An end to support for renewables? The wrong battle to fight

 Fabio Genoese

On Friday, October 11th, the CEOs of 10 European energy utilities, which own about
half of Europe’s electricity generation capacity, convened a joint press conference in
Brussels to issue a warning that the European energy infrastructure is “in jeopardy”.
Modern power plants would soon be closed for good, because they are making losses under
the current market conditions. As a result, they warned the electricity system “may face
situations close to blackout (...) every winter from now on”. To explain the unfavourable
market conditions, they singled out the rapid increase of renewables in some member states
because of subsidies. The CEOs specifically mentioned Germany, which is currently forming
a new government. They called for an end to support for renewables because wind and solar
were mature technologies that no longer require support.


Is it only renewables?

Whilst it is true that conventional electricity generators (gas, coal) have been overwhelmed
by the speed with which renewables have been deployed, they have also overestimated the
demand for new conventional capacity. They are currently struggling with overcapacity and
wholesale market prices that no longer guarantee adequate remuneration for previously
profitable power plants.

By 'unfavourable market conditions', conventional generators essentially mean that they are
selling less electricity at lower prices. In fact, since 2008, the wholesale market price, i.e. the
price at power exchanges, has nearly dropped by half in many EU countries. No one would
contest that renewables are the major driver behind this development: renewables have
reduced wholesale market prices by pushing conventional, mainly gas-fired1 power plants
out of the market2 and, as a consequence, have also reduced the market share of conventional
producers.

But the causes go beyond renewables. The total electricity demand has still not recovered
from the 2009 decline caused by the financial crisis: The EU-27 electricity demand in the year
2011 was 95 TWh lower than in 2008 (-3%). This is a significant amount, as it roughly
represents the combined electricity production of wind, solar and hydro power in Germany
in 2012. Moreover, some conventional producers have overinvested in generation capacities
during the last decade. While the installed capacity of fossil fuel-fired power plants in the
EU-27 increased by 18% from 2000 to 2010, the expectation of a growing electricity demand
has not fully materialised, as the consumption only increased by 10% in the same period of
time.


Reforming renewable energy support schemes

It is understandable that conventional generators are calling for an end to subsidies for
renewables altogether in order to stop the build-up of renewable capacity. But how realistic
is such a move? The massive deployment of renewables has been a political choice and part
of the 2007/08 EU Climate and Energy Package. A reversal of this policy seems very
unlikely: as stated in the EU low-carbon roadmap,3 there is no decarbonisation scenario
without a full decarbonisation of the power sector and, according to the EU Energy
Roadmap,4 every decarbonisation scenario will feature a high share of renewables, i.e. at
least 64% in 2050.

Moreover, support schemes have succeeded in their objective of increasing the market share
of renewables while reducing their investment costs.

Despite this, conventional generators have a point. The negative effects of current support
schemes on today’s electricity system are greater than expected. This is mainly due to
uncontrolled growth, in some cases excessive subsidies, unconditional grid priority, and
more generally, a lack of market integration: Electricity should only be produced when there
is demand and, more importantly for renewables, production should be stopped when the
demand is satisfied5 in order to avoid negative market prices. In the short-term, further
adjustments are needed to increase the efficiency of support and to reduce its negative
effects, as enumerated below:

(1) Payments for renewables should not be fixed but rather should depend on the market
value of electricity (e.g. on wholesale market prices).

(2) Renewables should have to contribute to grid stability (i.e. they should have a scheduling
and forecasting obligation, which is usually referred to as ‘balancing responsibility’).

(3) Subsidy caps should be introduced (i.e. payments for renewables should be stopped once
the development targets have been achieved).

Defining such caps will also help conventional generators, as this reduces the uncertainty on
the need for conventional capacities. A harmonised EU policy is preferable but not
mandatory to improve the efficiency. Instead, common European framework guidelines
could be developed, where different support schemes are allowed to compete.
Payments for both capacity and electricity?

In the long-term, reforming renewable support schemes will not be enough to maintain
supply security. While the demand for electricity generated by conventional power plants is
in decline, the demand for secured power – which as of today is mostly provided by
conventional units – does not decline in the same way. This is why conventional generators
are asking to be paid for the secured power they bring to the market in addition to the

energy they produce. However, before putting an additional burden on consumers, it is
worth exploring alternatives.

Like in other grid-based services, it is not only about the delivery of a certain amount of
electricity. It also about having access to electricity, i.e. about the reliability of the service.
Still, the reliability part is mostly disregarded in contracts between consumers and suppliers.
A transition to a so-called ‘reliability pricing system’ could be a viable option in which nearly
100% reliability would be guaranteed for base load but not for peak demand. Consumers
could then choose between different ‘reliability’ levels for their peak demand. This could
reduce the need for secured power and therefore reduce overall costs. To help this transition,
other tools such as demand response based on smart grids and also involving DSOs should
be explored.

Given the unlikelihood that EU decision-makers will renege on their decarbonisation or
renewable energy targets, it appears that support for renewables is here to stay. Rather than
fight a battle against renewables, would it not be better for conventional generators to
explore new business models built around a reliability pricing system?

http://www.ceps.eu/book/end-support-renewables-wrong-battle-fight