Support for Renewable Energy in the European Union
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October 2003 ECN-C--03-113 POLICY SUPPORT FOR RENEWABLE ENERGY IN THE EUROPEAN UNION A review of the regulatory framework and suggestions for adjustment J.C. Jansen Acknowledgement This report is an outgrowth of the project ‘Renewable Energy Trends’ under ECN project num- ber 7.7448. Constructive comments and suggestions were given by Wim van Arkel, Maroeska Boots, Bert Daniëls, Ruud Egging, Theo de Lange, Elke van Thuijl and Martine Uyterlinde. Yet the sole responsibility for the contents and opinions expressed in this report rest with Jaap Jan- sen ([email protected], tel.+31.224.564437). Abstract After putting renewable energy policy support in an overall policy perspective, some key EU renewable energy policy documents are reviewed. Recently promulgated EU policies on auto- motive biofuels are given special attention. The report generally questions the soundness of the basis on which the EU has set indicative targets for renewable energy, renewables-sourced elec- tricity, and renewable fuels. The justification provided for the ‘reference values’ with respect to the use of renewable fuels (that is, automotive biofuels) is found particularly wanting and the European Commission is urged to more credibly account for the alleged positive impacts of the targeted penetration of automotive biofuels on aggregate income and employment. The European Commission should also fully address the issue of the low efficiency of this policy instrument, relative to other op- tions, in securing energy supply and reducing greenhouse gas emissions. Lessons from the Common Agricultural Policy should be taken to heart by fully charting the risks of creating new vested interests. The current support frameworks for electricity from renewables (RES-E) at Member State level are reviewed. The EU and some of its Member States have taken a leading role in the design of innovative policies in support of renewable energy. But much EU policy making is still to be done if a genuine EU-wide RES-E electricity market is to be created. Renewable energy targets need to be redefined at the Community level using a long-term framework and making due al- lowance for the three foremost energy policy concerns, namely: • overall competitiveness of the EU economy, • security of energy supply, • environmental protection. The report outlines the design of a Community framework for harmonisation of national RE support frameworks. Issues addressed include the choice of framework model for market devel- opment support to distinct eligible RES-E technologies and the relationship between the RES-E market and automotive biofuels. 2 ECN-C--03-113 CONTENTS GLOSSARY 4 SUMMARY 5 1. INTRODUCTION 9 1.1 Background 9 1.2 Outline 9 2. BROADER POLICY PERSPECTIVES 10 2.1 Introduction 10 2.2 Improving overall competitiveness and market integration 10 2.3 Energy supply security 11 2.4 State aid for environmental protection technology 13 2.5 Conclusions 13 3. THE EU RENEWABLE ENERGY POLICY FRAMEWORK 16 3.1 Introduction 16 3.2 The White Paper on renewable sources of energy 16 3.3 Directive on electricity from renewable energy sources 20 3.4 Concluding observations 23 4. EU POLICIES ON BIOFUELS FUELS FOR TRANSPORTATION 27 4.1 Introduction 27 4.2 Instruments to reduce the dependency on oil 27 4.3 The Directive on the promotion of biofuels and other renewable fuels for transport 28 4.4 A review of the EU renewable fuels policy 30 4.5 Concluding remarks 33 5. A BLUEPRINT OF A HARMONISED AND COHESIVE POLICY DESIGN 35 5.1 Introduction 35 5.2 National regulatory frameworks for direct market support 35 5.3 Harmonising RES-E support 38 5.4 Harmonising and integrating the RF support framework 46 5.5 Optimising standards for RES-E and renewable fuels 49 5.6 Concluding observations 51 6. AN AGENDA FOR REGULATORY ADJUSTMENT 54 REFERENCES 56 APPENDIX A MAIN FEATURES OF THE COMMUNITY GUIDELINES ON STATE AID FOR ENVIRONMENTAL PROTECTION 60 APPENDIX B APPLYING LEARNING CURVES FOR TRANSITION MANAGEMENT 62 APPENDIX C DERIVATION OF A CONVERSION RATIO BETWEEN RES-E CERTIFICATES AND RF CERTIFICATES 64 C.1 Keys to determine the conversion ratio between RECs and RFCs 64 C.2 Assumptions 64 C.3 Determination of certificate conversion ratio 64 ECN-C--03-113 3 GLOSSARY Additional cost Extra cost to end users and the public sector over and above the cost of the energy carrier concerned or its closest substitute (grid electricity, gasoline, etc.) if no RE policy support would have been in place Ambitious targets Policy targets which will not be achieved without effective additional measures EJ Exa (1018) joule ECJ European Court of Justice Eligible 1) Qualifying for RE support; 2) counting for the RE policy target concerned EU European Union FIT system Feed-in tariffs system: a RES-E support system, in which distinct regulated preferential tariffs have to be paid to technology-specific categories of RES-E generators for feeding their electricity directly into the central grid within the jurisdiction concerned GJ Giga (109) joule GO Guarantee of origin: a unique proof of the source of a certain quantity (e.g., 1 MWh) of RES-E electricity IEA International Energy Agency MS(s) Member State(s) MWh Mega (106) watt-hour RD&D Research, development and demonstration PES Primary energy source PJ Peta (1015) joule PV Photovoltaics: technology by which direct and diffuse sunlight absorbed by solar panels, is converted into electricity RE Renewable energy REC Renewables-based electricity certificate: a unique proof that a certain quantity of electricity (e.g., 1 MWh) has been generated by eligible renewables-based electricity RES-E Renewables-based electricity; renewably-generated electricity RET Renewable energy technology RF Renewable fuels: comprises at least automotive biofuels, including biomass- based hydrogen to be used as biofuel (definition based on the RF Directive) RFC Renewable fuels certificate RFS Renewable fuels standard: a regulatory minimum share for renewable fuels in the total consumption of automotive fuels within a jurisdiction RPF Renewables portfolio standard: a RES-E support system, in which the regulator sets a minimum share of total electricity supply or demand in a jurisdiction to be sourced from eligible RES-E sources TGC Tradable green certificate: synoym of REC (term used in current EU legislation) Toe Tonne of oil equivalent, equal to 41,868 MJ (IEA definition) TPES Total primary energy supply 4 ECN-C--03-113 SUMMARY This report focuses on some specific features of renewable energy policies in the European Un- ion. It discusses among others the appropriateness of current approaches regarding the setting of (portfolio) targets for renewables, in particular biofuels, and the issue of harmonisation of re- newable energy policies among the Member States. The main research questions are: • Should renewables contribute as envisaged by the European Commission to meeting de- mand in the EU energy markets, the electricity and automotive fuel markets in particular? • Does the European renewable energy policy framework leave room for improvement? Main energy policy considerations The general EU policy objectives considered most relevant to the design of energy policy are: (1) competitiveness of the EU economy, (2) security of energy supply, and (3) environmental protection. All renewable energy policies should be measured by the contributions they make to these goals. Overall competitiveness is pursued by liberalising the EU electricity and gas markets and by separating of production, transportation, and distribution activities of gas and electricity. The European Commission aims for a single EU market. This requires the integration of the EU en- ergy markets including, in view of their planned greater weight, renewables. The Green Paper on energy supply security (EU, 2000) paints a dismal long-run picture in which the Union’s dependency for gas and oil on extra-territorial sources, geographically con- centrated, grows alarmingly. Diversification of primary energy sources and supply regions is recommended. By implication, renewable energy should be vigorously stimulated, although this is hardly elaborated. The Green Paper focuses on managing demand growth and supply depend- ence as main policy priorities: • Demand growth should be managed through fiscal measures. By removing externalities, existing price distortions among both energy carriers and Member States, energy prices would reflect their real costs, including environmental costs. Priority demand sectors for which the growth of energy use should be controlled most urgently are transportation (espe- cially road transportation) and buildings. • Supply dependence management. The Green Paper suggests, among a host of other meas- ures, that new renewables should be vigorously stimulated. The ‘Community Guidelines on State Aid for Environmental Protection’ (EU, 2001a) offers a framework for assessing the compatibility of various forms of State aid for renewable energy development with the Community’s internal market and competition regulations. These Guide- lines, unfortunately, leave ample room for Member States to introduce distinct incentive sys- tems. By not firmly guiding Member States towards the transparent frameworks and readily ac- cessible legal procedures that underpin a level-playing field, these Guidelines will not halt the ongoing fragmentation of the Internal Market, as far as renewable energy sources are concerned. Framework for EU renewable energy policies The Renewable Energy White Paper states that indigenous renewable sources of energy will