Lauber - Bath May 2008 1

The struggle over support schemes for wind power

in the European Union

Volkmar Lauber

Where next for wind?University of Bath ESRC Research Seminar

Series, 9 May 2008

Lauber - Bath May 2008 2

Nature of the struggle

From the beginning, this was a struggle between incumbents (big utilities) and new entrants if the latter benefited from

• a modicum of political support (for RES-E, for a green industrial policy)

• a background ideology which attributed importance to SMEs for innovation, competition and the prevention of excessive market concentration

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Why no such struggle in the UK?

• Very small RES-E sector, dependent on utilities for contracts

• RES-E not supported by strong popular movement as in Germany (anti-nuclear movement, acid rain, Chernobyl, climate)

• Not supported by development of a promising renewables industry

• Thatcherite neo-liberalism stresses short-term market competitiveness and thus incumbents

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Where did the struggle originate?

In 1990, the German Bundestag – responding to a strong movement - adopted feed-in law against the preference of government & Bundestag leaders and big utilities (private member‘s bill)

The big utilities (based on coal and nuclear) did not like RES-E („no subsidisation of inefficient technologies“), much less a FIT

After unsuccessful efforts court challenges to the law (German ordo-liberalism is favourable to new entrants), the utilities turned to the EU (DG Competition) for help, arguing illicit state aid

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Commission action and rationale

• DG Competition took up this cause gradually, also influenced DG Energy (Papoutsis) which was following a line of deregulation/liberalisation (first electricity directive of 1996)

• Commission challenged FIT in courts (joined PreussenElektra case) and in drafts of RES-E directive proposals: „illegal state aid, against internal market“

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On RES-E directive, Commission draws on UK and Eurelectric

• In developing RES-E draft directive, the

Commission strove for harmonisaton on the basis of what it called ‚market-based‘ models ‚compatible with Electricty Directive‘

• Favoured tenders, later on quota/ tradable certificate schemes (QTC): ‚direct competition‘. Viewed NFFO as particularly successful.

• Big utilities also approved of those schemes (to keep RES-E down)

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Commission rationale in favouring quota/certificate schemes in 1999

• Greater static efficiency than FIT (RES-E prices would come down faster, profits become less excessive)

• Greater effectiveness: lower prices would lead to more rapid deployment

• Greater dynamic efficiency: direct competition would foster more innovation

In retrospect: off the mark on all counts

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Actors in favour of QTC (1999-2001)

Interest group level• Eurelectric, esp. big German utilities (but not

Spanish utilities)• BWEA, to some extent EWEAEuropean Union level• DG Energy until early 2000, then compromise• DG CompetitionMember States• UK, Belgium, Italy, Sweden, Denmark

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Actors in favour of FIT (1999-2001)

Interest group and NGO level• German and Spanish renewables assn.• Greenpeace, WWF

European Union level• Parliament

Member states• Germany, Spain (have most of the renewable

energy deployment, their claim of subsidiarity meets with sympathy in Council)

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Situation in 2000

• de Palacio replaces Papoutsis as energy commissioner 1999 (DG TREN)

• sensitive to Spanish interests (both utilities and RES-E industry for FIT/premium sys.)

• more pragmatic, not as ideologically neo-liberal as Papoutsis

• confronted with strong opposition against QTC harmonisation

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Directive 2001/77/EC

• Leaves choice of support system to member states

• Subjects these to discipline of state aid regulations (DG Comp. in 2000 initiated state aid proceedings also against new German EEG). Lawsuit and provision became irrelevant after Preussen Elektra case upholds German FIT

• Provides for report on performance of national support systems and for possible harmonisation proposal in 2005; also for long transition period

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New developments after 2001

• UK, Belgium, Italy, Sweden, Poland and Romania introduce TQC schemes in 2002 or later

• 18 member states adopt FIT (by 2008)

• In 2004, European Parliament rejects Kovacs as energy commissioner because of his uncritical support for QTC. Instead, Piebalgs takes this place

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Piebalgs position

• Strongly empirical, not ideological

• In 2005: „It is too early to decide which support scheme is best“

• Commission report in 2005 and 2008 clearly shows that FIT are superior to QTC

• Until 2007, Piebalgs resists demands from Eurelectric and some DGs (Enterprise and Industry - Verheugen) for QTC

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Actors in favour of harmonised QTC scheme (2007-2008)

Interest group level• Eurelectric, esp. big German (but not Spanish)

utilities, RECs, Europ Fed En Traders EFET • No renewables associations

European Union level• DG Enterprise and Industry

Member States• UK (most strongly), other QTC states to some

extent

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Actors opposed to harmonised QTC scheme (2007-2008)

Interest group and NGO level• EREC, EREF, EPIA. EWEA … (this industry is

much stronger now than in 1999-2000) • Greenpeace, WWFEuropean Union level• ParliamentMember states• Germany, Spain (have most of the renewable

energy deployment), Slovenia and Latvia are most strongly opposed

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Legitimacy of QTC regime?

• 2005 and 2008 Commission reports on per-formance of support systems (CEC 2008, 25-26 and 34) showed dismal results for QTC, particularly for wind (see next slides)

• Least efficient in terms of pricing• Highest profits • Lowest deployment (effectiveness)

This is in addition to their limited capacity for innovation (PV, marine energy)

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Price ranges (average to minimum support) for direct support of

onshore wind in EU27 (average tariffs are indicative) compared to long-term marginal costs (minimum to average costs). Support schemes are normalised to 15 years. CEC: SEC(2008)57, 25- 26)

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Historically observed efficiency of support for onshore wind: Effectiveness indicator compared to expected profit in 2006

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2007 coup with GOs

• In summer 2007 new Commission approch to virtual trade in RES-E becomes public: Guarantees of origin (GOs, introduced in 2001) can be traded, supposedly leave national support systems in place

• Various models are discussed, a December draft provided for unchecked EU-wide trading of GOs

• Would have destroyed FIT schemesCompromise at last moment January 2008: „Trade

may be controlled under certain conditions by national systems of prior authorisation“

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Directive proposal 23 Jan 2008, art. 9: MS may control GO transfer if it is likely that the transfer will

• impair MS ability to ensure a secure and balanced energy supply

• undermine achievement of environmental objectives underlying MS support scheme

• impair MS ability to meet targets or indicative trajectory interim targets

Commission may propose to modify these rules in 2014 (no medium-term security for investors!)

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What drives efforts for internal market for TC/GOs?

1. Neoliberal ideology/regulatory capitalist practice (deregulation in name of free market and reregulation friendly to large corporations)

2. Interest• Perspective of tremendous windfall profits for

generators (reaching about 30bn Euro per year in 2020 in estimate by Ragwitz/Schleich/Resch, Fraunhofer 2008)

• Perspective of concentrating those windfall profits on the big utilities (better able to take the risk posed by trading schemes and to extract higher returns for such risks)

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What drives efforts for internal market for TCs/GOs? (2nd)

• Perspective that utilities will be able to contain RES-E development (check on innovation) and deployment (check on market entry) unless they are overcompensated (also for retired fossil plant)

3. Power (veto power? As in case of ETS?)• Clout of power sector. This is the sector that is

able to secure windfall profits of about 20-48 bn (at prices of Euro 21-32/t of CO2) just in Germany and the UK (cumulative, 2008-2012(See Point Carbon Advisory Services, 2008)

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RES-E deployment by big utilities under QTC/TO scheme means slower development of RES-E

• Diversion of resources towards higher internal rates of return (compensation for „risk“), windfall profits and rents of incumbents

• Reduced availability of resources for innovation coming mostly from new market entrants

• Incumbent utilities able to check „disruptive“ innovation Utilities will attempt to adapt RES-E to their centralised structure

• Higher cost to consumer

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Bibliography• Commission of the European Communities (2008) Proposal for a Directive of the

European Parliament and of the Council on the promotion of the use of energy from renewable sources, COM(2008)19 final, 23 Jan. 2008

• Commission of the European Communities (2008) Commission staff working document: The support of electricity from renewable energy sources, SEC(2008)17, 23 Jan. 2008

• Lauber, Volkmar (2007) The Politics of European Union Policy on Support Schemes for Electricity from Renewable Energy Sources, in Lutz Mez (ed.), Green Power Markets (Brentwood: Multi-Science) 9-29