Electricity Generated from Renewable Sources and Emission Marketplaces
(1)
Dept. of Accounting and Commercial Law, Hanken School of Economics, Vaasa, Finland
7.1 General Remarks
EU law has increased investment in the generation of electricity from renewable sources (RES-E). There are different kinds of promotion strategies for renewables. They can be (1) regulatory or voluntary and (2) direct or indirect. Moreover, they can address (3) price or quantity. They can also foster (4) investment or generation.1
Investments in RES-E are regulation-driven rather than market-driven. The most important regulatory drivers include: authorisations; feed-in tariffs and alternative systems; priority access and dispatching; allocation of costs for grid connection; duties of the TSO/DSO; net metering; and guarantees of origin. The EU Emission Trading Scheme (ETS)2 is thus not the most important driver.
The EU ETS is a regulated system for the auctioning of emission allowances and emissions trading. It means cap-and-trade.3 Emissions trading is potentially important for electricity producers, because electricity generation belongs to the biggest sources of greenhouse gas emissions. Electricity producers no longer receive free allowances and have to buy them.
7.2 The Preferential Treatment of RES-E
7.2.1 Regulation
General Remarks
The combined effect of priority authorisation, grid access, dispatching, and feed-in tariffs is to: reduce the wholesale market price for electricity; reduce incentives to invest in electricity generation from non-renewable sources; reduce the scope of the free electricity market that works on a competitive basis; and increase subventions. Current regulation is expensive but does not seem to result in any major reduction in greenhouse gas emissions.4
Germany provides an example. Wind power and solar power capacity have been increased in Germany by very high feed-in tariffs under the German Renewable Energy Act (EEG, now EEG 2014). At the same time, it would not make much commercial sense to invest in new conventional installations. Conventional installations are not competitive, because wholesale electricity prices are kept low by the very low marginal production costs of wind and solar power. Emissions have been increased, because old coal-powered installations have the lowest marginal production costs.
EEG has not contributed to a reduction of emissions at the European level either. Because there is more wind power and solar power capacity, there is less demand for emission rights. The available emission rights have been used in other parts of the EU.5
Dependence on the current favourable regulation and high levels of future subventions is combined with exposure to legal risk as laws may change.
This can again be illustrated with German experiences. As the EEG 2012 regime was neither economically nor environmentally sustainable and the Commission had opened an in-depth investigation that focused on the reductions for energy-intensive users in December 2013, the Bundesregierung submitted a proposal for a reform. EEG 2014 was adopted in July 2014. Under the new rules, the renewables sector will be subject to competition from 2017 onwards.
Authorisations
The 20 % target will influence the authorisation procedure for the construction of new generating capacity. When Member States lay down the criteria for the granting of an authorisation, Member States must consider, for example: the nature of the primary sources; the contribution of the generating capacity to meeting the overall Community target of at least a 20 % share of energy from renewable sources; and the contribution of generating capacity to reducing emissions.6
Guarantees of Origin
Guarantees of origin are designed to increase demand for electricity from renewable sources or from high-efficiency cogeneration plants.
Guarantees of origin are regulated by the Directive on the promotion of the use of energy from renewable sources (RES Directive) (energy from renewable sources),7 the Directive on the promotion of cogeneration, and the Energy Efficiency Directive (electricity produced from high-efficiency cogeneration plants).8
A guarantee of origin can be transferred, independently of the energy to which it relates, from one holder to another.9 There is thus an electricity market and a market for the environmental benefit derived from the way the electricity was generated. While guarantees of origin is the term used in EU law, green certificates or electricity certificates traded under national systems are basically the same thing.
There is a joint Swedish and Norwegian electricity certificate (El-Cert) system.10 Each state gives electricity certificates to the owners of electricity generation installations for every produced MWh of RES-E provided that they fulfil certain standards. The standards are technology neutral. The certificates can be sold. The price is decided by supply and demand.11 Demand is secured by a quota obligation. In Sweden, electricity suppliers, some wholesale market participants, large self-generators, and electricity-intensive industries must own a certain amount of certificates.12 However, energy intensive industries are largely exempted from the requirement.13
There is also a joint market for contracts with El-Certs as the contract base.14
Feed-in Tariffs and Alternative Systems
The choice between feed-in tariffs and alternative systems such as government tendering systems and quota-based trading systems has a major impact on investment.
Feed-in Tariffs
Feed-in tariffs—in combination with priority access to the grid and priority dispatching—are the main mechanism for the Member States of the EU to give support to generators of RES-E. Feed-in tariffs attract plenty of investment where they are set above the generation level and sufficiently generous.
The Member States use many different feed-in tariff systems. Feed-in tariffs can be fixed (such as EEG 2012 in Germany) or variable. One example of variable feed-in tariffs is guarantee prices (such as in Denmark).15
In Germany, the biggest market in Europe, TSOs were required to purchase renewable power at fixed feed-in tariffs under EEG 2012.16 They were compensated by electricity undertakings further down the chain.17 Final consumers ended up paying the difference between market prices and the fixed feed-in tariffs.18 When market prices were negative, final consumers (who were not paid the negative prices for consuming more electricity) ended up paying even more.19
EEG 2014 distinguishes between two supported ways to market RES-E, that is, direct marketing (Direktvermarktung)20 and the sale of RES-E to the TSO.21 In the former case, the buyer pays the market price and the TSO a variable monthly premium on top of the market price.22 In the latter case, the TSO pays a fixed feed-in tariff. The fixed feed-in tariff is designed for small installations.23 A RES-E producer may choose the support system monthly in advance.24
Quota-Based Systems
Quota-based systems are used in some Member States (Sweden, Poland, Belgium, the UK, Italy, and Romania), in about 20 US states and the District of Columbia, and in Japan.25 The duty to comply with the quota can be allocated to suppliers (the UK, Belgium, Poland, Romania), generators (Italy), end-users (Sweden until the end of 2006), or a combination such as the combination of suppliers and end-users (Sweden since 2007). In any case, a market participant can comply with these obligations in three alternative ways. It can (1) produce tradable green certificates (TGSs) by generating electricity at an eligible renewable plant; (2) purchase TGCs from other eligible generators, other suppliers or traders, or exchanges; or (3) pay the penalty or “Buy-Out Price” set by the regulatory authority.26
The Swedish model with El-Certs has attracted interest in Germany that woke up to the cost of EEG 2012.27 (a) In Sweden, the capacity that qualifies for certificates is mainly new. Originally, some old capacity was allowed. This led to “free riding” capacities and “windfall profits” for plants that preceded the TGC system. (b) In 2007, the compliance obligation was moved from end-users to suppliers. Originally, there were tax incentives and investment subsidies especially for wind power plants.28
Government Tendering
The same with quota-based trading systems, government tendering systems are an alternative to feed-in tariff systems.29 They have been used in many states in the US and, in the past, in some European countries. However, European countries tend to replace government tendering systems with other systems, that is, a feed-in tariff system or a renewables obligation.30
Priority Access, Dispatching
Preferential feed-in tariffs are complemented by priority access to the grid (subject to some security of supply constraints31). Member States must ensure that TSOs and DSOs (a) guarantee the transmission and distribution of electricity produced from renewable energy sources and (b) provide for either priority access or guaranteed access to the grid-system of electricity produced from renewable energy sources. What applies to electricity from renewable sources applies to (c) electricity produced from waste or the production of CHP.32
For reasons of security of supply, Member States may also choose that priority must be given to the dispatch of generating installations using “indigenous primary energy fuel sources”. There is a cap of 15 % of the overall primary energy necessary to produce the electricity consumed in the Member State.33
Allocation of Costs for Grid Connection and Other Investment Incentives
Member States provide various investment incentives and investment-based tax incentives for electricity generation from renewable sources.37 The allocation of costs for grid connection can play a big role.
Allocation of Costs for Grid Connection
As major grid investments are necessary, incentives to invest in generation installations can also depend on the allocation of costs for connecting the installation to the grid. There will be: costs for connecting the installation to the grid connection point; and costs for upgrades in the distribution network and regional network.
The position of EU law is to allocate most costs to the system operators and to socialise them. (a) The main rule under the Third Electricity Directive is that the system operator is responsible for the system. The TSO is thus responsible for the connection of electricity producers to the transmission grid38 and the DSO is responsible for the connection of microgenerators to the distribution grid.39 (b) System operators have a right to collect tariffs. However, the tariffs must be non-discriminatory, and they will be fixed or approved by the regulatory authority.40 (c) As a result, system operators should bear the burden of most costs but allocate them to customers that share the costs in the form of tariffs.
EU law does not require system operators to bear all such costs. System operators must regulate the allocation of costs in their standard rules.41 Member States may nevertheless require transmission system operators and distribution system operators to bear such costs in full or in part when it is “appropriate” to do so.42
In practice, there have been different ways to allocate these costs in the Member States.
This can be illustrated with offshore wind farms. (a) In some countries, project developers have to pay for the construction of the line, transformers, and all other necessary installations for grid connection.43 (b) In Germany, the biggest market, costs for connecting offshore wind farms to the grid are allocated to the system operator.44 This rule has placed a heavy financial burden on system operators and increased their risk exposure. However, it has also increased investment in wind power.45 In order to mitigate the risk exposure of system operators, Germany decided to socialise part of the losses caused by the failure of system operators to connect offshore wind farms to the grid.46 (c) In many countries, costs for upgrades in the transmission network are allocated to the system operator (and socialised in the form of tariffs). (d) There are nevertheless exceptions. In Sweden, as an illustration, upgrades that benefit only the wind farm owner have been paid by the wind farm owner. When upgrades benefit others (mainly in the 400 kV grid), the system operator (Svenska Kraftnät, the Swedish national grid) pays part of the costs.47
The Duties of the TSO/DSO
The duties of the system operator are designed to increase the supply of electricity produced from renewable sources. A system operator has a general duty to act with due regard to the environment.48 In particular, the duties relate to:
grid access (the duty to grant electricity produced from renewable energy sources priority or guaranteed access to the grid)49;
transmission and distribution (the duty to guarantee the transmission or distribution of electricity produced from renewable energy sources)50;
dispatching (the duty to give priority to generating installations using renewable energy sources51 when the TSO is responsible for dispatching the generating installations in its area)52;
combined heat and power (a Member State may require TSOs to give priority to generating installations producing CHP when they dispatch generating installations)53; and
tariffs (there is a particular duty not to charge discriminatory tariffs for the transmission or distribution of electricity from renewable energy sources).54
Metering
Net metering, net billing, and two-way metering can change the nature of the market.
Net Metering
The introduction of net metering and net billing can increase microgeneration that is distributed generation and often generation from renewable sources. In the US, all public electric utilities are required, upon request, to make net metering available to their customers.55 Europe uses two-way metering instead.
Two-Way Metering
In the EU, the Commission has recommended “import/export and reactive metering” as one of the common minimum functional requirements for smart metering systems to promote distributed generation.56 Current tax rules are regarded as a barrier to full net billing.57
The new Energy Efficiency Directive provides for two-way metering at the request of final customers to the extent that Member States implement intelligent metering systems and roll out smart meters as set out in the Third Electricity Directive. According to the new Energy Efficiency Directive, Member States shall, at the request of the final customer, “require meter operators to ensure that the meter or meters can account for electricity put into the grid from the final customer’s premises”.58
Two-way metering may enable microgenerators to (a) sell electricity when it is generated and buy it when there is no generation, or to (b) buy electricity when prices are low and sell electricity when prices are higher. Moreover, an end consumer that puts RES-E into the grid may be entitled to (c) obtain guarantees of origin or green certificates that it can sell in the market.59
Two-way metering will obviously increase costs because it facilitates electricity flows in two directions. It will increase metering costs and—even more importantly—costs for grid security.
As a microgenerator can only sell small volumes, the allocation of metering costs—and the costs of grid access—can have a major impact on volumes put into the grid. (a) If the costs are allocated to microgenerators, the costs may in many cases exceed the income they would generate. This could reduce supply.60 (b) Allocation of these costs to the system operator would reduce the system operator’s incentives to provide services to microgenerators. (c) This leaves the socialisation of costs.
7.2.2 Signalling the Use of RES-E
For commercial reasons, suppliers may want to sell RES-E to end consumers and non-energy firms may want to signal that they use RES-E. They have alternative ways to signal that the electricity is from renewable sources. These alternatives can have an impact on the business models and operations of electricity producers.
The main options are procuring certificates, procuring RES-E, power purchase agreements, and ownership of RES-E generation assets. (a) According to Global Corporate Renewable Index 2002,61 purchasing credits or green certificates is the most popular option as it leaves much to the parties’ discretion. (b) Instead of procuring certificates, an end consumer can purchase RES-E under a supply contract. In this case, it can agree with its supplier that the contract electricity is RES-E. Electricity suppliers can “make or buy” RES-E. Electricity producers react by investing more in RES-E generation assets. (c) A power purchase agreement means that electricity is supplied from a certain plant under a long-term agreement. (d) An end consumer can generate the electricity itself, such as by investing in wind power or solar panels. This can increase demand for operation and maintenance services. (e) An end consumer can purchase carbon offsets. However, carbon offsets are not necessarily generated by renewable energy projects.
7.3 Emissions Trading
7.3.1 General Remarks
The EU introduced its own trading system for greenhouse gas emission allowances on 1 January 2005. The purpose of this market-based approach is to provide economic incentives for achieving reductions in greenhouse gas emissions. It is also designed to influence investment. Because an increased price of greenhouse emission permits would spill over into wholesale electricity prices, it could, in principle, have an impact on the choice of technology, fuel, and other cost factors.62 In practice, the system has been a disappointment.
The system is established by Directive 2003/87/EC (the ETS Directive).63 As a rule, these allowances are transferable64 and recognised by the competent authorities of other Member States.65 A Central Administrator designated by the Commission maintains an independent transaction log recording the issue, transfer and cancellation of allowances.66
The allowances are transferable between operators within the EU67 and to some extent even across the EU’s border.68 International trading is organised by the UN through the Green Development Mechanism.
International Emissions Trading
The Linking Directive69 facilitates a connection between Member States’ emission targets, trading in emission allowances, and international emissions trading.70
Under the Kyoto Protocol, industrialised countries can achieve part of their emission reduction commitments by investing in emission-saving projects in developing countries through the Clean Development Mechanism (CDM).71