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ELECTRICITY MARKET REFORM

Keeping the lights on in thecheapest, cleanest way

ENERGY PRICES Without reform,

we’ll all be in the dark

- The economics of climate change

- New Feed-in Tariff levels for large-scale solar announced

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IntroductionInprint

Published by:Henley Procurement Publishing Ltd.Trans-World House, 100 City RoadLondon EC1Y 2BP, UKTel: +44 (0) 207 871 0123Fax: +44 (0) 207 871 0101E-mail: info@civicenergy.co.ukWeb: www.civicenergy.co.uk

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Printed by Quentin PressCivic Energy Volume 1, 2011ISSN: 1757-1197

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Publicity around the challenges presented by climate change has forced the UKgovernment to take action through policy. Government policy has a profound effect on the way public sector institutions manage their day to day business in an increasingly difficult funding environment.

Civic Energy is a dynamic resource to help the UK public sector achieve mandatedenvironmental targets. As a freely available resource with a focus on “real world” case studies and achievable actions, Civic Energy, helps public sector institutionsand in particular local authorities tackle the technological, procurement, management, educational and financing issues around leading the low carbon transition. The accessible and informative nature of the publication will support public sector institutions in the UK, helping them develop business cases for the implementation of new low carbon reduction technologies and identifying and adopting best practices for procurement and finance.

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Contents

Contents

4 News

6 Products

10 Project Focus Chris Whitmore

12 Electricity Market Reform: Keeping the lights on in the cheapest, cleanest way

15 Energy prices: Without reform, we’ll all be in the dark

20 The economics of climate change

23 New Feed-in Tariff levels for large-scale solar announced

28 Ur abore dolorum sedisqui ut et voles nem nis eatio tem

36 sundis sequam ut et ellorem in cullati onsequas reium am

42 Wind energy to power UK by 2020?

46 New Feed-in Tariff levels for large-scale solar announced

26 Policy recommendations for European photovoltaic markets

42 Wind energy to power UK by 2020?

Contents

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The behaviour of PV markets over the last decade in Europe has taught us that not only it is necessary to optimally design support schemes, but that priority access to the grid for renewable energy sources and the reduction of administrative barriers are the key market drivers for sustainable development and essential for the markets to sustainably develop in the long term. This paper provides an overview of Europe’s PV market performance and delivers policy recommendations by means of EPIA’s PV Observatory model.

Policy recommendations for European photovoltaic marketsMarie Latour, European Photovoltaic Industry Association (EPIA), Brussels, Belgium

INTRODUCTIONThe monitoring of support schemes and the consequent development of markets throughout Europe has, until now, led to the conclusion that for a market to develop in the long term three essential conditions need to be met, otherwise the attempt will fail. These are:

1. The support scheme in place needs to be sustainable in the long term.

2. The administrative authorization process needs to be streamlined.

3. The grid-connection process needs to be efficient.

Many of the lessons that have a lready been learnt come from Germany which has the longest and most successful experience so far. Furthermore, the Spanish case in 2008 and the Czech Republics more recent experience have shown that had these countr ies been given the chance to benefit from a larger experience in more advanced markets, the situation could be vastly dif ferent today. Other markets are opening or reviewing their support in Europe, but on a global scale, EPIA believes that to sustainably develop in the long-term, these markets could learn a lot from the experience of their predecessors. The details of these recommendations are as follows.

IMPLEMENTING SUSTAINABLE SUPPORT MECHANISMSExper ience has shown that the most ef fective suppor t schemes so far for developing a PV market has been via feed-in tariffs (FiT) or similar mechanisms. These should be wel l designed and adjusted to a level which allows a market development. Feed-in tarif f laws introduce the obligation for utilities to conclude purchase agreements for the solar electricity generated by PV systems. The cost of solar electricity purchased is passed on through the electricity bill and therefore does not negatively af fect government f inances. In markets where FiTs were introduced as rel iable and

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predictable market mechanisms, they have proven their ability to develop a sustainable PV industry that in return has progressively reduced costs towards competitiveness. In order to be sustainable, it is critical that FiTs are guaranteed for a significant period of time (at least 20 years), without any possibility of their being retroactively reduced.

Feed-in premium (FiP) is a new mechanism that may prove to be a viable alternative to FiTs. Under the FiP, utilities pay a premium on top of the price of electricity while the invoice of the consumer is reduced by the amount of PV electricity produced. If PV electricity exceeds consumption, the difference should be eligible for a FiT.

However, the FiP concept is new and is yet to be proved. It should be carefully considered and worked out in more detail before it is tested on the market. With the growing penetration of PV in many countries, support policies can be fine-tuned in order to drive the development of a specific market segment where this is relevant. D i rect consumpt ion premiums, additional incentives for building-integrated PV (BIPV), compensation for regional irradiation variations, orientation premiums such as east or west-oriented PV systems, as well as storage premiums are all examples of possible additional provisions.

Encouraging development of a sustainable marketSustainable market growth allows the industry to develop and creates added value for society and the economy as a whole. A cr it ical aspect of sustainable development is ensuring adequate levels of profitability that in turn ensures the availabil ity of capital for investments while avoiding speculative markets. Consequently, investments in PV projects need to be on a par with other investments of equivalent r isk levels. F ig. 1 i l lustrates market developments under dif ferent support strategies. The green line represents sustainable market growth; the red line shows a rapid and uncontrolled market peak, followed by a collapse due to sudden

policy adjustment; while the blue line illustrates a stagnating market due to an incentive deemed insufficient. Assessing the profitability through IRR calculationsA l l ava i l ab l e suppor t scheme components ( inc luding F iT, tax rebates and investment subsidies) must be taken into account when ca lcu lat ing the interna l rate of return (IRR) of a PV investment. Its sustainabi l i ty must be assessed by considering all local factors that impact the relative profitability of a PV investment. Table 1 presents an estimate of average sustainable IRR levels in a standard European country. Those percentages need to be adapted depending on local market conditions.

Guaranteeing gradual market development An uncontrolled market evolution tends to create ‘stop-and-go’ policies that risk undermining stakeholders’ confidence and investor appetite for PV. In that respect, there is need for a flexible market mechanism that is able to take more rapid cost digressions in the market into account and to adapt support schemes in order to ensure a sustainable growth path. The market corridor (as introduced in Germany for example) regulates the FiT based on market development over the preceding period (i.e. quarter, semester or year). This allows FiTs to be adapted as to maintain growth

within predefined boundaries. The FiT level is decreased on a regular basis in relation to the cumulated market level over a period passing below or above a set of predefined thresholds (quarterly or semi-annual revisions). The review periods should typically be set once a year to keep the administrative burden manageable for governments and to remain compatible with the visibility needed for investment cycles.

Developing a national roadmap to PV competitivenessWith the ongo ing decrease in installed PV system costs and the increase in conventional electricity prices, the use of financial incentives will be progressively phased out as competitiveness is reached. A realistic roadmap to grid parity should be defined for every country along with concepts for market mechanisms that treat all electricity sources equally.

Ensuring electricity costs for consumers As the cost of renewable energy sou rc e s suc h as PV i s ve r y transparent to the consumer through the FiT component on the electricity bill, the same transparency should exist for the cost of electricity from other conventional sources. These typical ly benef it f rom signif icant government support schemes that are not always reflected in the electricity price but are financed through other public means; in particular taxes paid by the same consumers but not accounted for on their electricity bill. On average, estimates suggest that conventional sources of electricity generation benefit from seven times as much suppor t as renewable energy sources. In addition the lack

Figure 2. Administrative lead time.

Insufficientsupport Sustainablesupport Unsustainablesupport

Private investor <6% 6-10% >10%

Business investor <8% 8-12% >12%

Table 1. Internal rate of return levels.

Solar Energy

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of transparent carbon costs indirectly supports non-renewable energies.

The increased mix of energy from renewable sources such as PV has raised a greater awareness among consumers about the need to increase the ef f iciency of their electr icity consumption. While the FiT has a visible impact on the electricity bill, it is at least partially compensated by the decrease in electricity demand. In addition, marginal cost of electricity produced from PV systems after the expiration of the FiT period is close to zero, therefore electricity prices will benefit in the long term.

Most importantly, and in view of continued reduction of FiTs over time, the PV industry is committed to significantly reducing the cost of PV systems to make it an affordable, mainstream source of power.

STREAMLINING ADMINISTRATIVE PROCEDURESAlthough many countr ies have imp lemented suppor t po l i c i es favourable to PV, when it comes to realising PV projects the bureaucratic issues and highly complex procedures and requirements (such as notification, registrat ion or permits) tend to significantly hold back installation processes. As a result, the cost of projects is kept artificially high, hampering PV market development or requiring unnecessarily high levels of FiTs to compensate.

In order to assess the situation in a given country and faci l i tate comparisons with identif ied best practices EPIA – as partner of the PV LEGAL project – has been involved in the col lection of information on adm in i s t r a t i ve f r ameworks by national PV associations and sys tem deve lope rs . The ma in recommendations drawn from this

analysis are detailed in the following section. In order to identify the major obstacles to the success of the legal-administrative process, a series of key characteristics need to be assessed thoroughly:

y Transparency: the process must be clear and understandable; the information necessary to complete each step must be ava i lable, complete and exhaustive.

y Linearity: when multiple institutions must be contacted, it is essential that each institution’s approval does not depend on the decision of the following one.

y S i m p l i c i t y : t h e nu m b e r o f institutions required in the process must be justifiable and reduced to a minimum; redundancies must be avoided.

y Proportionality: the procedure must be proportionate and well-suited to the specific features of each market segment.

y Cost effectiveness: the total cost of the administrative process should not represent a consistent share of the entire cost of the project.

y Reasonable duration: the time necessary to complete the whole process must not exceed a few weeks, par ticularly in the case of smal l and medium roof top installations.

CO N C LU S I O N : O B S E R V I N G MARKET DYNAMICS TO ENSURE RAPID PV EVOLUTIONIn the context of the fast evolution of the European PV market in recent years, the need to permanently monitor market dynamics has led to the creation of the Photovoltaic Observatory. The Photovo l ta ic Observatory identifies recommended conditions for market development and best practices for the sustainable development of PV by basing its ana lys is on examin ing ex ist ing policies of several key countries. The Photovoltaic Observatory also focuses on relevant regulatory issues, financial incentives, administrative barriers and grid connection procedures.

The Photovoltaic Observatory aims to:

y Identi fy best practices among existing support policies in Europe;

y Promote market transparency and PV deployment in the energy sector across Europe; and

y Advise national decision makers on the successful implementation of their support policies.

T h e m e th o d o l o g y o f t h e P V Obse r va to r y i s based on the systemat ic s tudy of regu lator y frameworks in European countries a n d t h e i r i m p a c t o n m a r ke t development.

In this respect, the administrative barrier analysis refers partly to the PV LEGAL project while financial schemes are analyzed using, among other indicators, the Internal Rate of Return (IRR) methodology. The system price evolution is also assessed on a regular basis.

References[1] PV LEGAL [available online at:

http://www.pvlegal.eu]

Enquiries:European Photovo l ta i c I ndus t r y Association (EPIA)Renewable Energy House63-67 Rue d’Arlon1040 Brussels, Belgium

Tel: +32 2 400 10 13Email: m.latour@epia.orgWeb: www.epia.org/pvobservatory

Figure 3. Sample picture

Marie Latour is national policy advisor at EPIA. Within EPIA’s pol icy department she takes care of coordinating the activities with nat ional European pol icy stakeholders and makes sure the position of EPIA are conveyed at a national level. She deals with nat ional pol icy developments, supports national associations and manages the participation of EPIA in the PV LEGAL project. Latour led the communication activities of EPIA until 2008. She holds a Master’s degree in European Management f rom the Bordeaux Ecole de Management and Madrid Cámara Oficial de Comercio. She also holds a Master’s in European Affairs from the Institut Catholique de Paris.

About the Author

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