From Fixed Feed-in-Tariffs to a Power Exchange Market: Advancing or Deterring Investment in Renewables?

by Maria Wirth

The popular Feed-in-Tariff (FiT) system in place in several countries in the European Union enabled renewable energies to cover 48% of the EU power mix in 2015. Intended as a temporary measure, the tariffs are subject to continuous degression. Amid cases of disproportional cuts, investors are threatening to turn away from renewable energy projects as they become increasingly unfeasible. Concerns for grid stability, challenged by intermittent power generation, are promoting a long-term policy shift from fixed tariffs toward tougher competition and market-oriented mechanisms. But prices determined by the power exchange market will increase uncertainty and may favor the larger players, undermine de-carbonization and deter investors interested in expanding renewable energy generation.

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FiTs are fees granted to renewable energy producers by law as a long-term security and have successfully promoted investment in this sector in the past. Prices are fixed for a set time period and lower FiTs only apply to projects entering operation after their adaptation. Periodic degressions are intended to follow cost reductions of the technologies until they reach cost-effectiveness without subsidies. At the moment, solar photovoltaics (PVs) are the only technology experiencing a learning curve, according to Mario Ortner, managing director of iC projecte and an investor in and developer of renewable power plants in Europe and China. He fears a standstill of wind and solar PV installations as projects simply cannot break even, except in specific areas blessed with optimal conditions of wind or solar radiation.

Based on the learning-curve argument, the Austrian FiT for solar PV was cut by 37% from 2013 to 2015 and was lowered another 28% in 2016 to 8.24 cents/kWh. A raise in subsidies to cover 40% of investment costs serves as a balance but is only granted to building-integrated PVs and systems below 200 kW. Meanwhile, the FiT for wind energy was cut by 2.4% to 9.04 cents/kWh, biogas by 1.3% and all other technologies by 1%. Conditions vary significantly across Europe. While Germany provides higher tariffs, slower degressions and includes large-scale systems, the United Kingdom slashed FiTs for solar PV by up to 63.5% and for wind energy by 38% from last year. These cuts threaten 18,700 jobs in the solar industry alone, according to the UK government’s own impact assessment. UK Energy and Climate Change Secretary Amber Rudd justified the radical policy change with his priority to ensure low energy bills for households: “When the cost of technologies come down, so should the consumer-funded support.”

Currently, the FiT mechanism is combined with quotas to avoid excessive power installations. Together they drive up balancing costs and reactive power input in order to maintain grid stability. The high variability of renewable energy generation poses a challenge to grid operators, as capacity fluctuations complicate balancing needs. Advances to retrofit existing grid systems will include more flexibility in energy systems and an expansion of the power exchange market. Rainer Baake, state secretary at the German Federal Ministry for Economic Affairs and Energy, is pushing toward reverse auctions instead of the FiT regime. The father of the German green-energy policy Energiewende sees a benefit in cheaper prices. According to RenewEconomy, critics argue that small projects and small investors will no longer be able to compete.

Deregulatory changes in the EU’s grid systems have been underway since 1999. A commercial and legal unbundling has already separated formerly monopolistic energy utilities into several units, namely generation, transmission, distribution and energy trade. While the deregulation of the energy sector has resulted in independent power producers and contributed to the rise of renewables, grid operators face increasing challenges in providing a consistent base load. Governments have therefore introduced quotas to keep new installations within the capacity of the grid’s system. Günther Brauner, head of the Institute of Energy Systems and Energy Economics at the Technical University of Vienna, sees a long-term removal of fixed subsidies and their replacement by flexible prices determined on the power exchange market. According to Brauner, “This would also be fair to the residual power plants and would bring [in] incentives to [enhance] competition in the renewable energy market.”

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In his interview with Polemics, Ortner argued that renewables are unique in cost transparency, and all other technologies have been supported by strong subsidies in the past. FiT cuts at this pace therefore make little sense. Reducing incentives and increasing risks of capital coverage and return will deter risk-averse investors. Ortner calls for a greater focus on hydro storage, which could help achieve supply security with renewables.

Indeed, Ariola Mbistrova, finance analyst at the European Wind Energy Association (EWEA), projects a dip in investments in the UK in 2016. Due to the drastic policy change toward auctions at the start of this year, investors in Britain rushed to close deals within the 2015 regulatory framework. Those who did not make it in time, pulled out. The solar industry released a wave of backlash against the proposed changes in August. In his statement, project developer at Energy for the World GmbH, a solar power company, Axel Puttkammer criticized the government for “creating massive worries for investors… we will stop our UK development activities after installing the current projects.”

Tariff reductions must be considered in light of the fact that 2014 and 2015 were record years in terms of the installation of new renewable power plants. Further, Germany and the UK accounted for the vast majority of cumulative investments, particularly in wind energy, according to the latest numbers published by the EWEA. According to Mbistrova, decreasing financial incentives are not the source of the problem, but rather the diverse regulatory schemes. It is remarkable that almost 60% of the money spent on wind energy in the last six years came from Germany and the UK. This has led to a narrow concentration in the two countries, and in other countries with optimal conditions, such as Spain and Italy, not one wind farm was installed in 2015.

It seems as though the rigid setup of our grid systems is a limiting factor to the desired rapid expansion of renewable energy. “The future trend…is deregulation,” Brauner emphasized. “Free real-time tariffs and additional regulation for predominant renewable electricity will lead to efficient systems,” he explained, but “there is still some work to be done to develop new market models.” The Vienna-based expert interacts directly with grid operators, developing business models to adapt grid systems to benefit from the growing capacity of renewables. “This system is not yet developed, but there is a need for big change,” he told Polemics.

Wind and solar PV were the two big drivers of the EU power mix in 2015. But it remains to be seen how drastically policymakers will re-evaluate this delicate set of incentives in the future, and how investors will react to heavy rates of degression as well as deregulation. Learning curves may evolve, but if they continue to stagnate, large actors producing at dumping prices will profit from increased investment. In the meantime, novel grid-system flexibilities and real-time pricing schemes may do their part in expanding the amount of wind and solar electricity admitted to the grid, bringing Europe one step closer to a climate-friendly economy.

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