Financing Renewable Energy for Europe: The way forward
Renewable energy is of manifold importance in the context of climate change. Despite the advantages of adopting renewable energy as a major source of energy, several challenges have to be overcome before its wider adoption by different European Union (EU) member states (MS). The financial and economic crisis of 2008 was a great setback for the renewable energy industry and led to a substantial weakening of policies in various EU countries. Ex post changes in Feed In Tariffs, in particular, have led to reductions in investment. So far, greenhouse gas mitigation (GHG) policies have provided a much lower incentive for renewable energy than support policies. On the other hand, renewable energy support policies have had detrimental effects on GHG mitigation. The harmonisation of renewable energy support policies may eventually improve policy performance.
This is a summary of the policy brief on Financing Renewable Energy for Europe, published by the EU-funded POLIMP project in December 2014.
Cost-effectiveness of renewable energy support schemes
As long as renewable energy have higher unit costs than fossil fuels, and the external costs of fossil fuels are not internalised in the energy price, public intervention is necessary to support the development and diffusion of technologies for renewable energy generation. This is also due to barriers such as the high share of investment costs in the total costs as well as the intermittency and greater technology risks of renewable energy.
Renewable energy support is mostly either covered by the public budget or by levies added to regular electricity prices. In the majority of EU MS, with the exception of Luxembourg and parts of Belgium, the costs of renewable energy support are imposed on electricity consumers in one way or another. In this context of a financing mechanism for support schemes, costeffectiveness refers either to minimising the costs to taxpayers (public budget) or to minimising the costs to energy end users (adding a levy per unit of energy generated additional to the energy price).
How to implement cost-effective renewable energy policies
Cost-effective renewable energy policies require the involvement of all participating actors in the decision processes regarding modifications of support schemes. For example, if all stakeholders in a support scheme agree to maintain support levels but introduce a new levy and eliminate overcompensation, the costeffectiveness of renewable energy support can be ensured without difficulties. Cost-effectiveness is a matter of choice of instruments; implementing the right design parameters and the best mixes of policy instruments is thus crucial. Important design features for cost-effectiveness are longterm legal commitments, flexible support schemes, transparency, planned review periods and the implementation of cost-control mechanisms, as well as the accomplishment of cooperation mechanisms and harmonisation.
How to achieve greater harmonisation of renewable energy support schemes across the EU?
A full harmonisation of the EU support scheme is unlikely in the short term, but a better coordination and the use of cooperation mechanisms could be a first step. Harmonisation should not become a pretext for „freezing‟ renewable energy support policies. Up to 2020 only a limited number of projects under the cooperation mechanisms are likely to emerge, but a few pilot projects could provide important lessons. Several EU member states are considering the opening of their support schemes to foreign investors in order to avoid conflict with state aid rules. The future of the cooperation mechanisms depends on the EU 2030 energy and climate framework that is currently under discussion. If there are no binding national targets for renewables, the EU‟s internal cooperation mechanisms may lose their role. For example, if there is an EU-wide target within a uniform support scheme applied throughout the EU, there is no role for cooperation mechanisms except for joint projects between MS and third countries. The need to open up EU support schemes based on EU state aid provisions, however, may be a trigger for more convergence of the support schemes, regardless of the detailed design of the 2030 energy and climate framework.
The full policy brief on Financing Renewable Energy for Europe, written by Axel Michaelowa (University of Zürich) and Andreas Tuerk (University of Graz) can be downloaded at the POLIMP project website.
The policy brief on financing renewable energy in Europe is an output of the EU-funded POLIMP project.