Policies in Europe

The situation of energy supply in Europe is highly dependent on the import of energy products. Today more than 50% of its requirements have to be imported. If the present trends continue, this figure will increase to about 70% in 2030, with a growing dependency on oil and gas imports. In 1999, the cost of energy imports was more than €240 billion Euro for the European Union (EU-15), or about 6% of its total imports and 1.2% of its gross domestic product [3]. These figures show that the European Union has a vital interest in reducing its degree of dependence on energy imports, and on the other hand to improve the development and increase the share of domestic and sustainable energy resources. In comparison with the strategy of the United States to respond to the increasing demand of energy with an increasing supply, the strategic plan of the European Commission is to implement measures which promote the efficiency of energy use with respect to the reduction of energy demand without reducing the comfort of the customers. According to the point of view of the European Commission, the reduction of energy demand can get influenced more than increasing the supply. Besides these reasons, there are many more strategic motivations and benefits to support the expansion of renewable energies and energy conservation technologies. From an environmental point of view, the increased application of renewable energy sources, energy efficiency, and energy conservation reduces the effects of climate change by the reduction of greenhouse gases and pollutant emissions from conventional power plants. Looking from the economic point of view, the expansion of energy conservation and renewable energy technologies allows a sustainable development, creates knowledge, improves the job situation by creating local employment, and will lead to the development of new industry branches in Europe.

Directive #2001/77/EC of the European Parliament and the Council for the "promotion of electricity produced from renewable energy sources" [4] gives the legal framework for the exploitation of the renewable energy sources in the European Union in the internal market. The directive sets a community target of sourcing 12% of gross inland energy consumption from renewable energy systems by 2010, with an indicative figure of 22% for electricity. It also sets indicative targets for each member state. Furthermore, the directive obliges member states to report on the progress of meeting the national indicative targets, issue guarantees of origin of electricity produced from renewable energy sources, guarantee grid access for electricity produced from renewable energy sources, and assure transparent and nondiscriminating pricing for the grid connection of producers of electricity from renewable energy sources.

Although the European Commission has set general targets for all member states, it does not stipulate them to any mandatory and legally binding policies in order to reach the goals of increasing the share of renewable energy sources. In fact, the individual member states have their full sovereignty and are free to decide which policies they prefer as steering instruments of their choice. As a consequence, different policy mechanisms are applied on a national level in Europe. Based on reports of individual national governments, the report of the European Commission will evaluate the success and the cost-effectiveness of the diverse support systems with respect to specific national targets. If necessary, the Commission can make a proposal for one general and union-wide support policy for renewable energy sources. The Commission will present its evaluations in a report to the European Parliament with detailed information on the experience acquired with the application of the different mechanisms in its member states. The report is expected to be published by the end of 2005.

According to the subsidiary principle, the EU Directive does not require a community-wide framework for all the Member States. Thus, several support mechanisms and policies are applied in different EU member states in order to promote the development of renewable energies, especially in domestic markets. The hierarchy of national policies in context with the European and international policies is shown in Figure 2.1.

Other important directives and legal instruments that have been adopted by the European Parliament and Council in order to achieve the common goal of 12% share of renewable energies of EU-15 by 2010 and to support renewable energies and energy efficiency are, for instance, in chronological order: [5]

• Directive #2000/55/EC on energy efficiency requirements for ballasts for fluorescent lighting [6]

• Directive #2001/77/EC on the promotion of electricity produced from renewable energy sources [7]

• Regulation #2422/2001/EC on Energy Star labeling for office equipment [8]

• Directive #2002/31/EC on labeling of air conditioners [9]

FIGURE 2.1 Hierarchy of national and European policies. (From Schaeffer, Alsema, Durstewitz, et al., Learing from the sun — Final report of the PHOTEX project, petten, NL, 2004.)

• Directive #2002/40/EC on labeling of electric ovens [10]

• Directive #2002/91/EC on energy performance of buildings [11]

• Directive #2003/30/EC on the promotion of biofuels [12]

• Directive #2003/66/EC on labeling of refrigerators [13]

• Directive #2003/96/EC for the taxation of energy products and electricity [14]

• Directive #2004/8/EC on the promotion of cogeneration [15]

With respect to the directive on the promotion of electricity by renewable energy sources, (2001/77/EC) the most common policy options are premium feed-in tariffs, quota systems, tendering, investment support, fiscal support, and green pricing. These mechanisms can be distinguished into policies which aim at the support of the supply and demand of renewable energy. The supply of renewable energy is stimulated by mechanisms supporting investments and production. The demand for the electricity from renewable energy systems is promoted by mechanisms that aim at consumption. The principles of these policy measures are particularly:

Feed-in tariffs typically support the supply side. Feed-intariffs guarantee a minimum price or an additional premium to market electricity prices per unit of electricity paid to the producers of electricity generated by renewable energy sources. This mechanism is usually accompanied by the obligation to grid operators to take and refund the electricity with a special tariff. The fixed price or fixed premiums are set for a number of years to maintain investor confidence. They can be revised and adjusted by governments to reflect long-term marginal generation costs and to stimulate further costs reduction. The costs are distributed to final customers. Feed-in tariffs are in use in several EU countries, notably in Germany, Spain, France, and Denmark.

Quota-based systems can support both, the supply and the demand side. On the supply side, quota-based systems are forced by regulations on producers and importers of electricity to produce a certain share i.e., a quota of electricity by renewable energy sources. In order to fulfill the quota obligation, producers can either install new capacity or buy an equivalent amount of electricity from renewable energy sources by means of tradable green certificates. Certificates provide an instrument for production monitoring, accounting, and transfer of electricity from renewable energy systems. In case of incompliance with the minimum quota settings, the producer will have to pay a penalty. This mechanism is presently applied in Italy. On the demand side, the quota system is applied to distributors, suppliers, and consumers in the electricity supply chain with the obligation to use a certain quota of electricity generated by renewable energy sources. This system is now introduced in the U.K., Belgium, and Sweden.

Investment support is the classical mechanism used to bring new technologies to the market by giving a certain amount of compensation of the capital cost for new installations. The mechanism has a number of advantages—it is simple, market compliant, easy adjustable to applied technology, capacity, as well as geographical and market conditions. Investment subsidies reduce the risk of operators in the investment with new technologies. However, the support of capital investment, as well as other capacity-based subsidies, is not necessarily advantageous for the cost-effective operation of renewable energy installations.

Fiscal support for renewable energy systems can be applied in different forms as direct or nondirect measures in order to stimulate the supply. An example for fiscal support measures is the exemption from energy taxes for renewable energy systems. A production-dependent tax relief per kilowatt-hour electricity stimulates the supply from new as well as old installations. Other support options, such as reduced VAT rates can be similar as investment subsidies. They affect only investments into new installations. On the demand side, energy taxes and the taxation of CO2 emissions increase the price of conventional electricity, which indirectly favor and stimulate the demand for renewable energies because they reduce the cost shear between conventional and renewable production. Since 2002, the Dutch taxation system on energy was combined with a stimulation of renewable energy consumption. This measure has allowed prices from renewable electricity to come close or match those of conventional electricity in the private sector. As a result, a large demand for energy from renewable energies has been created, but due to the uncertainty of continuity of the instrument and international competition, it did not lead to a substantial increase in installed capacity.

Tendering systems involve a competition of proposals of potential investors who compete on a bid price per kilowatt or megawatt of electricity generation. Successful bidders earn long-term power purchase agreements. Additional costs of power purchase from renewable energy projects are financed by a compulsory levy to be paid from all customers. The tendering system mechanism is favored to be one of the most cost-effective options; on the other side, the necessary administrative overhead costs tend to be rather high as well. This mechanism is in use, in the Republic of Ireland, however, it was announced recently that Ireland will replace its support mechanism of competitive bidding for government contracts with a fixed price support mechanism [16].

Green pricing or Green electricity is an instrument based on the voluntary willingness to pay additional charges on the electricity bill of private individuals and commercial companies. Today "green tariffs" are the most common voluntary instrument to promote electricity from renewable energy sources. It mainly attracts private individuals with its opportunity to sponsor the further development of electricity from renewable energy sources by their willingness to pay additional charges per kilowatt to the regular tariff rate. However, till now, not many customers choose this support option. Table 2.3 gives an overview of the presently applied mechanisms in Europe (marked with (#), pointing out dominant ones with an additional exclamation mark (#!)).

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