into technologies, policies, and economic impacts of renewable energy development, with an exclusive focus on wind and solar. The countries analyzed are Germany, Spain, and the United Kingdom. This report aims to understand the market penetration of renewables and documents the key lessons that policymakers around the world could draw from the European experience. The purpose of this study is to do a comprehensive review of the EU power markets to understand key takeaways, convey the trends towards success and determine best practices and market initiatives in the renewable power sector.

Methodology

The methodology for this comprehensive evaluation of European renewable power programs included an in depth literature review of European renewable energy practices and goals, personal interviews, and analysis of governmental and industry reports to determine which issues were at the forefront for renewable energy integration in the European Union. Three initial countries were selected for deeper analysis (Germany, Spain, and the United Kingdom) based on their differences in economic standing, policy measures, electricity market type, and current level of renewable electricity generation. Each of these countries was in the top 15% of global renewable electricity production and thus provided a valuable platform for comparison.2

Data collection involved academic literature research of peer-reviewed papers (i.e. Energy Policy, Agora), industry reports (IRENA, GWEC, IEA, trade associations, country specific organizations), government directives and reports (from governing bodies, regulatory agencies, etc.) and interviews with a European energy trade expert and professionals in the solar, wind, utility, and larger energy industries in Germany, Spain, and the United Kingdom that were in attendance at the E-World Conference in Essen, Germany on February 16-18, 2016. Industry reports and financial data as well as key stakeholders influencing these industries in the EU were utilized and compared across a standard framework to get a comprehensive profile of renewable energy in each target country analysis.

An evaluative framework was established to qualitatively compare these criteria across countries. The following template of parameters was used across all three countries to compare the overall renewable energy system in each country.

• Market Overview • Policy Impacts • Economic Impact • Technology: Wind, Solar, Biomass • Social Impact

These data were then analyzed to determine the most successful integration techniques and policies for renewable electricity generation and the best uses of technology in comparison with areas for improvement. From this framework of analysis, the data was then compared with other countries that had experienced similar challenges and successes as the target countries analyzed to generate overall key lessons for forward thinking renewable energy system integration.

European Union Overview

European countries are the first movers in the renewable energy world. Among the 10 priorities listed by the European Commission, “Energy Union and Climate” presents the EU the opportunity to make “energy more secure, affordable, and sustainable.” 3 An integral part of the “unification” process of Europe is transforming and synergizing the energy systems in its member states. In the transformation of the Energy Union, renewable energy plays a fundamental role in terms of ensuring the security, affordability, as well as sustainability of EU energy systems.4

The Renewable Energy Road Map was published by the European Union in 2007 as an effort to lay out the timeline and strategy for promoting the share of renewable energy in the energy consumption to 20% by 2020. 5 To reach this goal, the Renewable Energy Directive, enacted in 2009, set the overarching framework and targets by 2013 for the member states to promote the use of renewable energy. 6 Member states are required to submit its National Renewable Action Plan with national targets and implementation plans. To enforce the target, a variety of policy support instruments including feed-in tariff, tax incentives, feed-in premium, tendering, and investment grants, are adopted. 7

Committed to the development of a low-carbon economy, most of the 28 member states have made substantive progress in achieving the targets mandated by the EU commission. According to each member state’s renewable energy policies and national targets, 19 of the member states will achieve well above their 2020 renewable energy targets (Figure 1). 8

80 70 60 50 40 30 20 10 0 % Electricity Consumpon

2014 Performance 2020 Target Source: Eurostat

Figure 1 Share of Renewable Energy in Gross Energy Consumption in 2014 and 2020 Target by Country

Germany

Country Profile Population 80,854,408 (July 2015 est.)

GDP per capita $47,400 (2015 est.)

Energy Consumption (MWh) 540.1 billion kWh (2012 est.)

Total Installed Renewables Capacity 177.1 million kW (2012 est.)

Energy Mix Hard Coal (17.8%) Lignite (25.4%) Natural Gas (9.5%) Nuclear (15.8%) Renewables (26.2%) Renewable Energy Projections (National Targets) 2020 :27% 2030 :45% 2050: 80% Market Overview As the largest economy and most populated country in the EU, Germany also has the largest power system in Europe. Traditionally relying on conventional fossil fuels such as coal and lignite, Germany now has become the third largest market for renewable energy.9 In the 1960s, 80% of total power generation in Germany was from fossil fuels. 10

The oil crisis in the 1970s, the Chernobyl nuclear power plant accident in 1986, and increasingly clear scientific evidence in climate change have contributed to Germany’s transition to renewable energy development.11 In the past 15 years, Germany has experienced rapid development in the renewable energy sector and it has become the largest renewable energy market in the EU. By 2015, renewable energy generated 30% of total electricity production in Germany.12

Regulatory System According to Energy Industry Act, at the national level, regulatory agencies involved in the energy market in Germany are the Federal Ministry for the Environment, Nature Conservation, Building, and Nuclear Safety (BMUB) and the Federal Ministry of Economic Affairs and Energy (BMWi). BMWi is the major government agency responsible for the power market, whereas BMUB addresses climate change, environmental protection, and nuclear safety. Under BMWi, the Federal Network Agency (BNetzA) is responsible for developing the power and telecommunications network and the Federal Cartel Office (BKartA) is in charge of regulating market competition. Other federal agencies involved in the development of renewables include Federal Ministry of Agriculture in terms of the development of biomass and Federal Ministry of Transportation and Digital Infrastructure when it comes to energy

9 efficiency. 13 The German parliament also supported the development of the energy policies through lobbying groups’ activities among parties.

At the regional level, 11 states are regulated by their own state regulatory offices among the 16 states. Federal Network Agency regulates power markets in the other five states as well as interstate grids. 14

Market Structure The power system in Germany can be divided into generation, transmission, distribution, and retail. Currently, most of these activities in the market have been unbundled vertically. In the production phase, the “Big Four” utility companies including E.ON (now E.ON and Uniper), RWE, EnBW, and Vattenfall account for 59% of the total electricity generation15, whose production portfolios mainly consist of conventional power mix including coal, lignite, natural gas, and nuclear (Figure 2). 16 They account for 80% of fossil fuels and nuclear electricity generation in Germany in total.17 In terms of renewable energy generation, a more decentralized and distributed market structure has taken in place. In 2012, about 46% of the renewable energy installed capacity is owned by private individual and farmers, 14% by project developers, and only 5% by the “Big Four” utilities. 18

0% 2% 5% 3% 3% 12%

31% 52% 31% 3% 81% 1%

20% 53% 40%

21% 8% 13% 8% 0% 4% 1% 4% RWE E.ON ENBW VATTENFALL

Renewables Nuclear Gas Hard Coal Lignite Other

Source: Clean Energy Wire

Figure 2 "Big Four" Energy Production Portfolio

The transmission system in Germany is operated by four Transmission System Operators (TSOs): 50Hertz, TenneT, Amprion, and Transnet BW. In the distribution system, there are about 890 distribution system operators, among which majority are municipally owned utilities.

Policy Instruments and Financial Incentives Early Experiment As early as 1989, Germany initiated the 250MW Program as an effort to boost wind power project development with generous financial incentives. 19 By providing investment grants on a capacity basis and operation subsidies to wind projects, the 250MW Program supported and accelerated the commercialization of wind turbine technologies. As a result, 354 MW wind capacity was installed under 250MW Program.20 To some extent, the 250MW set the seed for the distributed renewables generation in Germany. Under this program, private producers such as citizens and farmers could benefit from additional investment incentives.21

1991 Electricity Feed-In Act In 1991, Germany introduced the Electricity Feed-In Act (StrEG), which guaranteed renewable energy sources to be the first connected to the grid and purchased at certain tariffs as a fixed percentage of the electricity prices. This Act is the first legislation milestone in Germany’s renewable energy policy development and “was the starting point for the successful introduction of renewable energies to the markets.” Hydroelectric and wind power experienced a fast track development. However, the tariffs fluctuated along with the changes in retail electricity prices. When the price level went down in the late 1990s, tariffs for renewables also went down and there was no significant financial incentive for generators. There was also a lack of equivalent financial and political stimuli for other renewables under the StrEG framework. At that time, existing policies were not capable of helping Germany reach the goal of doubling the share of renewables by 2010. 22 Revisions and updates were needed to address the new challenges and changes in the market.

2000 Renewable Energy Sources Act (EEG) The Renewable Energy Sources Act (EEG), formally introduced in 2000 to replace StrEG, has been the major guiding policy for renewable energy development in Germany since then. 23 Taking on the momentum created by StrEG, EEG is also designated to support emerging clean energy technology, reduce the use of fossil fuels, and improve energy efficiency. 24 EEG adopted, revised, and updated a plethora of financial incentives including differentiated feed-in tariffs, grid priority, and purchase guarantee in order to better support the sustainable growth of the renewable energy industry and reliable electricity supply in the market. 25

700 600 500 400 300 200 100 Electricity Generaon (TWh) -

Lignite Nuclear Hard Coal Natural Gas Renewable Energy Other Source: AGEB

Figure 3 Electricity Generation in Germany 1990 - 2014 (TWh)

The 2014 revision of EEG set new roadmap for renewables’ development with an emphasis on continuous growth and cost effectiveness Based on the new amendment, renewable energy will reach 40% to 45% by 2025, 55% to 60% by 2035, and 80% by 2050 in the electricity consumption.26

Feed-in Tariff and Purchase Guarantee Established in EEG 2000, the new feed-in tariff and remuneration model has demonstrated wide success in promoting renewables in Germany. Similar types of incentives also have been adopted widely among other EU countries. Instead of a fixed tariff level, the new model adopted a more comprehensive pricing matrix for different renewables with annual digression. The new model could better accommodate technological development as well as the process of market maturity. 27

Another component of the new model is the purchase obligation. Renewable energy plant operators are guaranteed to receive a 20 year payment at set rates for the electricity they produced. These guaranteed cash-flows have significantly incentivized the development of renewables. As a result, renewables continuously increased their share in the German energy mix.

Priority Grid Connection EEG also rules that electricity generated from renewable energy is prioritized to be fed into the grid first. The policy mandates that grid operators must do whatever they can to make it happen unless it is economically unreasonable to expand the grid. 28 This rule actually defines renewables as the “baseload” in the network.

Special Equalization Scheme The EEG surcharge does not apply to all consumers equally. To some energy intensive industrial consumers, higher electricity prices would increase the overall costs and result in losing competitiveness in the global market. In order to protect the competitiveness of the large energy consumers, EEG exempts them from certain taxes and fees. These large consumers can also access to the wholesale market to purchase cheaper electricity. 29

Marketing components in EEG 2014 and onwards Feed-in Tariffs are reflected in the final electricity prices as an “EEG surcharge” and are compensated by final consumers. On one hand it has provided renewable energy generators with generous financial support. On the other hand, renewables eventually have to be able to gain competitiveness through technological advancement and cost-effectiveness in the free market, rather than planned and guaranteed policy support. In the latest amendment EEG 2014, Germany has planned that it will gradually transition from the feed-in tariff model to a market based feed-in premium model. Instead of receiving payment at a guaranteed level, renewable energy generators profit from selling electricity into the market at a price higher than the feed-in tariff level. In 2015, Germany carried out its pilot tender project for certain new solar PV plants. In this process, remuneration for installing renewable energy will be determined by their competitiveness in the market, instead of fixed feed-in tariffs. Those who successfully win the bid, usually with a lower price, will be paid for their supply. The new tendering process, to be introduced by BMWi in the 2016 EEG amendment, is expected to cover 80% of electricity generation from renewables. 30

Economic Impact Production costs After 15 years of rapid development, onshore wind and solar photovoltaic have become the most mature and competitive renewable energy sources. It is estimated that the levelized cost of electricity for onshore wind and large scale solar PV are as low as 6.1 ct/kwh and 8.1 ct/kwh respectively, compared to 6.6 cts€/ kwh for hard coal and 7.0 cts€/kwh for natural gas (Figure 4). 31 It is expected that by 2025 costs of solar PV will further decline to as low as 5.5 cts € /kwh. 32 Additionally, integrating renewable energy sources, such as grid connection, balancing, and backup power, could result in additional costs ranging from 5 to 20 €/MWh on average. 33

Source: Agora

Figure 4 Levelized Costs of Electricity in Germany in 2013

EEG Surcharge and Consumer Price The costs of subsidizing renewables through feed-in tariffs are compensated as “EEG surcharge” when consumers pay for their electricity bills, except energy intensive industrial consumers. The level of the EEG surcharge has increased more than 30 times in the last 15 years. In 2015, consumers paid €21.5 billion for EEG surcharge. 34

Wholesale market Renewables are fed into the grid first. Since they could operate at a marginal cost almost close to zero, the “merit order effect” has driven the electricity wholesale market price down by almost 50% compared to the highest price level in 2008 (Figure 5). 35 This further increased EEG surcharge needed to cover utilities’ expenses of obligatory purchase of electricity from renewables.

Source: EEX, BMWi Fortschrittsbericht

Figure 5 Monthly average power price at the spot market

On the other hand, since it is obligatory to feed electricity produced from renewables into the grid, when there is a spike in supply of renewable energy that exceeds the demand during a certain time period in the day, wholesale electricity prices could become negative. This phenomenon has happened several times, especially when Germany peaked its renewable energy output in 2015. 36

Investment Since the introduction of EEG in 2000 until 2014, it is estimated that Germany has invested about 220 billion euros in developing renewable energy throughout the entire value chain. In the next 10 years, annual investment in the energy sector can reach 15 billion euros. 37

Traditional utilities The traditional utility companies including the “Big Four” are also impacted by the energy transition. With their portfolio mainly made up with large scale conventional power plants such as coal and natural gas, conventional utilities’ heavy upfront capital investment and assets have restricted their flexibility in terms of shifting business focus or adjusting business models quickly towards renewable energy. Several have already experiencing operating loss and stock price drops (Figure 6). Among the four utilities, E.ON and RWE have both announced to split their operations in order to focus on renewable energy. Vattenfall, the Swedish energy company, has been looking for buyers for its coal-fired power plants, which makes up 90% of its capacity in Germany. EnBW will continue to expand its renewable energy portfolio and grid services. 38

Source: Google Finance

Figure 6 Stock Share Price (€) of RWE AG

Technology Two technologies have become mature and competitive after 15 years support from EEG – wind power and solar PV. They are believed to be the most cost competitive technologies and will be the focus of German’s future renewable energy policy. Wind and solar power are expected to dominate the renewable energy power generation, providing about 215 TWh, or 36% of the gross power consumption in 2020, and 309 TWh, or 51% respectively in 2035. 39

200

150

100 (TWh) 50

- Electricity Generaon from Renewables 1991 1993 1995 1996 1997 1998 1999 2001 2003 2005 2006 2007 2008 2009 2011 2013 2015 1990 1992 1994 2000 2002 2004 2010 2012 2014

Hydro Onshore Wind Oﬀshore wind Biomass Solar PV Source: AGEB

Figure 7 Electricity Generation from Renewables in Germany 1990 - 2015 (TWh)

Wind Germany has the third largest market for wind energy in the world, accounting for 10.6% of global installed capacity. In 2014, Germany has cumulated 39.17 GW of total installed wind capacity, including 1.05 GW of offshore wind (Figure 7). 40

As a result of technological development, new wind turbines are bigger, taller, and with larger capacity. Germany’s new turbines installed onshore have an average size of 2.7 MW and average hub height of about 116 meters. In 2014, Germany also doubled its cumulative offshore wind capacity. By the end of 2014, 258 offshore wind turbines had been built in the North and Baltic Seas, providing a cumulative capacity of 1.05 GW. 41

Solar Germany currently has the world’s largest market for solar PV and has installed more than one fifth of the world total installed capacity, which was about 38.2 GW of cumulative installed capacity at the end of 2014 (Figure 7).42 In addition to the financial support mandated by EEG, significant decrease in costs also contributed to the booming solar PV installation. In the past 20 years, system costs of solar PV have decreased by more than 80 to 90%. 43 In order to encourage renewable energy generators to compete independently in the market, EEG 2014 initiated pilot auction to engage solar power generators more directly in the wholesale market.

Biomass Even though biomass is capable of producing both power and heat, and has more flexibility than wind and solar, Germany has much less ambitious goals for biomass. The annual growth target for biomass is only about 100 MW new installation per year.44 In 2012, biomass accounts for 9.2% of heat generation, 5.7% of electricity, and 5.5 percent of fuel consumption. One constraint facing the biomass sector in Germany is the competition in land use. Using wood product for energy and growing energy crops will directly reduce alternative land uses, including conservation, recreation, and growing crops for food and industrial raw materials. And importing sustainable biomass from abroad is still very limited. Compared to wind and solar PV, the costs of biomass are still relatively less economically competitive. 45

Infrastructure Grid Integration and Reliability BMWi claimed that “electricity supply in Germany is one of the most reliable in the world” even after feeding more than 25% of electricity generation from renewables.46 This is partially true as grid stability is reflected by the System Average Interruption Duration Index (SAIDI). SAIDI indicates how much time each consumer is experiencing interruption. In 2013, Germany’s SAIDI score was 15.32 minutes

17 annually, which is the third best in Europe and significantly lower compared to 244 minutes in the U.S. 47 However, surplus renewable energy could still cause congestion on domestic power grids. Unwanted “loop flows” could still negatively impact transmission capacity in neighboring countries such as Czech and Poland.

Expansion and upgrade of the current transmission network both domestically and across borders will reduce grid congestion, eliminate loop flows, and serve as a flexibility option through enabling more responsive electricity trade among countries to balance supply and demand. Germany has adopted the Power Grid Expansion Act (EnLAG) and Federal Requirement Plan Act (BBPlG) to accelerate the effort in expanding high voltage grids both within the national boarders as well as improving connection with neighboring countries. The total planned line expansion under this act is 1816 km. By the end of 2015, about 614 km, or 35% of the expansion that was planned under EnLAG has been constructed. Half of the planned expansion is planned to complete by 2017. 48

Flexibility Options For Germany, flexibility options include smart grid, demand side management, and storage. Until today, access to flexibility mechanisms is still limited due to lack of economic incentives. As a result, more pressure has been put on grid system operations to ensure a stable integration. Implementation of demand response has lagged behind compared to the U.S. Storage facilities are required to pay fees and taxes to get on the grid, even though they are not “consumers”. As a result, the storage sector has been growing slowly, with total capacity of 303 MW in 2013. As the “Big Four” make their transition from pure suppliers to services providers, the industry is optimistic about accelerating adoption of smart metering.

Social Impact The social impact of Energiewende has gone far beyond the power sector in Germany. It is changing the culture, lifestyle, and the social structure.

The quest for clean energy has inspired the development in academic research and education in the country. There are 385 programs at German universities that are related to renewable energy. 824 secondary schools have installed solar panels on campus or incorporated renewable energy as part of the curriculum.

Agriculture has also shifted its focus to adapt to the new trend. Farmers and private citizens own almost half of the total renewable energy generation in the country. In Bavaria, almost all the biogas plants are operated by farmers. More and more arable land has shifted from traditional corps to energy corps.

The Energiewende also changed the landscape of the job market. In 2013, the job market in the renewable energy sector has more than doubled in size compared to 2004. More than 370,000 people were working in the renewable energy sector in 2013. 49

Sustainable tourism is also booming in Germany. Tourists could travel to more than 190 renewable energy-themed destinations. 50 Many of the visitors are German or even local residents. According to a survey on public’s attitude towards wind farms near recreation sites in Mittelgebirge, even though 22% of the respondents thought wind turbines would ruin the beautiful scenery, 47% said the wind turbines are “a symbol of the Energiewende and contribute to a positive image of the Mittelgebirge as a vacation destination.” 51

There are also concerns with the renewable development. To connect the unevenly distributed renewable energy sources – particularly delivering wind power from the north to the south, new transmission lines are needed. Even though Environmental Impact Assessment has been conducted to evaluate the environmental impact of the construction, resistance continues to occur from local communities and has delayed the process of grid expansion. Local residents who are living along the planned power lines are concerned over the environmental and public health impact of the construction. Environmental groups also expressed their concerns on the impact of the landscape of areas that the new power lines will go through. 52

Spain Country Profile

Population 48,146,134 (July 2015 est.)

GDP $51.636 trillion (2015 est.) Energy Consumption 243.1 billion kWh (2012 est.) Total Installed Capacity 102.3 million kW (2014 est.)

Energy Mix Nuclear 20.9% Wind 19.1% Natural gas 17.2% Coal 16.3% Hydro 14.3% Oil 5.2% Solar 5% Biofuels and waste 2% Renewable Energy Projections 2020: 20.7% of total energy consumption from renewable sources 2030: 27% of total energy consumption from renewable sources

Market overview In 2014, Spain generated a total of 273.9 TWh of electricity53. The generation mix was 20.9% nuclear, 14.3% hydro, 16.3% coal, 5.2% oil, 17.2% natural gas, 19.1% wind, 5% solar and 2% biofuels and waste 2%.54

Figure 8 Electricity Power Generation by Source, 1973 - 2014

As a result of huge governmental incentives provided for wind, solar and hydro power, there was a 93.8% increase in renewable power generation between 2004 and 201455. This came as a result of huge

20 incentives being provided for solar and wind power. Hydro power is unpredictable depending on weather and water availability.

There are numerous players in Spain’s power generation market but the three largest companies have more than 55% of the market share56. The market share of the main power generation companies is shown in Figure 9 below.

Others, 18.0% Nexus, 2.1% Endesa, 23.8% EVM, 2.7% E.ON, 3.0%

Acciona, 4.7% Iberdola, 20.1%

EDP Hidrocantabrico EGL, Energia, 6.0% 8.1%

Gas Natural Source: Deloie Fenosa, 11.4%

Figure 9 Market share of electricity generation in Spain 57

The Spanish power generation market is divided in two components, the special regime and the ordinary regime. Renewable electricity generators under 50MW come under the special regime and conventional plants fall under the ordinary regime. In the past, the special regime had a priority dispatch over the ordinary regime but this method was abolished in 2013. To better explain the market structure, an org- chart of the Spanish electricity market is shown below.

Red Electrica Nacional (REN) and Red Electrica de Espana (REE) are the main system operating companies who are responsible for security of the system, technical management and ancillary services. Five main players in the wholesale market have a 15% to 24% market share each. Talking about installed capacity, Endesa , Iberdrola and Gas Natural Fenosa are the largest companies.

Policy instruments The Ministry of Industry, Energy and Tourism is responsible for framing and effectively employing energy policy. They approve the electricity network’s access tariffs and regulate mechanisms of electricity prices58. The National Commission of Markets and Competition (commonly referred to as CNMC) and the Ministry of Economy and Competitiveness regulate the energy sector59. At the European Union level, the CNMC works with the Council of European Energy Regulators (CEER) and the Agency for the Cooperation of Energy Regulators (ACER). This office develops the network codes and implements policies for the internal electricity market.

In December 1980, the government introduced a law which supported up to 30% renewable energy investment via the Renewable Energy Sources directive (RES)60. In the period 1995–1998, the tariff was between 6.5 and 6.9 eurocents/kWh61. The EU directive on liberalization of the electricity markets was adopted in 1996, which for the first time established a few round rules for generation, transmission and distribution for the electricity companies.

In 1998, a policy that introduced different tariffs and premiums for “green technologies” was implemented by the Royal Decree. Favorable feed in tariffs and the aspiring goals for wind energy served as high degree of security for the investors.

In 2004, a Royal Decree established incentives for RES producers to join the national energy pool. It provided an economic market bonus for the producers which were above the market price of electricity. An element of discouragement was also introduced in the form of a fee, where plants with a capacity of more than 10MW were penalized if production was less than 20% of the target at that time62. As a result, between 2000 and 2005 more than 90% of wind producers had joined the Spanish pool system63.

Spain’s electricity market was deregulated in 1998 and integrated with the Portuguese electricity market in 2007. Feed-in tariffs and premiums, which regulated the generation of electricity64 were the highlight of the economic framework until 2012. Spain generated 67.9 TWh of renewable electricity from government support in 2012, and this 67.9 TWh was 23% of total electricity generation. Suspension of support schemes for future plants was first implemented in January 2012 as per the Royal Decree-Law of 2012, however this did not affect the current electricity plants. A 7% tax on electricity generation was also introduced in the year 2012 followed by a new reward system where the return was based on the life of a plant, the installed capacity and the technology being used. In the past, the reward policies were solely based on electricity generated. In addition to these changes, in July of 2013, feed-in tariffs were eliminated and substituted with a compensation system which allowed an investor to cover the investment, operation and maintenance costs. This new policy enabled the renewable power generators to compete with the conventional power plants under the same conditions65.

Retail market The retail market includes a free market price segment and a voluntary price segment for the small consumer. The voluntary price segment is also known as VPSC and is accessible to customers with a demand of less than 10 kW. In 2013, the VPSC segment had only five suppliers, Endesa, E.ON, Iberdrola, Gas Natural Fenosa and Hidroeléctrica del Cantábrico (also referred to as EDP).

Concerning the free market, Endesa supplied 34% of the total electricity in 2013. However, Iberdrola had 48% of the customer market, the largest amongst its competitors.

As of 2013, Endesa, Gas Natural Fenosa and Iberdrola provided 67% of the total electricity consumed. In the same year, Endesa held largest retail market share with 40 percent customer market share while also supplying 37 percent of the electricity by volume66.

Financing Historically, financing of renewable energy in Spain was through subsidies. Renewable energy growth was promoted by using incentives that repaid the renewable energy generator some portion of the tariff per MWh of renewable power generated. To promote direct use of heat and thermoelectric plants built on renewable sources, new projects were started in 2009-10 and funding came through the energy service

23 companies (ESCOs) under programs like SOLCASA and GIT, which focused on solar thermal energy. Investments in renewable energy were also supported from Energy Saving and Diversification Investment Fund (FIDAE).

The costs of the electricity system comprise of a fee for transmission, distribution network activities, subsidies and other costs. Figure 10 below shows the various costs of the electricity system over the years.

Figure 10 Electricity Costs, Revenues of the Spanish System, 2005 – 2013

Beginning in 2005, electricity system costs grew faster than revenues. The government did not allow end- user electricity tariffs to be increased beyond a certain maximum however much fuel prices for power generation were amplified for coal and natural gas. As a result, the utilities ended up supplying electricity below cost67. Furthermore, Spain was hit by a recession in 2008, which continued until 201468. As a result of the recession, the industries shut down and the domestic electricity demand was lower than expected. The change in annual electricity demand is shown in the figure 11. As such the revenues collected each year dropped drastically. From 2005 to 2013, while the revenues doubled, the regulated costs more than tripled69.

Figure 11 Change in Annual Demand for Electricity 70

In the initial phase, the five main utilities financed the deficit and the government assured that the utilities would be remunerated from future revenues. When in reality that never happened, from 2003 onwards the utilities were allowed to sell their debt to third parties. In the later years as the deficit increased sharply, it became increasingly challenging to finance. The situation deteriorated with the 2008 recession, and the monetary capabilities of the utilities weakened. The government established the Electricity Deficit Amortization Fund (FADE) in April 2009 and this was mainly done with a loan from the private / external market and plans to reimburse the utilities. As a result of this, the burden of the deficit was transferred to the new lenders and the new lenders would be repaid from future revenues.

All this financial fiasco resulted in the government cutting back the subsidies for renewable power. These changes created uncertainty and as of today, the investments have come to a complete standstill.

Economic impact Retail prices In comparison with the International Energy Agency (IEA) standards, prices in Spain are higher than most of it peer countries. The average annual electricity price for a middle class home increased year after year, approximately 109% in ten years (2004 price - 0.1079 EUR/kWh; 2014 price - 0.2252 EUR/kWh)71. In the same period, average price for a medium scale industry augmented from 0.0538 to 0.1185 EUR/kWh, faster than the increase in residential prices72.

Wholesale prices Wholesale prices in the Spanish market decreased 36% in 6 years, from 65.89 EUR/MWh in 2008 to 42.13 EUR/MWh in 201473. Based on estimates of the Ministry of Industry, Energy and Tourism estimates, end user electricity prices in 2012 were 40% higher in Spain than in other European countries.

End user prices The majority of the customers, 25.5 million out of the 27.6 million, had a demand of less than 10KW and as such were eligible for the VPSC74. Out of these 25.5 million, approximately 13.89 million users were on access tariff, and rest 11.61 million used the free market-price75. A new method was formulated in 2013 for estimating the electricity cost for a connection of less than 10KW, and this was basically done to remove government interference in determining prices. This new method associated retail prices with the spot prices of the wholesale market.

Technology Electricity from renewable sources in 2014 was 40.4% of total generation. Renewable sources included wind (52.3 TWh, 19.1% of total generation), solar (13.7 TWh, 5%), hydro (39.1 TWh, 14.3%) and biofuels and waste (5.5 TWh, 2%).

The National Renewable Energy Action Plan of 2011-2020 (NREAP) developed a framework of policies to meet the 2020 targets. It followed the Renewable Energy Plan of 2005-2010. National target for 2020 is set at 20.8% of renewable energy in gross energy consumption76.

Wind For the continent of Europe, until 2014, Spain had the second largest wind energy market. Compared to the global market, it had the fourth largest installed capacity77. The cumulative capacity installed by the end of 2014 was 22,986 MW78. Between 2012 and 2015, the annual number of new installments had drastically decreased, and by the end of 2015, almost no new wind power was installed in Spain79. This can be attributed to the financial crisis and decrease in renewable energy support. To achieve 20.8% renewables in gross energy consumption by 2020, Spain must have a cumulative installed capacity of 35.75 GW of wind by then80.

Figure 12 Annual and cumulative wind energy in Spain 81

Solar When renewable sources were promoted back in 1980, wind and solar started under similar support and policy frameworks, but over the last two decades, solar power has not been able to generate interest with the investors in spite of Spain having excellent solar resources. In the last 5 or more years, growth in the Spanish solar market has decelerated compared with other EU countries. This decrease in growth can be explained by the expiration of government subsidies in 201282. As per the database of European Photovoltaic Industry Association (EPIA), Spain’s target for solar capacity is to have 8,367 MW by

4500 4000 3500 3000 2500

(MW) 2000 1500 1000 500 Electricity Generang Capacity 0 1990 2000 2005 2007 2008 2009 2010

Source: IRENA Solar PV Solar thermal 202083.

Figure 13 Cumulative installed solar capacity in Spain 84

Barriers to PV energy Upfront investment cost: Since wind turbines were manufactured domestically in Spain as opposed to solar panels, investing in solar turned out to be more expensive in relation to wind and due to low return on investment and longer payback period, it discouraged solar deployment. High initial costs and lack of economies of scale made solar power noncompetitive with conventional electricity.

Insufficient support and inaccurate economic framework: while the Royal Decree of 1998 provided incentives for solar power generation, the subsidies and feed-in-tariffs for solar were significantly lower than its neighboring countries. Plants which had a capacity of more than 100 MW were unqualified for funding and this led to payback periods of 13 to 25 years.

Administrative obstacles: Administrative requirements and technical qualifications required to install the solar panels / modules as well as the process to receive government support are very complex. This is an added expense for an investor and increases lead times.

Financial obstacles: Funding or subsidy options are not promising, relative to wind or hydro.

Grid Integration: As per some PV generating companies, “before 2000 there were no grid connection regulations, which allowed utilities to set exorbitant charges”. In the second half of 2000, the Royal Decree passed a law, which regulated the connection of PV technology to the grid. Generators claim “grid access continues to be discriminatory and at unfair fees and directly accuse the grid operator and utilities of preventing PV access”.

Biomass There is little or almost negligible presence of biomass in Spain. Only two plants have been commissioned since 2012, and the total number of operational units is 203. The total cumulative biomass capacity is approximately 863 MW. Given the electricity deficit and a long recession, the then present subsidies for biofuels were also cut down by the Spanish government in 201485.

Infrastructure Transmission REE owns the high voltage transmission network. In 2013, total length of the transmission network was approximately 40,000 km86. By law REE is required to be an independent operator and cannot own shares in companies associated with generation or supply of electricity / gas.

With rapid increase in the demand in 1990’s and 2000’s and necessity to integrate intermittent renewables, the government stimulated grid transmission development and flexibility.

Distribution Distribution service companies are accountable for maintaining, developing and operating the distribution network. Spain has five major distribution companies: E.ON, Endesa, Iberdrola, Gas Natural Fenosa and HC Energia EDP. 300 additional small subsidiary companies also operate in the distribution sector.

Network access-tariffs paid by consumers vary depending on voltage, power and periods of time. The government sets the network access tariff and also revises them once a year. The revenue from access tariff of retail customers is used to pay the transmission distributor operators and the distribution service companies.

Social Impact The main impact of the electricity deficit has been on the sentiment of the industry and the people. When the government cut back on the incentives and subsidies it made a huge financial impact on the investors. Instead of gradually slowing down the growth in renewable energy, the government put a full stop to everything, which brought the market to a sudden standstill. Spain was once the leading manufacturer of wind turbines and a lot of wind turbines and other equipment were exported to different countries in the world. However, when renewable energy growth slowed down, the domestic demand for turbines was reduced, and it turned out to be cost ineffective for many companies to generate revenue from just the export business. Thus, the manufacturing industry was hugely impacted and resulted in shutting down of many industries. While renewables created job opportunities for Spanish citizens in the early 2000’s, the downfall of the economy has made Spain’s current unemployment rate the second highest in Europe87

In 2015, Spain did not attract any investment in new wind power88. Currently the market for renewables, particularly wind, is inactive and the situation is not expected to change for a couple more years. The financial sentiment of the current market does not look good either. Financing new projects in Spain is very difficult, as neither domestic nor foreign banks are willing to fund renewable energy projects.

United Kingdom 89 Country Profile

Population 64,088,222 GDP $2.66 trillion 2012 Energy Consumption 319.1 billion kWh Total Installed Capacity 84.99 million kW Energy Mix (CIA 2014 and UK.gov)90 Coal (21.1%) Natural Gas (38.2%) Oil and other non-renewables (2.7%) Nuclear (20.5%) Hydroelectric (5.1%) Other Renewables (12.2%)

Renewable Energy Projections 2020: (15%) 2030: (30-40%) Market Overview The United Kingdom has experienced a dynamic renewable energy journey since the early 2000s. Privatization, shifting policies, climate goals, and significant financial investment have encouraged electric market reform in the UK. With so many issues at play in the market revision process, there has been little room to focus on the establishment of unified renewable energy strategies for long-term market success. Despite this lack of uniformity, the UK has placed a significant emphasis on investment in renewable energy to work toward EU climate targets, with an initial focus on biomass and onshore wind, and recently shifting toward the introduction of more offshore wind projects and solar generation as costs for these technologies begin to decline. Predicted as the 11th most promising country to invest in renewable energy in 201391, the United Kingdom is in a transition phase with renewable energy integration when compared with the over abundance of capacity in Spain and the more established renewable energy market in Germany. Yet, this transition phase of renewable energy integration in the UK has been hindered as disjointed policies have led to uncertainty in the long-term renewable energy market. Lessons learned from past policy and market structure reform will provide valuable insights moving forward as renewable energy LCOE costs continue to decline and investments could become more attractive for all countries.

Hydro, 1.8% Other, 1.8%

Solar , 1.2% Wind, Biomass, 8.0% 6.8% Nuclear, 19.0%

Natural Gas, Coal, 30.0% 30.0%

Figure 14 UK Electricity Mix (2014)

In 2006, the United Kingdom was falling behind other countries with ambitious renewable energy strategies for widespread system efficiency and reliability.92 Current predictions indicate the year 2016 as more promising for renewable energy. Large investment has taken place in biomass, wind, and solar energy sectors (Figure 14). As policies shift subsidies away from funding these projects, and old generation plants retire, further market drivers and price incentives will be needed to bring the United Kingdom up to the levels of more established renewable energy countries such as Germany and Denmark. Recent carbon tax initiatives supplement market drivers in the current capacity market, but this isn't enough funding to solve all renewable energy market challenges in the country without the promise of long term market expansion and backing.

General Market Structure In general, the UK operates on a market-driven capacity market for electricity where spot prices are determined based on the lowest marginal cost generators that have sufficient capacity. In recent years, the main marginal unit has tended to be natural gas as the country had a major divestment away from coal

31 and toward lower carbon intensive resources in the early 2000s. As shale gas technology in the UK is not currently on par to meet demand, renewable energy will be needed to fill this generation gap and maintain the 50% emissions reduction goal by 2050.93 Shifting trends in the electricity energy mix over time (Figure 17) have shown natural gas and coal as alternating as the dominant electricity generation sources. The cost of natural gas during time of abundant resources and the subsequent deletion have led to changes in generation mix. The shift toward privatization of the market has left about 10 main electricity generation companies (Table 1) and many additional smaller generation companies.94

Table 1. Top 10 Electricity Generation Companies and Percentage of Capacity Market Share

Company Percent of total UK Capacity (2007) British Energy 15 Npower (RWE -Germany) 13 Powergen (E.On-Germany) 12 Scottish & Southern 10 ScottishPower 8 EDF Energy (Edf-France) 6 Drax 5 Centrica 4 International Power 4 BNFL (*no longer operational: nuclear 3 decommissioned)95

Among the top 10 of these energy-generating companies, the following structure shows the proportion of the wholesale market served by each as of 2014.

Brish Energy

Npower (RWE -Germany) 15% 20% Powergen (E.On-Germany)

Scosh & Southern 3% 13% ScoshPower 4% EDF Energy (Edf-France) 4% Drax 5% 12% Centrica

6% Internaonal Power 8% 10% BNFL Other

Figure 15. Proportion of Energy Generated by the Top Energy Providers in the UK96

The United Kingdom follows a traditional market structure with generation, transmission, suppliers, and retail distributers that has been completely privatized over transitioning policy, yet a government run organization, OFGEM, is responsible for regulating electricity prices and to ensure that fair market regulation and business practices are maintained in the electricity market. Energy Watch further addresses concerns of consumers to maintain fair prices and represent their interests.97

Overall, the UK energy sector provides strong economic value to the market. About 1 in 48 people in the UK are employed by the energy sector, and 5% of the country’s GDP is associated with sector gains.98 Although the UK has lagged behind other countries in renewable energy expansion, there have been significant gains with recent carbon tax advancements, shifting policies to promote more solar and distributed energy generation, and existing infrastructure set to reach construction completion in coming years. Investment in renewables has been high but implementation has been low. The UK has been ranked as the 4th country for total annual renewable energy investment in 2013, although this funding has not been supported by all citizens of Great Britain.99 Overarching strategies around GHGs involve a reduction in emissions 50% below 1990 levels by 2020, suggesting needed electricity reform to supplement transportation and energy efficiency gains.100

As of 2012, Scotland made up about 36% of all UK renewable generation.101 This nation is a unique case in the UK as this country has set its own (very ambitious) renewable energy goals-100% of electricity to

33 be supplied by renewable energy equivalent sources by 2020. As Scotland uses many of the same generators as mentioned in the overall UK electricity market structure, it will be interesting to see how this impacts the overall UK energy policy formation over time.

Figure 16 Scotland Renewable Electricity Generation (GWh) 2000- 2012102

Policy Instruments The lack of sustained implementable policies in the United Kingdom has made renewable energy investment a more risky business. This has been the largest hindrance to widespread system reliability for renewable energy in the UK as investors are uncertain if policies will continue to support investments well beyond the 10 to 20 years needed to bring many of these projects up to capacity generation levels. Policy lessons in the UK point to fewer shifts in policy agenda and a more streamlined policy plan with long term goal targets included as a more viable method for renewable energy system integration in a country.

Non-Fossil Fuel Obligation (NFFO) Beginning with the Non-Fossil Fuel Obligation (NFFO) from 1990-1998, the United Kingdom committed more funding to research and development of carbon reduction and shifts away from traditional fossil fuel generation and towards renewable energy projects.103 The NFFO was problematic in that the bidding led to a lack of diversity (as mostly high wind sites were selected) and a lack of competition to drive down prices.

Renewable Obligation The NFFO policy then transitioned to the Renewable Obligation (RO), which is similar to a renewable portfolio standard with a specific proportion increasing over time of electricity required to be met by renewable generators. This system has seen less reliability in stimulating innovation than other feed-in- tariff policy measures in other countries, although it is supposed to be a more market-driven approach to help drive electricity prices to the market equilibrium.104 This policy is set to expire in 2017 for small- scale solar projects and onshore wind projects, which has led investors to question the implementation of plans beyond the subsidy support timeframe.105

Electricity Market Reform Overall, Electricity Market Reform has driven more UK attention than the RO. Electricity Market Reform began the privatization of the electricity market by maintaining a government led regulatory entity, Ofgem106, to maintain market fairness while taking government control out of other operations to allow smaller energy players a chance at market share as well.107 Electricity Market Reform further set future targets for climate emissions reduction of 15% by 2020 and 80% by 2050108.

Part of this market reform involved the establishment of a feed-in tariff in 2010.109 This feed -in tariff has seen some growth in recent years. The first quarter of 2015 showed an increase of about 148 MW enrolled in the feed in tariff system.110

More recent policies such as the Energy Bill of 2012, Green Deal (to encourage consumer investment in energy efficiency measures for the home for long term investment)111 and Feed-In-Tariff revision to tailor more renewable energy fairness for consumers have increased attention on renewable energy investment and market potential in England, Scotland, Wales, and Northern Ireland, but have provided further confusion about the long-term renewable energy strategy for the country.

Current and Future Renewable Energy Policies With government investment opportunities from the Renewables Obligation and Green Deal set to expire, new policies have emerged around meeting carbon goals and targets. The Contracts for Differences policy aims to support renewable electricity generators by paying the difference between the spot price and the costs of energy production for more capital-intensive renewable energy investments. .112 Other climate policies include the Carbon Change Levy to create incentives to emit less harmful pollution as a tax on carbon emissions in the United Kingdom is in place, 113 and the setting of a Carbon Price Floor Policy to support efforts to meet climate targets and emissions reduction in the region in support of the levy.114

Policies

Non-Fossil Fuel Obligation

Renewables Green Deal Obligation Feed in Electricity Market Reform Tariff

Figure 17 UK Electricity Generation by Source and Policy Influence

Financing Mostly renewable energy in the UK has been financed with the aid of government subsidies and bank investment in renewables. As the 4th highest renewable energy capacity investor in 2013 (Table 2), the United Kingdom is in a period of rapid project financing for onshore wind and small-scale solar practices before the government Renewable Obligation subsidy expires in 2017.115 As seen in previous country sections, LCOE prices for renewable power technologies have been declining. The issue in the UK is that recently changing policy measures support rapid construction costs but lack support for long-range operational plans. Until these measures are mapped out for the country, the lag between construction and implementation will be difficult to remedy.

Table 2 2013 Top 5 Global Renewable Energy Investment Countries116

2013 1st 2nd 3rd 4th 5th Renewable Investment Rankings

Total Investment China US Japan UK Germany Solar China Japan US Germany UK

Wind China Germany UK India Canada

Economic Impact

Market Structure The UK wholesale electricity market is a centralized capacity market, which stacks generation sources based on availability and wholesale energy price. This electricity market mechanism has been proposed as more price sensitive to the market for renewable power generation. A centralized capacity market typically supports more short-term projects as typically predictions are made 3 to 5 years out in a capacity market. Unfortunately, the UK has experienced difficulty in promoting the reliability and follow through for renewable energy projects although investments have been high with many renewable energy projects going beyond a 5 year timescale for actual operation and implementation. Establishing more connections to distributed energy resources through improved transmission and creating storage capabilities would be necessary in the future to ensure grid reliability and efficiency. Further efforts have been made to support the capacity market that bolster renewable energy adoption and make these investments more compatible with traditional fossil fuel sources such as the Carbon Price Support and the Climate Change Levy—a carbon tax on traditional fossil fuel generation that differentiates energy costs117. These measures are also in a stage of policy revision regarding government support for renewables, and thus the coming years will be interesting periods for market formation. Further carbon related policies being restructured to shift away from construction of renewable generation projects include electricity market reform, and CFDs (contracts for difference private contracts to pay generators the difference between the strike price and the price for renewable power generation) and capacity contracts will be determined by the best technologies rather than subsidized larger scale renewables projects as Climate Change Levy exemptions expire for renewables and the feed-in-tariff gets more streamlined by eliminating long pre-approval periods.118

Industry Growth Since 2005, when the UK reached a peak in oil and coal production, there became greater need to find alternative generation sources to meet EU climate reduction targets of 15% by 2020 and UK targets of 50% reduction by 2050.119 Fuel switching to sources with lower carbon emissions seemed to be a viable alternative. The UK has significantly higher GDP than average EU countries and has invested in many renewable energy projects. While renewable energy integration has grown exponentially since the introduction of renewable energy into the market in the early 2000s, the 2012 mix of about 12.2% renewable energy puts the UK at 14th for renewable energy countries according to IRENA global renewable energy strategies.120 This lower ranking when compared with the significant initial investment in renewable energy capacity (especially as rapid build out aims to utilize government installation

37 subsidies before they expire) could be related to the uncertain policy schedule making long term investments more risky for stakeholders.

Retail Pricing Overall, retail pricing in the UK has remained relatively stable for consumers regarding the proportion of utility bills for electricity and natural gas usage. Ofgem (the Office of Gas and Electricity Markets) has regulated the electricity prices to maintain this relative stability (Figure 18).

Figure 18. UK Utility Price Components for Retail Consumers 2007-2014 (Ofgem)

The retail market in the United Kingdom is interesting in that it has followed the principle of privatization that the overall generation and distribution systems have followed by allowing consumer freedom of choice when selecting electricity providers. Consumer pricing in the UK has evolved to allow consumers to switch providers anytime they wish as well as the opportunity to select a specific tariff tailored to their needs. 121

Figure 19 Current Tariff Choices for Retail Consumers in the UK122

Technology With significant initial investment in renewable energy projects in the UK, more types of energy resources can be explored as capital costs decline. For example, the UK is one of the few countries with successful off shore wind projects underway and transmission projects to connect these resources to the grid. The year 2015 has shown new investment in large scale projects for the country such as the Duddon Sands Offshore Wind Farm proposed to have a capacity of 398 MW and new transmission lines in Scotland from Beauty to Denny.123 Large power producers, such as Drax, have also committed to switching from coal to biomass to meet lower emissions goals as well.124

Figure 20 Renewable Energy Installed Capacity in the UK (IRENA)

Figure 21 All UK Electricity Generation Compared by Fuel125

Solar In a region renowned for its cloudy, rainy weather throughout the majority of the year, solar wouldn’t seem to be the primary renewable energy technology to capitalize available climate resources in the

39 country, yet solar generation has seen some success in recent years with the first few large scale solar farms added to the grid and home energy system management practices introduced to utilize available solar irradiance in the region126 (Figure 22).

Figure 22. Global Horizontal Irradiance (GHI) UK

Solar initially received a boost with renewable energy policies aimed at promoting distributed energy generation and small scale residential investments such as the Green Deal to support more distributed energy sources of generation and small scale projects.127 Recent policy shifts have ended government funding of this Green Deal program as it has been discontinued. Utilizing the available solar resources in the UK is uncertain moving forward unless carbon levy policy makes the cost of solar resources more equitable with conventional generation sources for both producers and consumers of electricity. Although currently there is less than 5,228 MW of installed solar capacity in the UK as of 2014, the similar geography, economic stability, and political system to Germany would make solar a viable option in the

UK, with costs already one of the most effective compared with other renewable transition countries such as the United States and Japan.128

Wind Wind is one of highest renewable energy technologies in the UK at an installed capacity of 12,808 MW as of 2014.129 Onshore projects have attracted large investment under the Renewables Obligation subsidies, and with the expiration of this support for onshore wind in 2017, projects are being constructed rapidly, but operators are hesitant to follow through with projects as the uncertainty of government policy support makes the investment more risky. The UK is one of the few countries with successful offshore wind resources and has significant offshore resources to utilize in the future130 (Figure 23). As of 2013 the UK was ranked third in global wind investment behind China and Germany.131 The UK has been suggested to have 56% of the global offshore wind resource, yet many proposed projects are still yet to reach support for full-scale operation.132

Figure 23 Installed Wind Farms as of December 2014

Biomass Biomass from waste to energy has been seen as one of the most economically viable alternative energy options in the UK. After initial carbon reductions due to a systems shift away from coal generation to using natural gas and nuclear energy, biomass was seen as an alternative requiring less risk in investment. With an installed capacity of approximately 4,431 MW in 2014, and projects such as the Drax generation with its 50% shift away from coal to wood pellet biomass in its operations, this form of renewable energy seems to be another alternative lower emission strategy seen as a viable alternative in the UK.133

Infrastructure Grid The UK has focused much more effort on privatizing the electricity sector rather than devoting research and development to renewable energy investment in uniform framework and targets. After many years in transition, the government regulatory body Ofgem enabled fair price standards across the 10 large player energy providers as well as over 40 smaller entities. The future holds great potential for renewable energy expansion in the UK with climate goals on every country's horizon after Cop21 and the realization that pollution is becoming impactful with human health challenges and extreme weather events. Connection to the grid in the UK is lagging behind investment in project construction, mostly as a result of the previously mentioned Renewable Obligation policy expiration on the near horizon. Transmission and storage operations would be necessary to ensure that generation could be supplied effectively with increased renewable energy adoption throughout the UK.

Flexibility Transmission has been another driver in climate reduction policies in the UK, but little attention has been focused on restructuring overall grid flexibility. Since much attention over the past 10 years focused on the privatization of the energy sector, there may be room for new focus toward improving flexibility of the grid systems—especially since 1/5 of the 10 largest utility operators in the UK (nPower and E.on) are German owned and operated. Currently, there is no storage capability associated with renewable energy in the UK to stabilize the grid beyond ramping natural gas peaking plants to deal with over generation.134 Smart metering for home monitoring programs associated with small-scale biodigesters, solar panels, and wind generators has been one way to try to monitor excess energy back to the grid. Programs such as Good Energy HomeGen and SmartGen helped to provide government support for feed in tariff schemes and are a start toward improving grid flexibility in the UK.135

As transportation policy is at the forefront of UK policy initiatives to reduce carbon emissions with zero emission taxis vehicle policies and the dynamic charging road test pilot136 to promote electric vehicle

42 adoption, electric vehicles could provide another means of storage potential for the UK. This option to use mobility sources as a form of storage could work by utilizing the lithium ion batteries in electric vehicles to storage excess generation from variable wind and solar resources, or to suggest strategic charging initiatives and time of use pricing to encourage vehicle owners to wait to charge when high levels of solar and wind resources are on the grid.

Social Impacts Social pushback for renewable energy growth in the UK has come from public and parliamentary sources throughout the changing policy measures and project proposals. One example of public pushback involved efforts through the Localism Bill to gain petition support to postpone planning for renewable energy projects and was an area of contention for a time.137 The overturning of this effort to slow growth in 2010 allowed renewable projects to proceed, but concerns continue to hold back unified renewable energy system development. One social concern from Parliament officials points to the implication that the 2020 carbon emissions goals associated with renewable energy projects needed to meet targets has already been met in the UK as a whole. The over investment in this sector is seen as a potential problem as some government officials wonder what will happen to the renewable energy system after funds run out.138 These concerns are not voiced by all British citizens and government officials, though. Survey results from 2015 suggest about 75% of the public in the UK have a favorable view of renewable energy139, and the Department for Energy and Climate Change has pushed for expansion of climate change goals through the power sector with various policy provisions as indicated in the policy section through the Renewables Obligation, Feed in Tariff, Electricity Market Reform, etc. Once uniform policies are backed by financial opportunities, technology could have greater potential for success in the country, but has the potential to shift focus away from conventional generation sources in the electricity sector.

The United Kingdom has proposed renewable energy goals, has significant investments underway, and a market based structure with carbon tax support to subsidize renewable energy with the support of a feed in tariff plan as energy strategy shifts for the country. The main challenge to the integration of variable energy resources in the UK electricity market is the lack of clear policy signals as funding is set to expire and future cost incentives and support mechanisms for renewable electricity are uncertain. Targets and reliable policy mechanisms would be needed along with a stable electricity market system to make long- term investment in renewables a less risky venture when compared with conventional generation resources such as natural gas and coal.

Discussion: Lessons learned from the European Experience

Lesson 1 Policy Design is important to support renewable generation It is important to establish a credible payback mechanism for the electricity system. From Spain’s experience, the government tried to transform the electricity system without having a strong financial platform to support it. Furthermore, when policies are launched to boost private investment in renewable energy projects, there has to be a secure long term mechanism to ensure the investments’ costs are recovered over time. This process is similar in the United Kingdom with high initial investment but uncertainty in long term support for variable energy generation.

In Spain’s case, the root cause of the problem is not the investment in wind turbines / solar power or the policy that encouraged investment in them. The root cause of the problem is that historically, over many decades, the government prevented utilities from recovering the true costs of the electricity system.

United Kingdom policies over the last two decades have been unsuccessful to meet long-term renewable energy adoption and targets140. UK renewable energy policy has been characterized by frequently shifting policy direction between subsidized efforts, feed-in-tariffs, and climate policies and lack of long-term investment support. After subsidized funding through the Renewables Obligation (RO) expires, new policy mechanisms will be required to compensate for this new lack of investment if the renewable electricity market is to maintain is trajectory of growth.

The political and economic framework must have the support of the citizens in that the systems must self- sustain itself to changes in the in governments, and overall economic conditions. A smooth transition to renewable energy can be sustained if built on a sound financial footing. Utilities also need to actively engage in policymaking process, advocate for regulatory certainty, and pivot business focus based on policy outlook.

Lesson 2 Subsidies boost renewable growth. But someone has to pay for it. Many of the European states provide generous financial subsidies such as feed-in tariffs for renewable energy installation and operations. Such subsidies have been shown to be successful as they incentivized the fast growth of large amount of renewable energy installation in a relatively short period of time by ensuring the financial return for renewable generators. At the same time, such policies are proven to be very costly to implement. According to German’s former Minister of Environment, to meet the commitment of the 2022 target, the cost of the Feed in tariff program will be at least another € 680 billion, totaled at least € 1 trillion if counts in all paid feed-in tariffs by the end of 2013. This calculation did not even include the cost of grid expansion, flexibility, and research on new technologies. 141

Figure 24 Germany EEG Surcharge 2000 - 2016 (ct€/kwh) 142

In Germany, the EEG surcharge, which is added to the electricity bill of end consumers to compensate the cost of the feed-in tariffs, has increased by 30 times compared to its introduction in 2000 (Figure 22). In 2016, the EEG surcharge has gone up to a record high of 6.35 ct/kwh. 143 In a 2014 survey, the sentiment among German public remained quite supportive. 92% of the respondents supported the further development of renewable energy and 70% considered the use and development of renewable energy was very or extremely important.144 However, as German households are paying one of the most expensive electricity price tags, the support from the public may be at risk if the price continues to go up. Social issues related to “energy poverty” come into play as the poor are usually the most affected by rising cost of electricity consumption.

Other EU countries also have seen similar electricity price surge as renewable energy capacity continues to increase under the support of various subsidies programs (Figure 25). It has become clear that urgent policy reform is needed in order to make sure the renewables are capable of participating in the market competition without guaranteed financial assistance. In 2013 the European Commission has published new guidance on state intervention in electricity market to direct member states toward further market and policy reform. According to this guideline, mature renewable energy technologies should be gradually “exposed to market prices and eventually support must be fully removed.” 145

Renewables Capcity vs Electricity Prices

0.35 Denmark

0.3

Germany

0.25 Italy Portugal Belgium Spain 0.2 Austria UK Sweden Netherlands Greece Norway France 0.15 Finland Romania Turkey 0.1

Electricity Price (€/KWh) Bulgaria

0.05

0 0 100 200 300 400 500 600 700 800 900 1000

Figure 25 Electricity Price versus Wind & Solar Installed Capacity in EU Countries (2014)146 147148

Lesson 3 Conventional utilities: Mind the profitability and innovation gap. Conventional utilities are impacted by the development of renewable energy in three major aspects: output, operating costs, and market prices. Take Germany for example, mandated by the feed-in priority and purchase guarantee, renewables are able to get on the grid first. Total electricity generation from fossil fuels in 2015 has decreased by 10% compared to 2006. Many conventional power plants now only run as backup power plants with little output (Figure 26). With lower service level and shorter operation period, for conventional plants the operating cost per unit output has increased and the payback period for capital investment has become longer. Because renewables can operate on very low operating costs, they lower the price in the wholesale electricity market to a point that might not be economical to conventional plants. Coal and natural gas plants are more expensive and forced to be pushed out of the exchange market.

This does not mean that all conventional plants are destined to be retired soon. Conventional power plants are still an important source for security of supply in the power markets. The increasing share of the non-

46 dispatchable renewables in the energy mix demands that the grid now requires higher level of backup power to balance the grid when there is not enough electricity generated from renewable available due to fluctuation. It has been proven that technically it is feasible to optimize and modify existing conventional power plants to reduce size of capacity and shorten ramp-up time in order to better serve as “backup” power plants. 149 However, from an economical point of view, the shrinking revenue due to lower price and less output and increasing embedded costs of these backup power plants need to be addressed properly.

Figure 26 Generation at E.ON’s Irsching Natural Gas Power Plant (2011 vs. 2012, in MWh)150

Many traditional utilities have started to revisit their business models. In 2016, E.ON, the biggest utility company in Germany, posted another record high annual loss due to coal and gas fired power plant writedowns. Previously it has already announced to split into two separate companies due to profitability pressure. 151

To many traditional utilities, heavy capital investment in the conventional power plants often put the decision to expand in renewable energy in a less desirable place. However, there are other opportunities that utilities could catch up with. The ownership structure of renewable energy in Germany displays a trend of decentralization: about half of the renewable energy capacity is owned by private citizens and farmers. The transmission system seeks to operate responsively to demand and better stabilize the integration of these generation sources into the grids. Residents and owners of renewable energy also want to enjoy more energy efficiency features and live more sustainably at home. Therefore, one alternative revenue stream would be energy services such as smart metering, smart home and distributed energy system.

Lesson 4 Market Design Comparison

The role of the capacity market, along with strong government subsidies, in theory would make market price signals respond to adopt renewable energy generation, but in practice this has not been the case in all countries. Regulatory policies and budget constraints have weakened market price signals.152 The UK with its centralized capacity market has experienced market inefficiencies in this area, and has needed to adopt a supplementary feed-in-tariff program as well as carbon tax policies to maintain wholesale electricity prices while increasing renewable energy generation. Other countries that have tried to integrate renewables with the capacity market structure such as France’s decentralized capacity market have also seen a lag in meeting high renewable energy adoption in the nation.

Figure 27 EU Energy Market and Renewable Energy Support Schemes (Agora)

Capacity markets in the EU are in various stages of development. France, Belgium, and the UK have centralized capacity markets for all energy generation types. 153 With forward-thinking policy changes, capacity markets are being re-adjusted to account for variable generation sources. The future of capacity market mechanisms to meet variable demand and supply in electricity markets would need to cross country borders to improve peak generation reliability. This requires standardization across capacity market generation in the EU. This market standardization lesson could be applied to the regional market variation across the US power generation and global resource utilization as well.

The alternative—energy only markets—has also experienced mixed results. For example, as this analysis has shown, in Germany the energy only market with feed-in-tariff rates to promote renewable energy integration has shifted the price burden to consumers, as the market is not selecting for the price where supply must meet demand. Germany has proposed the integration of capacity-like auction systems to further support the energy only market. Other countries such as Denmark have an energy-only market with feed-in rates and proposed certificate trading mechanisms to have market prices and integration from a top-down governance structure.154

Electricity market design can be impacted by regional differences as the electricity market reaches different stages of maturity. With different energy resources making up total generation, market design must address regional decommissioning as plants reach retirement stage (as is the case in the UK and Belgium), geographic weather conditions, and economic stability of the country to avoid renewable energy market decline, as was the case in Spain.

Lesson 5 Grid Integration Sufficient network connectivity and integration with the grid is a significant concern for power generators as variable energy resources begin to compose a more significant portion of electricity generation in the EU and beyond. Three main issues exist around variable energy resources and grid integration—how the grid can curtail or store energy from over generation events in times of high wind and solar resource availability, connection between distributed energy systems and the subsequent build out of transmission lines, and improving grid flexibility and communication to balance periods of high generation with low generation to supply electricity to meet demand at the time it is needed by consumers.

Figure 28 Necessary expansion and restructuring of the German electricity grid155

Lack of transmission has been a major deterring factor for successful renewable energy integration. For instance, in the UK there is a lack of transmission infrastructure to meet the significant investment and rapid construction of renewable energy projects. Germany has made strides with a proposed project to connect the north and south portions of the country to distribute wind to where it is needed (as discussed with Germany’s EnBW at the E-World Energy Conference), yet the completion of this network is currently a long term plan. International transmission lines have also been proposed (in the UK for instance, plans to transmit electricity between Norway, France, and Brussels have been proposed as a way to control for shifting variable resources across regional differences).156 Other countries could integrate renewable energy from more developed systems through this cross-continental transmission practice as well.

Over-generation becomes more of an issue when transmission needs are not reliable enough to distribute variable energy resources in times of high generation and when too much power is being produced and must be curtailed or stored. The UK is still not at the level of renewable energy penetration where this is a concern, but with growing offshore wind projects in the UK subject to bursts of high wind during the early morning or late night hours when less electricity is needed will need to be addressed. Spain also has experienced a disconnect in resource availability and transmission capacity. Germany has experienced this need to adjust for curtailed wind and develop strategies to address variability. Storage in the form of

50 batteries, electric vehicles, power to heat (CHP), or pumped storage plants could be developed into the market structure moving forward to help accommodate variability issues in wind and solar resources. The European Association for the Storage of Energy (EASE) has proposed a separate energy storage market to accompany renewable energy build out as one solution to the over generation problem as variable energy resources expand in the EU.

Improved flexibility of the grid systems will be necessary for successful wind, solar, and biomass integration in the form of smart metering, variable resource monitoring, and innovative energy trading platforms. Many leaders at the E-World Energy and Water Conference in Essen, Germany spoke about innovative software programs, technology platforms to monitor distributed energy resources, and to utilize storage capabilities to allow more flexibility in grid generation and begin to mitigate this concern.

Figure 29 Relative Direct Solar-energy Availability in the United States, Spain, and Germany 157

Implication to U.S. Compared to the development in Germany, feed-in tariff programs have relatively limited and fragmented implementation in the U.S.158 An alternative to encourage residential and distributed solar installation in the U.S. is the combination of net metering, third-party Power Purchasing Agreement, and storage. The latter option does not require generators to feed all electricity generated into the grid. Instead, it allows generators to offset their electricity usage from their generation. Although the two incentive programs work under different mechanisms, it is still worth noticing that how private individuals could be motivated by promising financing methods to accept and promote renewable energy as showcased in the example of Germany. Germany receives about as much solar resources as Alaska (Figure 29), but its total solar PV installation is twice as much as the entire U.S. installation. 159

Conclusion Lessons learned in the EU have provided areas to consider as potential threats or beneficial design elements when integrating renewable energy into a country or state’s energy portfolio for electricity generation. The five lessons listed above are applicable in context to the variable policy, economic, and regional differences on a state-by-state basis as the European Union countries differ in these elements. The Southeastern United States could benefit from strategic policy support for long term integration, subsidy evaluation, innovation in conventional energy resources, market design to maintain the lowest prices for consumers possible, and the allocation of funding to install sufficient transmission lines and grid flexibility measures to ensure variable energy resources can be used when they are available.

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