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Policy News, BB200710

A new legislation for renewables: EWEA’s recommendations and fears

05.11.2007

RES Directive

In March 2007, the EU Heads of State agreed upon an EU binding target of 20% renewable energy sources (RES) by 2020, and tasked the European Commission with the preparation of a comprehensive directive that would define the details of the commitment. The new directive will propose, amongst other things, the distribution of the 20% between Member States, and regulate the content of the national renewable action plans. It should also address the main barriers that are hindering the deployment of renewable energy sources in their three main applications (electricity, heating and cooling, biofuels) and ensure that the RES target is in line with the other targets that have been agreed (20% of GHG as measured by the EU’s Emissions Trading Scheme and 20% gains in energy efficiency).

The European Wind Energy Association has published a position paper which expresses the opinion of the wind energy sector in relation to the upcoming legislative process. The paper stresses the key role that wind energy can play in meeting the RES target; namely, that wind can provide 180GW of installed capacity by 2020, equivalent to around 12% of the predicted EU electricity demand by that time.

EWEA Position Paper

First of all, it is possible that the directive will broach the subject of a harmonised support scheme for the 27 EU Member States. In 2005, the Commission declared that it was “not appropriate” to put one in place, and for EWEA this is still the case. The Association believes that experience is still too limited, and that a comprehensive analysis of all the factors – not only the payment mechanism - that influence the profitability of renewables should be carried out. It believes that the creation of a single competitive electricity market is a pre-requisite for harmonisation.

For EWEA, the national renewable action plans must be legally binding and contain specific sectoral targets - for electricity, heating and cooling and biofuels - so as to facilitate the creation of the appropriate infrastructure and to provide clear signals to the investors. Regular progress reports are necessary, in order to follow up on the meeting of objectives.

Regarding the greenhouse gas (GHG) targets – a reduction of 20-30% by 2020, compared with 1990 levels - EWEA believes that the EU’s Emissions Trading Scheme (ETS), which aims to cut GHG within some priority sectors, should remain separate from the RES legislation, as the ETS does not take into account the benefits of wind energy and RES such as security of supply, competitiveness or job creation. In the Association’s view, the renewable and energy efficiency targets should be considered first, in combination with the emissions reduction they provide, and then the remaining CO2 targets distributed.

Priority grid access must also be reinforced for RES. Gate-closure times should be reduced, for improved forecast accuracy. Administrative barriers should be diminished by means of a one-stop- shop system and clear guidelines to investors.

The “Virtual Trade” possibility

One of the key – and most controversial elements – of the draft legislation is the possible proposal to introduce “virtual” trade, which could allow for the exchange of Guarantees of Origin (GoO) from renewables in order to help achieve the 20% target. At the time of writing, it is not clear what the Commission means by trade: it could range from a mandatory system where all Member States are obliged to make their support scheme available to all producers of renewable energy heating and electricity, or it could be a voluntary system based on bilateral agreements between Member States. The uncertainty on the content and details of this proposal is reinforced by the lack of any impact assessment on the matter.

EWEA believes that it would be unwise to introduce a virtual trade mechanism as currently debated, not least because there is no clarity about what exactly it is. What is clear is that preconditions for such a system that must be met, but there is no analysis to suggest that those exist. It is EWEA’s view that the legislative proposal should focus on how to increase physical trade of renewable energy across borders, e.g. through stronger interconnectors. Furthermore, better competition in the internal electricity market must be achieved first. With virtual trade, there is a risk that Member States will enter into a strategic gaming exercise of frequent adjustments of their national frameworks in order to ensure that their support system is attractive enough to maintain domestic action, while avoiding attracting foreign exporters. This would lead to increased uncertainty and cost.

For the European wind energy sector, another precondition is that it must be established by some degree of certainty that virtual trade will make it easier for Member States to reach their targets cost effectively, that it will attract investors and increase their confidence, and that it will not unintentionally undermine existing well functioning domestic support systems for renewable electricity. EWEA asked the European Commission twenty key questions in early October: answers to these must found in an independent analysis before virtual trade can be proposed.

“Nobody can be against trade. But the discussion should focus on the preconditions for trade rather than trade itself. Otherwise the discussion becomes tantamount to debating how we re-enter the Earth’s atmosphere and land at Cape Canaveral before having even thought about how to build the space shuttle,” commented Christian Kjaer, EWEA chief executive in a press release issued in early October.

Introducing a virtual trade system that allows one country to import part of its renewable energy target from another only makes sense if the country which acts as the seller is over-performing in comparison with the target it has been assigned, and the country which acts as a buyer is underperforming. Otherwise, we run the risk of creating a market without liquidity, and where all the parties involved are lagging behind their obligations.

An alternative way forward, EWEA suggests, would be the creation of an EU fund. This would pay each kWh of electricity that exceeds the national target, thus alleviating the financial burden of the Member States that are performing well. A slightly different option would be the creation of an fund in which the countries (where feed-in tariffs exist) or companies (guarantees of origin model) that foresee difficulties in complying with the target internally could place a pre-defined amount of financial resources to be used by countries/companies who can over-achieve their national target/company quota, so that the EU overall target can be met.

New research by the Fraunhofer Institute, EEG and Ecofys looks into some of the major issues surrounding the virtual trade question. The research concludes, like EWEA, that the trade issue needs further analysis, and that it is too soon to implement it for the time being. It estimates the cost of such a system to be 50% higher than a system based on the current national mechanisms.

It points out that a “virtual” trade system should be a voluntary one, so that domestic support schemes are not undermined. The system should be based on long-term contracts, to avoid RES producers cherry-picking the most favourable support schemes. It ought to include technology specification, because if the GoO is kept at one global price, low-cost technologies will be subject to greater exportation and high-cost ones imported, which will distort the market.

Read EWEA's position paper
Read Fraunhofer, EEG, Ecofys research paper

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