The proposed EU renewables directive

A report from the discussion webinar held on Friday 22nd February 2008.

On the 23rd of January, the European Commission launched its final proposal for a Directive on the Promotion of the Use of Energy from Renewable Sources.

Leonardo ENERGY addressed this proposal on a discussion webinar on February 15th 2008. The focus was on the Guarantees of Origin (GoO) system that allows for cross-border transfers and on possible discrimination of certain renewable technologies. Furthermore, grid access issues and the internalisation of grid enforcement costs were also discussed.

The following are a few of the major points arising from that discussion.

1. The proposed directive and its target

The main reason for creating this directive on renewable energy is, of course, the limitation of CO2 emissions throughout the EU. Some participants of the seminar expressed their doubts as to whether we really need a directive on renewables for this. A directive on CO2 emission reduction alone would have the advantage that each Member State could choose its own balance between renewable energy, energy savings, and nuclear energy for limiting CO2 emissions.

The renewables directive sets a mandatory target of a 20% share of renewable energy in the final energy consumption of electrical, heating and cooling applications. This overall target is divided among the Member States according to their GDP. It also sets a target of a 10% biofuels share in transport, equal for all countries.

Each Member State will have to develop a National Action Plan by 31st March 2010 for reaching their national target. Those plans will have to be approved by the European Commission.

The approach of this directive has been criticised for being autocratic, since it poses a high level of obligations to the Member States. However, most participants in the discussion seminar agreed on the fact that the approach was preceded by several in-depth assessments that proved such an approach would be required if we are to reach the target.

2. How do Guarantees of Origin (GoO) function?

In each Member State, the GoOs should be managed by a Single Competent Body.

Each calendar year, a renewable energy (RE) producer can request GoOs to the Competent Body for all the energy of renewable origin he has generated. Once they are issued, the GoOs are written down in a National Register.

Under a support aid scheme (feed-in tariffs, premium payments, tax reduction, calls for tenders), the RE producer will use its GoO to receive the designated aid. Under an obligation scheme (obligation to power producers to have a minimum share of RE), the RE producer can either decide to “use” the GoOs to comply with his obligation, or he can sell the GoOs to another producer. This second producer can then use the GoOs to fulfil his obligation.

Once the GoOs are used, they are cancelled from the national register. The number of cancelled GoOs is used to count the Member States’ contribution to the target.

Once a Member State has reached its intermediate target for a certain year (indicative trajectory), the GoOs can also be sold to other Member States (provided those need such GoO in order to fulfill their targets)

GoOs can also be issued to RE producer in a third country, outside the EU, who will then sell them to a EU producer. This is only allowed if the transaction is coupled to a physical transfer of the energy across the borders and the third country has implemented a GoO system compliant with EU standards.

Finally, should a country decide to set obligations regarding the RE share to energy suppliers or energy consumers, GoOs can also be used to verify those.

3. Guarantees of Origin: advantages and drawbacks

A GoO system has the advantage that it introduces flexibility in terms of the choice of regions in which the investments in RE are economically the most efficient.

However, some participants in the discussion expressed doubts as to whether we really need GoOs. It results mainly in “the picking of low hanging fruit”, since it discourages investments in less evident countries or technologies. More particularly, inside a country, GoOs make it difficult for more expensive renewables like photovoltaic energy to compete with cheaper, already more developed technologies like wind energy, contrary to a system with only feed-in tariffs.

The fact that the GoOs can also be issued in third world countries can be narrowly seen as regrettable, since the investment capital and jobs will consequently also go to that non-EU country, additionally to a decreased energy independence. However, all climate policy can influence regional investment patterns. Also, some neighbouring countries as North Africa have proven to have an excelent RE potential (particularly solar resources): cross-border cooperation would bring global advantages, particularly in the field of climate change mitigation.

4. Stimulating the development of new renewables

So, what is the best road to stimulate renewables and reach the ambitious targets? A few participants in the discussion seminar stated that Renewable Obligations combined with feed-in tariffs are probably the best way to differentiate and stimulate renewables that are in a more early market development stage. However, this statement should be put into perspective, since certificate schemes as well can be differentiated between various types of renewables.

In any case, the variable price of GoOs results in a higher risk for investors in RE than if they could rely on a fixed feed-in tariff. Conversely, GoOs are more compatible with our culture of risk-based capitalism.

Obligation schemes already exist, such as in the UK, where renewable obligations are posed to energy suppliers, independent from production and the GoO trading market. It is also interesting to look at systems that are applied outside the EU. In Brazil, for example, the distribution utilities are obliged to distribute a certain share of renewable energy, for which they can charge a fixed extra price to energy users.

5. The dispatchability of renewables

If the EU Member States are able to reach their target, the question is still whether the transmission and distribution grids will be able to manage such large shares of intermittent energy sources.

In the UK and in many other countries, renewables are currently dispatched as “negative demand.” This means that demand estimates are made, then the renewable production estimates are withdrawn from that figure, and the remaining part is dispatched among the “reliable” production units. The question is, until which share of renewable production this method can be maintained? For high penetrations of RE, the current infrastructure and management of the grid is insufficient, so investments will have to be made here.

The dispatchability of cross-border traffic is another crucial issue. With a high penetration of renewables, adequate capacity and a trading system for cross-border traffic will be required.

A point that is often forgotten, as mentioned by one of the discussion participants, is the impact of renewables on the other generation units has also to be assessed. Those units will have to operate more intermittently than before to compensate for the intermittency of renewables. This will result in a lower efficiency for those plants, meaning higher fuel consumption and more emissions per MWh generated. Currently, the intermittency risk is carried by the system, for example by the transmission system operator.

6. Internalization of grid costs

If renewable production units require extra distribution and transmission capacity, who has to pay the investment? How can the costs of grid development be internalised?

Do renewable energy producers have to pay only for the connection to the nearest public network line? Or do they have to participate as well in the investments to strengthen the existing grid? And if the latter is the case, to what extent do they have to participate? It would be unfair if the first RE investor had to pay for the new line, while others could join for free later on. It would be equally unfair for several RE units to connect without extra cost, until a certain unit was the last drop to make the cup run over and had to invest all alone in a transmission line upgrade. So, if RE producers are to participate in grid improvements, a certain repartition will be required. An entity having a global view over all the potential projects and grid access demands could organise this planning and repartition.

For dedicated lines, the problem is less complicated, but still the question remains up to what point to charge the renewable energy producers for access.

Also, in the case of massive transfer of GoO from one country rich in RE sources to other countries, the first would have to support an increased development of its distribution grid. GoO transfer price between countries should internalise the cost of this grid development, otherwise the "RE rich" country would be supporting charges having to be financed by the target country.

7. Accessibility for small RE producers

A last point discussed on the seminar was the complexity of the GoO system, creating a serious barrier for individual owners of small RE production units. The UK certificate system clearly demonstrated this problem. For an individual annual production of one MWh, this system is costing the producer no less than £56.

So, for the GoO system, individual RE producers will have to be represented by some Supplier Agency that can take on all the coordination, administration and trading of the GoOs.

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