EUROPEAN COMMISSION Brussels, 30.11.2016 SWD(2016) 418 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT

Accompanying the document Proposal for a Directive of the European Parliament and of the Council on the promotion of the use of energy from renewable sources (recast) {COM(2016) 767 final}

{SWD(2016) 419 final}



Contents Abstract accompanying the Impact Assessment 1.Introduction 1.1.Background and scope of the initiative 1.2.Context of the initiative 1.3.Links with parallel initiatives, approach taken for modelling, data gaps and other limitations 1.3.1.Links with parallel initiatives 1.3.2.Approach taken for modelling and limitations 2.What is the Problem and why is it a Problem? 2.1.Evolution of the problem and need to act post-2020 2.2.The problem areas and underlying main drivers 2.2.1.Problem 1 - Investor uncertainty 2.2.2.Problem 2 - Need to improve cost-effectiveness of deployment of renewable energy 2.2.3.Problem 3 - Absence of functioning markets 2.2.4.Problem 4 - Need to update the regulatory framework 2.2.5.Problem 5 - Lack of citizen-buy in during transition 2.3.The EU dimension of the problem 2.4.Who is affected and how 2.5.REFIT Evaluation of the RES Directive

3.Subsidiarity and the diverse situations in Member States 3.1.Legal base 3.2.Necessity of EU action 3.3.EU added-value 4.Objectives 4.1.General objectives 4.2.Specific objectives 5.Policy options 5.1.Options to increase renewable energy in the electricity sector (RES-E) 5.1.1.Consolidating a framework for cost-effective, and market-oriented and Europeanised support to renewable electricity to promote regulatory certainty 5.1.2.A more coordinated regional approach to renewables support 5.1.3.Reducing the cost of capital for renewable electricity projects 5.1.4 Administrative simplification 5.1.5.Overall comparison of the options to increase renewable energy in the electricity sector (RES-E) 5.2.Options to increase renewable energy in the heating and cooling sector (RES-H&C) 5.2.1.Mainstreaming renewables in heating and cooling supply 5.2.2.Facilitating the uptake of renewable energy and waste heat in district heating and cooling systems 5.2.3.Overall comparison of the options to increase renewable energy in the heating and cooling sector (RES-H&C) 5.3.Options to increase renewable energy in the transport sector (RES-T) 5.3.1.Overall comparison of the options to increase renewable energy in the transport sector (RES-T)

5.4.Options to empower and inform consumers of renewable energy 5.4.1.Empower consumers to generate, self-consume and store renewable electricity 5.4.2.Disclosing information on the sources of electricity generation 5.4.3.Tracing origins of renewable fuels used in heating and cooling and transport 5.4.4.Overall comparison of the options to empower and inform consumers of renewable energy 5.5.Options to ensure the achievement of at least 27% renewable energy in 2030 5.5.1.Baseline of 2020 targets 5.5.2.EU Trajectory 2021 - 2030 for achievement of the EU renewables target 5.5.3.Mechanism to avoid an "ambition gap" to the EU renewables target 5.5.4.Mechanism to avoid and fill a "delivery gap" to the EU renewables target 5.5.5.Overall comparison of the options to ensure the achievement of at least 27% renewable energy in 2030 Abstract accompanying the Impact Assessment 1. Policy Context And Key Challenges The Energy Union framework strategy puts forward a vision of an energy market 'with citizens at its core, where citizens take ownership of the energy transition, benefit from new technologies to reduce their bills, participate actively in the market, and where vulnerable consumers are protected'. The Energy Union with a sustainable, low-carbon and climate-friendly economy includes President Juncker's political ambition to become the world leader in renewable energy, the global hub for developing technically advanced and competitive renewable energies. To live up to this vision, a series of legislative proposals have been prepared, following the objectives of secure and competitive energy supplies and building on the EU's 2030 climate commitments reconfirmed in Paris last year. Renewables in Europe – good results so far As a result of Directive 2009/28/EC (2009 RES Directive), with currently 16% of renewable energy in its final energy consumption, the European Union is on track to achieve its 20% renewables target by 2020. This piece of EU legislation, along with other EU and Member State complementary measures, has boosted European investment in renewable technologies at a domestic level. Renewables are now being deployed across the various sectors (electricity, transport, and heating and cooling) in all Member States. Economies of scale and innovation have reduced significantly the related costs.

The renewable energy sector already delivers an important dividend to EU energy security with around €20 billion saved in fuel import costs in 2014 for the whole EU. The sector also remains key to EU objectives to sustain and improve growth, employment and competitiveness. The EU renewable energy industry employed in 2014 around 1.1 million workers, and European companies held 30% of all patents for renewable technologies globally in 2013. Taking renewables to the next level – the 2030 framework and EU leadership in renewables The EU has set itself a target to reach, collectively, a share of at least 27 % in the final energy consumption by 2030. While the EU is today well on track to achieve its 2020 renewables target, yet, investments in renewable have dropped by more than half since 2011 to $48.8 billion last year. The EU now accounts for only 18% of global total investment in renewables, down from close to 50% only 6 years ago. This calls for concrete and decisive actions to put the EU back on track in pioneering world efforts. While the Renewables Directive, together with the Market Design and Energy Union Governance initiatives, will be a central element for the EU to pursue its ambition of a world leadership role in renewables, this political goal needs to be further supported in a holistic approach by policies and initiatives also in areas outside the scope of this package, such as financing (including ESIF and EFSI), regional development, research and innovation, international cooperation and industrial policy. Key challenges and opportunities going forward The costs for a number of renewable energy technologies have rapidly declined, this shifting the need for policy intervention from cost-competitiveness issues to market integration aspects - at least for most mature technologies. The EU policy framework for renewable electricity (RES-E) has successfully turned solar and onshore wind technologies from niche technologies into central players in the power sector. However, the heating and cooling, and the transport sectors continue to rely heavily on fossil energy imports. The move from national binding targets set by the current 2020 framework, towards an EU-level binding target for renewables for 2030, opens up new challenges, but also new opportunities for the EU to achieve the target collectively and in a cost-effective, sustainable way. New technologies like smart grids, smart homes, increasingly competitive roof-top solar panels and battery storage solutions make it possible for energy consumers to become active players on the market and this opportunity should be harnessed. Markets for renewable energy are opening across the world. Whilst global investments in renewable energy are growing, the investments in renewables in the European Union are declining, jeopardising the EU leadership ambition. 2. Problem definition The EU as a whole is currently on track to reach a share of renewable energy of 24.3% by 2030, falling short of the 2030 ambition. This result shows that we risk following a development path that is insufficient to achieve the 2050 decarbonisation scenarios. Several obstacles still prevent a cost-effective achievement of an at least 27% renewable energy target within the European Union in a business as usual scenario. Investor uncertainty For the EU, the investment needs are estimated to be around or above €1 trillion from 2015 to 2030 in renewable electricity generation alone. It is unclear at which point in time an enhanced market design and a strengthened EU ETS, alongside other factors such as further cost reductions, will provide sufficient incentives for renewable energy investments, without any additional support to cover investment gaps. Further uncertainty for investors comes from the future evolution of rules on support schemes. In addition, the uncertainty regarding the EU sustainability criteria post-2020 is not conducive for investment in the bioenergy sector, including in advanced biofuels. Lack of cost-effectiveness Renewable technologies are being deployed across various sectors - electricity, heating and cooling, and transport, with different levels of cost-effectiveness. Over the past decade, a lot of emphasis was put on the development of renewable electricity. The 2030 and 2050 decarbonisations scenarios require however also accelerated renewables deployment in heating and cooling, and transport. Renewable technologies, their cost and potentials vary significantly. Ignoring these differences might result in either underinvestment or overcompensation. There are also clear benefits to be reaped from a more Europeanised approach to renewables support, in order to facilitate cost-effective deployment of renewable electricity across the EU. Last but not least, differences in cost of capital and national approaches to other investment conditions such as grid connection fees undermine the optimal allocation of renewable electricity generation capacity across the EU. Imperfect markets

Well-functioning internal energy markets are crucial for the deployment of renewables. However, the markets in the electricity, transport and heating and cooling sectors are at different phases of development or integration and require different measures to ensure their correct functioning. In the case of the electricity sector, where renewables are expected to reach around 50% market penetration by 2030, the electricity market should be redesigned to support the integration of renewables as proposed in the framework of the Market Design initiative. In the heating and cooling market, the challenge is to ensure access to existing infrastructure and sufficient incentives for the expansion of renewables. In the transport sector, renewable energy uptake is still hampered by a lack of clear market signals for low-carbon and renewable fuels. Update of the regulatory framework The renewable energy target of at least 27% is expressed as a binding target at EU level. This is a policy change from the previously binding targets at national level on which the current EU legislation and in particular the 2009 RES Directive is built. Furthermore there will be no specific sectorial targets as it is the case with the current 10 % target in the transport sector. This calls for an update of the regulatory framework so that it is adapted to the new approach. Lack of citizen buy in Existing rules do not sufficiently enable citizens and communities to have sufficient buy in into the energy transition. This can lead to lack of public acceptance at local level, resulting in higher development costs and slower renewable development. Empowering consumers and energy communities, and providing them with reliable information about renewables, are therefore fundamental preconditions for deploying renewable energies in a cost-effective way. 3. Overarching goals of the revised Renewable Energy Directive Renewable energy is central to the five dimensions of the Energy Union: energy security, energy efficiency, competitiveness, emission reduction, and global leadership through innovation. As such, the new EU-wide renewable energy target for 2030 set by the European Council in October 2014, based on the Commission's proposal and underpinning analysis presented in the 2030 Framework for Climate and Energy and the Energy Union Framework Strategy, is key for achieving the Energy Union priorities. Therefore, the ambition is to increase the share of renewable energy consumed in the EU to at least 27% by 2030 in line with the cost-effective pathway described in the 2030 Framework for Climate and Energy, and further reduce greenhouse gas emissions (at least 40% by 2030) and save at least 27% energy by 2030 compared to 2007 baseline projections. The specific goals are: First, the renewables deployment should contribute to greenhouse gas emissions reduction of at least 40% compared to 1990 levels, including a reduction of 30.2% of emissions in the non-ETS sector compared to 2005 levels. It should bring the EU economy closer to the required decarbonisation pathway to achieve the objective of 80-95% emissions reduction by 2050. Second, the revised Directive should improve energy security by diversifying the energy mix and reduce EU's dependence on imported fossil fuels, particularly in the heating and cooling sector and the transport sector, as outlined in the 2030 Framework for Climate and Energy. Overall, the specific measures proposed for these two sectors could lead to a reduction in import dependency. Third, renewable energies should further contribute to the integration of the internal energy market. The results show that a continuation of nationally-based support schemes would lead to less efficient deployment of renewable energy, a concentration of renewables investments in three countries, and a 25% increase in the average electricity prices in 2030 compared to 2010. In contrast, a consolidated framework that builds upon a good market functioning, a more coordinated regional approach and addressing the costs of capital can achieve a more balanced deployment of renewables across the EU and reduce energy system costs. Finally, the proposed options should foster innovation in renewables deployment and ensure that the EU can truly become a global leader in renewables. The proposed measures would strengthen both technology and market driven innovation, support the creation of flexible and integrated infrastructure, and create healthy supply chains, thereby enhancing the EU technological leadership role in this sector. With this experience, European companies will be able to position themselves to support the global transformation towards a more sustainable energy system. 4. Interlinkages with other initiatives The preparation of this Impact Assessment has been done in close coordination with, and is complementary to, other related Commission initiatives. First and foremost, this includes the Market Design and Energy Union Governance proposals but also the revision of the Energy Efficiency and Energy Performance of Buildings Directives, the EU ETS and the Effort Sharing Regulation, the LULUCF Regulation and the Bioenergy Sustainability Policy. These other pieces of legislation mutually complement the Directive. However, they are not by themselves sufficient to allow the EU to reach, collectively, a share of at least 27 % in the final energy consumption by 2030 in a cost effective way and to deliver on the EU political priority of becoming the world's number one in renewables. The Market Design initiative will, inter alia, facilitate the development of an electricity market fit for renewable energies, where short term markets are fully developed and integrated and flexibility plays a key role in enhancing the market value of renewables. This enhanced electricity market design, together with the strengthened EU ETS, will be a key foundation of the 2030 framework and will ensure that renewable energy generators can earn a higher fraction of their revenues from the energy markets. The revision of the Renewables Directive will build on this approach and complement it by introducing different measures aimed at attracting the necessary investments cost-efficiently and in a timely manner. The Energy Union Governance frames the Integrated National Energy and Climate Plans, which set out national contributions to the legally binding EU-level RES target. The revision of the Renewables Directive complements the Energy Union Governance by considering different options to fill a potential gap either on ambition or delivery of the EU target. At the same time, the Governance initiative streamlines and integrates the existing planning, reporting and monitoring obligations of the energy acquis including those for renewable energy post 2020. The Energy Efficiency Directive (EED) and Energy Performance for Buildings Directive (EPBD) aim, respectively, at facilitating the achievement of the energy efficiency target and at enhancing the energy performance of buildings. The provisions in the heating and cooling section are consistent with and complement the measures in both the EED and the EPBD, in particular by tackling existing buildings, tertiary and industry, as well as by including specific requirements on renewables.

The EU Emission Trading Scheme (EU ETS) will be reformed for the period after 2020. Existing legislation includes the Market Stability Reserve to address the current surplus of allowances and to improve the ETS resilience to major shocks by adjusting the supply of allowances to be auctioned. The strengthened EU ETS will play an increasing role in providing a stronger investment signal for lower carbon technologies, including renewables, and will ensure that synergies between renewable energy and climate policies are better exploited. Furthermore, the proposed Effort Sharing Regulation makes proposals for setting national binding emission reduction targets for greenhouse gases for the sectors outside the EU ETS and on Land Use, Land Use Change and Forestry (LULUCF). The LULUCF Regulation aims at integrating carbon emissions credits and debits form agriculture and forestry into the EU 2030 climate and energy framework. In addition, the Bioenergy Sustainability Policy aims at guaranteing the climate and environmental benefits of EU bioenergy consumption for the period after 2020, focusing in particular on biomass in heating/cooling and electricity. The provisions in the transport sector of this Impact Assessment build and complement these approaches, by promoting higher direct greenhouse gas saving for new biofuels and bioliquid installations. 5. Subsidiarity EU level action is needed to ensure that Member States' contribute to the at least 27% EU level binding renewable energy target and that this is collectively and cost-effectively met. Common principles to govern support of renewable electricity are needed to address fragmentation of the internal market and ensure cross-border tradability. Thus also a case for common rules for transport fuel could be made. EU-level action on heating and cooling is necessary due to the high share of the sector in energy consumption, however given the limited cross-border dimension, the options are designed with a significant degree of flexibility for Member States. Member States' shares of heating and cooling in overall energy mix may differ, as does the relative importance of heating versus cooling. However, the fundamental market failures are similar, particularly due to technology lock-in (i.e. existing fossil fuel heating systems) and lock-out (consumers cannot individually change fuels in collective supplies such as gas grid, district heating, etc.). Action only at Member States' level would likely lead to a more limited deployment of renewables and create additional costs that can be reduced through complementary EU-level action. It would also lead to more fragmentation of, and distortions in, the energy internal market and put the achievement of the EU renewable energy target at risk. 6. Description of policy options and analysis of impacts The overarching goals of the revision of the Directive can only be achieved through a systematic approach, which results in renewables being deployed cost-effectively in all Member States and in all sectors. A balanced and stable set of measures aimed at facilitating renewables investments across the electricity, transport and heating and cooling sectors in the 28 Member States will enhance regulatory certainty. They should also improve the conditions for renewables investment to take place where needed. In addition, measures oriented towards empowering and informing consumers also mobilise private capital for investments in renewable energy and increase social acceptance of renewable energy projects. Lastly, given the binding nature of the EU level target it is necessary to make sure the target is achieved in a timely manner, in a way that is complementary to the Governance Initiative. The latter defines the iterative process between Member States and the Commission in order to ensure the respective national contributions to the target. 6.1 Expanding renewable electricity cost-effectively Amongst all sectors that make up our energy system, electricity is the most cost-effective to decarbonize. In 2014, 27.5% of Europe's electricity is produced using renewable energy and the modelling shows that close to half of our electricity will come from renewables by 2030. Yet, the necessary investments in renewable power generation are declining, concentrated in a small number of countries with low weighted cost of capital (WACC) and policy frameworks perceived as most stable, and are insufficient to achieve the 2030 target. Consistent with 'The vision for the EU electricity market in 2030 and beyond', the Commission's ambition for the post-2020 context is that renewable electricity generators can earn a high fraction of their revenues from energy markets. Such a market would be based on an enhanced electricity market design – where short term markets are fully developed and integrated and flexibility plays a key role in enhancing the market value of renewables – as well as a strengthened EU ETS. These are no regret solutions that need to be at the core of the decarbonisation of the power system. However, despite such market enhancement, in some cases energy market revenues alone will remain insufficient to attract renewable investments in a timely manner and at the required scale. Where limited, specific financial support is still needed, the market – via competitive tenders – will confirm its necessity and the level of support through tender mechanisms, which will act as a natural phase-out for support measures. Ensuring regulatory certainty is paramount to ensure cost-effective deployment of renewables electricity. The findings of the Renewable Energy and the Electricity Market Design Impact Assessments and the proposed policy options The results of modelling work undertaken for the Electricity Market Design and Renewable Energy Impact Assessments indicate that the improved electricity market, in conjunction with a revised ETS with a functioning Market Stability Reserve, could, under certain conditions, deliver investments in the most mature renewable technologies (such as solar PV and onshore wind) by 2030. However, less mature renewable electricity technologies, such as off-shore wind, ocean energy, will likely need some form of support throughout the period. The analysis shows that the picture is dynamic, with the enhanced market design and the strengthened EU ETS gradually improving renewable electricity profitability over the 2021-2030 period. At the beginning of the period, over-capacity, the imbalance on the ETS market and low wholesale electricity market prices and high renewable electricity technology costs, make the case for market only driven investment in renewable electricity technologies more difficult. However, a stronger carbon price signal, a more flexible and dynamic electricity market and technology cost reductions gradually facilitate market investment over this period. The picture also depends on regions. RES-E technologies could be more easily financed by the market in the regions with the highest potential (e.g. onshore wind in the Nordic region or solar in Southern Europe), while RES-E continue to largely require support in the British Isles and in Central Europe. Conditions however also depend on the cost of capital. At the same time it has to be acknowledged that whether and at what point in time financing of renewables through markets alone will actually take off remains difficult to predict. This is because financing of capital intensive technologies such as most renewables through markets based on marginal cost pricing will remain challenging. In particular, higher penetration of renewables with low marginal cost could further reduce the market value that such renewables can actually achieve (so-called cannibalisation effect). Further flexibilisation of demand stands out as a key measure in this regards in order to further stabilise the revenue of renewables producers from the market. On the other hand, the future capacity of renewables to be financed through the market will also depend on certain conditions outside of the market design and ETS prices, such as continued decrease in the costs of technologies, availability of (reasonably cheap) capital, social acceptance and sufficiently high and stable fossil fuel prices. While the market reforms described above are therefore no regret options to facilitate renewables investment, support schemes will still be needed at least for a transitional period. It is therefore essential to further reform such schemes to make them as market-oriented as possible. Against this background, the RES Impact Assessment investigates options to ensure that if and where support is needed, (i) support is cost-effective and kept to a minimum, and (ii) creates as little distortion as possible in the functioning of electricity markets.

As a first measure, the RES Impact Assessment suggests creating a common European framework for support schemes. The framework would be effective as it would define design principles (i) that ensure sufficient investor certainty over the 2021-2030 and (ii) require the use (where needed) of market-based and cost-effective schemes based on emerging best practice design (including principles that are not covered by the current state aid guidelines). At the same time, the framework would be proportionate by leaving actual implementation to the state aid guidelines (e.g. for the definition of thresholds applicable for any foreseen exemptions) and, most importantly, to the case by case, evidence-based, in-depth assessment of individual schemes by the services of DG Competition. Importantly, the framework would enshrine in legislation and expand the requirement to tender support; it would define tender design principles, based on emerging best practice, to ensure the highest cost-efficiency gains. The framework would thus strengthen the use of tenders as a natural phase-out mechanism for support, by which a competitive bidding process determines the remaining level of support required to bridge any financing gap – such level of support being expected to disappear for the most mature technologies over the course of the 2021-2030 period. The second measure addresses the need for a more coordinated regional approach to ensure a healthy investment portfolio of different renewable power generation technologies and investment locations. The results of the Impact Assessment shows that these measure would result in reduced energy system costs ranging from €1.0 billion (partial opening) and €1.3 billion (mandatory regional schemes) annually for the period 2021-2030, and renewable energy support costs paid by the consumer are reduced by 3% and 5% respectively. The third measure proposes a renewables-focused financial instrument to address the high costs of capital for investments in renewable power. The risk is that overall investments may be insufficient to meet the 2020 and 2030 targets, a sub-optimal medium- and long-term deployment at EU-level, and a lack of exploitation of the renewable energy potential of countries with a higher cost of capital. Two different financial instruments have been assessed. A financial instrument that reduces the cost of capital in a number of Member States and regions will reduce energy system costs by €1.5 billion and achieves a more balanced deployment of renewables across the EU. A financial instrument that addresses only high risk projects would result in an increase of energy system costs, but could lead to technological breakthroughs in technologies like offshore wind and tidal. The fourth measure addresses the varying administrative costs between Member States, which can account for around 15% of the overall development costs of wind projects. Administrative barriers bring uncertainty and delay to investors, artificially increase the costs of renewable energy projects, create distortions in the allocation of investments within the EU, and therefore hamper building a single integrated market for renewable energy and reaching a cost-effective deployment. Building on the existing provisions on administrative procedures in the 2009 RES Directive, regulations and codes and on the TEN-E Regulation, the Impact Assessment proposes additional options to address the remaining obstacles including the introduction of a one-stop-shop and a time range for permitting procedures and facilitated procedures for repowering. 6.2 Improve energy performance and energy security with renewables in the heating and cooling sector Heating and cooling represents the largest energy sector in the EU, consisting of around half of the European energy demand. It is made up of 75% fossil fuel and accounts for 68% of the EU's gas imports. There are currently limited heating and cooling measures across the sector in EU legislation, leading to slow progress, an absence of a long-term policy vision and investor uncertainty. On top of this situation, the negative externalities of the fossil fuel use in the heating and cooling sector are not internalised and reflected in the energy prices for most parts of the heating and cooling sector, which hinders market uptake of highly efficient renewable energy technologies. While the share of renewable energy in electricity has increased by more than 8 percentage points between 2009 and 2015, the share of renewables in the heating and cooling sector has only expanded by less than 3 percentage points in the same period. The EU Strategy for Heating and Cooling also highlights the important impact of renewables deployment in district heating and cooling systems to reduce the costs and increase the flexibility of the EU energy system. The findings of the Impact Assessment and proposed policy options In the absence of additional and coordinated policies, the current slow rate of progress in Member States is incompatible with a cost-effective achievement of the EU renewable energy target by 2030 and long-term decarbonisation goals. Given its large share in total energy consumption, measures intended to increase renewables use in the heating and cooling sector are crucial for the EU to meet its renewable target in a cost-effective manner. The impact assessment has evaluated a number of measures – consistent with the enhanced EED - to improve the renewables deployment in the heating and cooling sector as well as in district heating and cooling systems. For the heating and cooling supply, an obligation on all fuel suppliers is considered to increase the amount of renewable energy that they supply. This should enable the cost-effective deployment of renewables in heating and cooling at EU-level, and reduce investor uncertainty. Two design variants are compared: A gradual increase in the obligation every year, or The obligation to reach a certain share of renewables by 2030 Given the fact that the heating and cooling sectors are very diverse across the EU, Member States would be allowed to have significant flexibility to design the obligation (e.g. choice of obligated parties, the possibility to exempt SMEs from the scheme). The promotion of efficient and renewable district heating and cooling aims to address the market uptake of renewables, empower the citizens and reinforces the provisions above by: Making it possible for renewables suppliers to access of district heating and cooling networks through energy performance certification; and Facilitating consumers' choice of high performance energy supplies (be it centralized or decentralized). These options introduce an obligation to allow open access rights to infrastructure for RES and waste heat and cold, an obligation to certify the district heating system performance using an existing standard, and the right for consumers to pursue higher efficiency by disconnecting from the district grid. The Impact Assessment shows that if the renewable supply increases in existing district heating and cooling systems by 20% roughly, an additional 2 Mtoe renewable heating and cooling could be delivered by 2030. The risk of disconnection is deemed limited at the EU level, but could vary depending on the Member State. Both options result in new compliance costs linked to the certification which could not be quantified, but are estimated to be minimal if streamlined with the new provisions in the Energy Efficiency Directive.

6.3 Renewable fuels in the transport sector Transport consumes a third of EU's total energy demand and it is almost entirely dependent on oil. While the transition to low-emission alternative energy in transport has already begun, spurred by the current Renewable Energy Directive, the sector is significantly lagging behind the other sectors. There is high potential for increasing renewable energy use in transport through electrification and development of advanced renewable fuels. It is also an opportunity for Europe to develop leadership in new bio-based products, such as advanced biofuels. The work on the Impact Assessment has been developed in full consistency with the European Strategy for Low-Emission Mobility. This strategy already indicated that the Commission was examining how to provide a strong incentive to innovate in energies needed for the long-term transport decarbonisation by, for example, introducing an obligation for fuel suppliers to provide a certain share of renewable alternative energy. The findings of the Impact Assessment and proposed policy options Modelling-based analysis shows that, under the EU Reference Scenario 2016, the deployment of alternative fuels (including renewable fuels) in transport will slow down. It will be insufficient for achieving the 2030 climate and energy target and contributing to the EU's long-term decarbonisation goals. The main reasons for this under-performance include, amongst other: the high dependence of the sector on liquid fossil fuels, lack of economic viability of alternative fuels, the variable GHG emission performance of biofuels and specific barriers in aviation, waterborne (inland waterways and maritime) and heavy duty vehicles. Against this background, this Impact Assessment analyses four policy options to promote innovation and significant market uptake of alternative and renewable fuels in the transport sector, including different paths to phase out food-based biofuels. These options include: EU incorporation obligation for renewable fuels, under the revised Renewable Energy Directive; EU incorporation obligation for renewable fuels, plus an EU-wide cap on the use of food-based biofuels. Two types of caps are analysed: a full phase out of food-based biofuels by 2030 or, alternatively, a phase down to pre-2008 levels. An additional sub-option consists of a faster phasing out of seed crop-based biodiesel and an increase in the direct greenhouse gas saving threshold of 70% for new installations; GHG emission reduction obligation, under the Fuel Quality Directive. The impact assessment indicates that, under the same decarbonisation ambition, a complete phase out of food-based biofuels by 2030 would require higher shares of advanced biofuels. This outcome would increase annual investment costs by over 60% compared to a gradual phase out scenario. This cost increase would be partially offset by lowered feedstock costs. Furthermore, a complete phase out of food-based biofuels by 2030 would lead to job losses in the production facilities, and related industries such as crushing plants and refineries. This would occur particularly in the biodiesel sector where there are lower synergies between conventional and advanced biofuel production technologies. In addition, rape seed production could decline substantially. On the other hand, employment would increase in the production of advanced biofuels and fuels of non-biological origin, including technology development and use of feedstocks such as wastes, energy crops and lignocellulosic material. The net impact of the biofuels options is uncertain. The analysis also shows that emissions from indirect land use change (ILUC) can be significantly reduced through a gradual phase out of conventional biofuels by 2030, focusing primarily on oil-crop based that are associated with higher ILUC impacts, combined with a higher greenhouse gas emission saving threshold for new biofuel installations. The assessment finds that an EU-wide incorporation obligation would have the advantage of building on the extensive policy and administrative experience developed by Member States in implementing the Renewable Energy Directive and their national renewable fuel mandates. Furthermore, administrative burden for economic operators would be minimised, as they would continue to use mainly default values. 6.4 Empowering and informing consumers The Energy Union Strategy places the consumer at its centre. Consumers should have the possibility to sell, consume and store self-generated energy. At the same time consumers should be informed about the energy they buy, as some might wish to purchase renewable energy and are prepared to pay a premium for such energy suppliers. Consumer empowerment could help mobilise additional private capital for investments in renewable energy sources. However, in the absence of a European framework, Member States have addressed renewable energy self-consumption individually. This situation has led to differing degrees of consumer empowerment, unstable legal frameworks, and few incentives for citizens to invest in renewable energy sources when self-consumption is not facilitated. Equally, consumers wishing to be informed about the energy they buy must be absolutely certain that the renewable energy products are trustworthy. This requires an effective tracking system. The findings of the Impact Assessment and proposed policy options In line with the vision on consumers presented in the Energy Union strategy, two sets of measures have been proposed to empower consumers. Regarding self-consumption three possible options are put forward: EU guidance on self-consumption

Framework principles empowering consumers to self-consume and store renewable electricity Distance self-consumption for municipalities The Impact Assessment finds that the option of including framework principles empowering consumers could drive PV deployment, increase the share of self-consumed electricity and might create 10 000 to 20 000 additional jobs in roof-top solar by 2030 compared to the baseline scenario. An EU guidance is unlikely to have a strong impact, whilst allowing for distance self-consumption could have a negative impact on grid financing. Regarding consumer information, the proposed measures aim at strengthening and extending the existing "guarantees of origin" (GO) system. Although GOs covered 45 % of all renewable electricity generated in the EU in 2015, the majority of power generation is outside of the system. Furthermore, Member States have implemented the GO system in widely differing ways, which increased the risk of double counting of renewable electricity. For the electricity sector, the GO system could become the only means for disclosure of renewable electricity consumption to consumers. Furthermore, the GO system could be extended to renewable liquid and renewable gaseous fuels used in the heating and cooling and transport sectors. Such a system could be built on the existing sustainability requirements for biofuels. In addition to providing information to consumers, it would also facilitate cross border trade. 6.5 Making sure the EU will be on track on its ambitions by 2030 The new EU-wide binding target for 2030 set by the European Council in October 2014, is to increase the share of renewable energy consumed in the EU to at least 27% by 2030. In the absence of binding national targets for renewable energy post-2020, one main challenge is how to achieve this target in a cost-effective way through EU, regional and national level actions. This would need to take into account differing national capacities to produce renewable energy, whilst building on the renewable shares achieved in 2020. In this context, Member States' Integrated National Energy and Climate Plans, to be developed as part of the initiative on Energy Union Governance, will play an important role, as they will include contributions to the EU-level 2030 target for renewable energy. Furthermore, the Energy Union Governance initiative aims, inter alia, via an iterative process with Member States, at addressing in first instance the possibility that contributions do not add up to the binding EU target (by means of recommendations on National Plans). However, the Governance process anticipates that further incentives for target achievement would be included in the Renewable Energy Directive should a gap in the target remain despite of the iterative process. There are four overarching concerns that may warrant the need for additional and specific mechanisms to be included in the revised Renewable Energy Directive: -How to ensure that – in line with the European Council conclusions of October 2014 – 2020 target are fully met? -How to ensure a continued project pipeline from 2021 onwards – the year after the end of the binding 2020 requirement – to restore and maintain investor certainty? -How to incentivise Member States to contribute appropriately and cost-effectively to the EU level binding target? -How to ensure that Member States deliver on their contributions? The findings of the Impact Assessment and proposed policy options The first measure proposes the 2020 national targets as a mandatory floor for the period 2021 to 2030, providing certainty to investors and creating a virtuous circle of higher levels of investments. This measure would need to be reflected in the requirements for the Integrated National Energy and Climate Plans set out under the Energy Union Governance, and requires a continuation of the existing co-operation mechanisms. A number of EU trajectories have been examined to ensure a continued project pipeline between 2021 and 2030. The assessment suggests that there are sufficient mature technologies available to warrant a linear uptake of renewables over the 2020-2030 timeframe. This would result in a more consistent stream of investments, bring forward investments that have the opportunity to reduce the levelised cost of electricity, and has a positive impact on greenhouse gas emission reductions. To avoid an "ambition gap", the proposed options include the iterative process under the Energy Union Governance, a review clause of the legislation to propose additional measures at a later stage, EU wide measures to ensure target achievement included in sectorial legislation, or other measures. The impacts of the options may vary depending on the size and the reason for the gap. The three considerations assessed are the impact of the options on investment certainty, the administrative burden and the political feasibility. The "delivery gap" can be addressed with the same options considered for the "ambition gap". The key difference is that progress reporting under the Energy Union Governance will be a crucial element to detect delivery gaps at an early stage, that the options for the "delivery gap" and the "ambition gap" are consistent, and any corrective measure can be introduced effectively and without time delays to ensure investor certainty. 7. Overview of measures and linkage to identified problems The Impact Assessment considers measures that can respond to one or more of the specific problems that prevent achievement of the overarching objectives of greenhouse gas emissions reduction, energy security, internal market, and global leadership.

As a conclusion, the table below presents a summary of the main measures considered in the impact assessment and their linkage to the identified problems. Table 1: Overview of measures and linkage to the identified problems 1.Introduction 1.1.Background and scope of the initiative The Renewable Energy Directive (the "RES Directive") establishes a European framework for the promotion of renewable energy and constitutes the most relevant measure to deliver on the EU's mandate to promote the development of new and renewable form of energy as set out in Article 194 TFEU. It has been the main driver for European investment in renewable technologies at a domestic level, economies of scale and innovation driving down significantly the related costs. It has also had a spill-over effect worldwide, triggering the adoption of renewable energy policies outside the European Union and helping renewables towards becoming a cost-competitive energy source. GHG emissions reduction Gross avoided CO² emissions between 380 Mt and 767 Mt in 2014 Fossil fuel displacement Reduction in fossil fuels consumption by 114 Mtoe in 2014 (c. 10 % of total fossil fuel consumption) Avoided imported fuel costs Around €20bn in 2014, Employment EU renewable energy industry currently employs in 2014 c. 1.1 million workers Innovation and technology leadership European companies held 30% of all patents for renewable technologies in 2013 The RES Directive establishes, inter alia, national mandatory targets for the share of renewables in final energy consumption for each Member State. It also includes biennial indicative trajectories, as partial milestones to ensure that actual developments are not lagging behind in view of the achievement of the 2020 targets. A holistic approach is ensured by covering the three sectors: electricity, heating and cooling and transport, but the split of the national target and trajectories between the sectors is left to the discretion of the Member States (apart from a separate mandatory 10% sub-target for the 2020 share of renewable energy in the transport sector). With an estimated renewable energy share of 17% of gross final energy consumption in 2015, if the effort continues, the EU and an overwhelming majority of Member States are expected to achieve the 2020 targets set in the RES Directive. More specifically, in the electricity sector (RES-E), 30% of the EU's power was estimated to be generated from renewables in 2015, with 11% of the total EU electricity sourced from variable renewable electricity. In the heating and cooling sector (RES-H&C), the renewables share is estimated to reach 18,5% in 2015. However, in the transport sector (RES-T), with a renewables share of 6,2% in 2015, the EU and the majority of Member States are still estimated at half-way towards the 10% target for 2020. Some provisions of the RES Directive effectively end in December 2020, notably on national binding targets. Finally the electricity sector is at this stage at an important crossroad with the Emission Trading System being reformed to address the surplus in allowances, the electricity market (including rules on generation adequacy) being redesigned and the new Energy Union Governance to be set up. The renewables electricity sector is also still recovering from abrupt, sometimes retroactive, changes that occurred in the aftermaths of the financial crisis and the biofuels sector need clarity on the post 2020 policies for biofuels. Re-establishing regulatory certainty for renewables producers and investors is therefore paramount at this point in time where the EU is falling behind global competitors in terms of absolute investments. There is equally a need to clarify the future policy on biofuels for investors in that sector. The question this Impact Assessment aims to address is which additional measures and policies should be included in the RES Directive post-2020 to promote the necessary long-term investments that will allow for further reduction in technology costs and the achievement of the 2030 renewable energy target in a timely and cost effective way. 1.2.Context of the initiative The 2030 Framework for Climate and Energy and the Energy Union Framework Strategy establish the EU commitment to further reduce greenhouse gas emissions (at least 40% by 2030) in line with the cost-effective pathway described in the 2050 Roadmaps , to increase the share of renewable energy consumed to at least 27%, and to save at least 27% energy by 2030 at EU level compared to 2007 baseline projections as quantitative headline targets of the Energy Union, in particular to increase Europe's energy security, achieve a moderation of energy demand and progress in the decarbonisation of the economy. The Energy Union Framework Strategy stated the need, inter alia, for an integrated governance and monitoring process, to ensure that all energy-related actions at European, regional, national and local level contribute to the Energy Union's objectives and to secure the delivery of the 2030 Framework for Climate and Energy. This is also in line with the EU commitments at the COP21 Climate Summit in December 2015, which adopted the first-ever global and legally-binding climate agreement with the aim to hold the global warming well below 2°C and to pursue efforts to limit it to 1.5°C.

Integrated National Energy and Climate Plans, together with comprehensive monitoring and reporting at the EU and national levels, and an iterative political process between the Commission and Member States on the implementation of national plans will be essential elements of such a governance framework. These provisions will be reflected in the Commission's initiative on the Energy Union Governance. In February 2014, the European Parliament called for a 40% cut in CO2 emissions, a 30% target for renewable energy and a 40% target for energy efficiency by 2030, under the EU's long-term climate-change policy.. With a view to the period beyond 2020, in October 2014 the European Council agreed on a binding EU-level target of at least a 27% share of renewable energy consumed in the EU in 2030. Furthermore, in February 2015 the Commission confirmed the political commitment for the European Union to become the world leader in renewable energy. The roadmap for delivering the Energy Union, launched in November 2015 as part of the first Report on the State of the Energy Union, foresees a new Renewable Energy Package for the period after 2020, containing a revised Renewable Energy Directive (the "Revised RES Directive"), and including a bioenergy sustainability policy for the period 2021-2030. 1.3.Links with parallel initiatives, approach taken for modelling, data gaps and other limitations 1.3.1. Links with parallel initiatives The Commission has already tabled legislative proposals of relevance to an EU policy on renewable energy, such as the revision of the EU Emission Trading Scheme (ETS) for the period after 2020, including, inter alia, a Market Stability Reserve to address the current surplus of allowances and improve the ETS resilience to major shocks by adjusting the supply of allowances to be auctioned. It also made proposals as regards setting national binding emission reduction targets for greenhouse gases (GHG) for the sectors outside the ETS (the so called "Effort Sharing Regulation") and on Land Use, Land Use Change and Forestry (LULUCF). In addition, legislative initiatives are being tabled as regards the revision of the directives on energy efficiency (EED) and energy performance of buildings (EPBD), and a policy communication was published on the European strategy for low-emission mobility. Finally, this Impact Assessment has been prepared in parallel with the Impact Assessments accompanying the initiatives on Electricity Market Design, Governance of the Energy Union as well as Bioenergy Sustainability. In relation to the latter, sustainability issues associated to bioenergy, particularly in heating/cooling and electricity, are specifically dealt with in that impact assessment. This Impact Assessment addresses only issues related to the climate performance of biofuels, and in particular indirect land use change impacts of conventional food-based biofuels which are not captured by the sustainability criteria. As regards electricity in particular, the failures causing an inefficient integration of renewables in electricity markets are analysed in Chapter 2 as they are closely related to renewable electricity deployment. However, for sake of completeness, it should be stressed that policy options related to (i) the priority dispatch and priority access to the grid of electricity produced from renewable sources, (ii) balancing and other market responsibilities imposed on renewable electricity generators, (iii) grid connection charges and grid access tariffs applicable to renewable electricity generators as well as (iv) network planning obligations are assessed as part of the Electricity Market Design Impact Assessment. Various measures aimed at making electricity markets fit for integrating a large share of variable renewable generation, as well as facilitating the participation of renewables in all markets and all timeframes (including as regards the provision of ancillary services) are also assessed in the Market Design Impact Assessment, whereas policy options related to the promotion of renewable electricity will be assessed as part of this Impact Assessment. For the heating and cooling sector, this Impact Assessment reflects, as appropriate, the Commission's intentions included in its EU Strategy on Heating and Cooling, notably with regard to promoting renewable energy through a comprehensive approach to speed up the replacement of obsolete boilers, including by encouraging the uptake of renewable energy in heat production and increasing the deployment of renewable energy in district heating and combined heat and power generation (CHPs), as well as supporting planning for renewable energy deployment at local level also taking into account the need to reduce emissions of air pollutants such as Particulate Matters (PM) and Nitrogen Dioxide (NO²). In this respect, some relevant measures are included in the Commission's proposal for the revision of the Energy Performance of Buildings Directive (EPBD) and the Energy Efficiency Directive (EED) and assessed in the impact assessments supporting these initiatives. For the transport sector, this Impact Assessment builds on the work carried out in the Staff Working Document accompanying the Commission's communication on a European strategy for low-emission mobility and additionally takes into account the reduction of the carbon intensity of transport fuels in the framework of the Fuel Quality Directive (FQD). Furthermore it focuses on the sustainability issues of biofuels, particularly the GHG emissions. The absence of binding national renewable energy targets as a policy tool in a post-2020 timeframe requires the exploration of other policy avenues to ensure an adequate ambition and distribution of Member States' efforts to contribute to the EU-level target of at least 27% renewable energy in 2030. The legislative initiative on the Governance of the Energy Union aims to contribute to addressing this issue together with the revision of the RES Directive. The general approach is that governance provides the framework for planning, reporting and monitoring the development of renewable energy, whilst corrective measures if required would be part of the RES Directive, which is a simple approach applied with other aspects of climate and energy policy such as the Effort Sharing Regulation and the Energy Efficiency Directive. The interaction between the governance process and the RES Directive and the specific issues to be addressed are further explained in Chapters 2 and 5. 1.3.2. Approach taken for modelling and limitations Annex 4 describes in detail the models used for the quantitative analysis presented in this IA, as well as the scenario descriptions. It also presents the interactions in the modelling work undertaken for this Impact Assessment and for the other related Impact Assessments on the 2016 Energy Union initiatives. The problem definition and the policy options assessed in this Impact Assessment build on the outcomes of energy-system modelling scenarios. More specifically, the starting point for this Impact Assessment, as for all other related Impact Assessments, is the EU Reference Scenario 2016 ("REF2016"), which provides 2030 energy-system projections, based on current trends and policies. This Impact Assessment makes also use of a central policy scenario also used for the Impact Assessments supporting the proposal for a revision of the Energy Efficiency Directive (as a baseline scenario) and for the proposal on the Effort Sharing Regulation, as well as in the Staff Working Document published together with the EU Strategy on low-emission mobility (as one of the two central policy scenarios - in both initiatives), which are in line with 2030 minimum ambition levels as stated by Heads of States and Governments in October 2014. This scenario (called "EUCO27") projects the expected developments across sectors to reach the 2030 targets and help identify the scale of the economic, social and environmental challenges to cost-effectively reach an at least 27% renewable energy share. The second policy scenario (called "EUCO30" as its only difference from EUCO27 is a more ambitious energy efficiency target of 30%) is also used in analysis of transport sector options. Building on the REF2016 and the EUCO27 scenario, specific baseline scenarios are then prepared, which highlight the expected implications of the continuation of current policies and practices on the developments in the specific sectors subject to policy interventions, assuming that all other sectors and policies are in line with the central policy scenario. This approach, building on a common policy scenario and then focusing on 'one issue at a time', was deemed the only operational way to assess the impacts of specific policy options in the general context of various far-reaching initiatives put forward by the Commission as part of the 2016 Energy Union initiatives. However, this approach has some limitations. First, assumptions have to be made about what the continuation of current practices mean in each sector. Second, the implications of a failure in one sector to deliver on agreed policies or targets on other policies or sectors cannot be directly modelled. Finally, since some of the policy options presented in this Impact Assessment cannot be properly addressed in an integrated energy system model, the analysis is complemented by other modelling or analytical tools and qualitative assessment when necessary, as further elaborated in the document. 2.What is the Problem and why is it a Problem? 2.1.Evolution of the problem and need to act post-2020

The EU and the world are moving towards a more sustainable and renewable energy system. Addressing concerns about greenhouse gas emissions, local air pollution, cost-competitiveness, and security of energy supply are among the main reasons for this global shift. The Lisbon Treaty enshrined in the treaties of the European Union that "Union policy on energy shall aim, in a spirit of solidarity between Member States, to […] promote […] the development of new and renewable forms of energy". In this context, the European Council in October 2014 set a binding EU-level target of at least 27% for the share of renewable energy consumed in the EU in 2030. It also invited the European Commission to further examine instruments and measures capable of reducing emissions and dependency on energy imports in the transport sector, including measures for the promotion of energy from renewable energy sources. Taking action to curb energy use and boost renewables in the heating and cooling sector would reduce EU energy costs, help cut the EU's dependence on imported fossil fuels and reduce carbon dioxide emissions, especially if highly efficient heating and cooling systems replace old ones, together with district heating deployment. REF2016 projects a greenhouse gas reduction of 35% in 2030 compared to 1990 and a renewable energy share by 2030 of 24.3% in 2030. Although this scenario does not assume any additional dedicated renewables policies, the combination of long-lasting effects of current policies, improved cost-competitiveness associated with technological progress, and the continuation of the ETS, lead to an increase in renewables share even post-2020. However, this increase still falls short of the minimum share of renewables agreed, and more generally highlights the potential risk of not reaching the 2030 EU climate and energy objectives, in the absence of additional policies. The initiatives on the ETS and non-ETS sectors, Electricity Market Design, Governance and Energy Efficiency are expected to contribute to increasing the level of renewables as a share of final energy consumed in 2030. They will also facilitate the integration of renewable energy in relevant markets, and provide economic signals for the uptake of renewable energy in line with the EU's climate and energy objectives, in the context of an improved internal energy market. However, such initiatives cannot address the full range of specific issues that hamper the needed expansion of renewable energy in all sectors to ensure achievement of the 2030 renewables' target in the most cost-effective, proportionate and least distortive way for the ultimate benefit of the European taxpayers and energy actors, notably the consumers. Moreover, they will not suffice to provide clear signals to Member States, investors, and citizens and address President Juncker's ambition for the European Union to become "the world number one in renewables". Against this background, this Impact Assessment identifies the following five problem areas: 1. Investor uncertainty 2. Need to improve cost-effectiveness of renewables deployment 3. Absence of functioning markets 4. Need to update the policy framework 5. Risk of loss of citizen-buy in during transition 2.2.The problem areas and underlying main drivers 2.2.1. Problem 1 - Investor uncertainty Investor certainty will be crucial for attracting the significant private investments needed to reach the at least 27% EU-level target. For the EU, these are estimated around or above EUR 1 trillion from 2015 to 2030 in renewable electricity generation alone. As explained above, the regulatory framework is much wider than the RES Directive only, in particular for electricity. Driver 1: Uncertainty as to when energy-only market will provide sufficient investment signals European electricity markets were designed in the past for conventional, centralised power plants. In most Member States, electricity systems and markets are today not fit for a large penetration of variable renewable generation. Certain subsets of the electricity market are not designed to accommodate variable renewable generation. For instance, short term markets such as intraday and balancing do not run as close to real time as necessary and in many cases market rules do not facilitate, or even impede, the integration of renewables (e.g. definition of market products). Existing rules create significant barriers to market entry, especially for new and/or small market entrants (in particular variable generation) and create a non-level playing field in favour of larger incumbents. Furthermore, system service markets are often not designed in a way that allow the participation of variable renewables, nor value and monetise the system services that distributed resources can bring. Secondly, energy systems as a whole lack the required flexibility crucial for the cost-efficient deployment of variable renewables sources. The further cost-efficient penetration of variable renewables depends on a sufficient and timely deployment of all sources of system flexibility, such as interconnectors, demand response, storage, flexible plants, electrical vehicle charging, and power-to-heat or to other energy carriers. System flexibility is crucial in limiting the renewables market value gap – by reducing the occurrence of both low/negative prices when renewables are dispatching and of high prices when renewables are not dispatching – and ensuring that adding variable renewable generation translates into net benefits to the system as a whole, i.e. the avoided costs minus increased costs. At the same time, it should be noted that flexibility measures also tend to suppress price spikes that could be necessary to recoup fixed costs of generating assets. These issues will be addressed in the market design Impact Assessment. Indeed, variable renewable electricity suffers from a "cannibalisation" effect in the market based on marginal cost financing logic, creating a renewables "market value gap". Due to the merit order effect pricing mechanisms, prices during hours of peak production of variable renewable sources tend to be lower than average market prices. While this effect is already visible today in certain Member States, it is expected to become even more relevant as renewables penetration further increases. As an order of magnitude, recent research suggests that, in the absence of hydro reservoirs and demand response, when its market share will reach 30% of total generation on a given market, the revenues that a wind plant can get through the market could fall to only 50% to 80% of the average market price. These factors may be reached by solar power when it reaches only 15% of total generation. This is a market indication of the changes in market values of renewables as they are deployed. As renewables are further gaining market shares in the coming decade, the regulatory framework should not only incentivise the deployment of renewables where costs are low (e.g. due to abundant wind or solar resources), but also where the value of the produced electricity is the highest. The Commission's ambition for the post 2020 context is that renewable electricity generators can earn an increasing fraction of their revenues from the energy markets based on an enhanced market design – where short term markets are fully developed and integrated and flexibility plays a key role in enhancing the market value of renewables – and a strengthened EU ETS. The incentive provided by the ETS has been limited in recent years due to the large surplus of allowances on the market, resulting from the imbalance between supply and demand for allowances. A large surplus confounds the signal for investments, which are necessary for the transition towards a low-carbon economy, including energy supply. Additionally, the current behaviour of many investors on power generation markets seems to be driven by myopia looking primarily at current price levels. Overall, even though the ETS carbon price can be expected to increase as scarcity in the carbon market will resume, in the short term prevailing myopic views and the uncertainty on long term CO2 price development may remain an impediment for investors to fully factor in future prices in investment decisions. This imbalance between supply and credit of allowances resulted from several economic and policy factors, such as the reduction in emissions following the economic crisis and the higher use of international credits than was expected. At the same time, specific support for renewables has shown to be a strong driver for investment, and, for a given CO2 cap in the ETS, a fast deployment of renewable electricity can contribute (among other factors) to a lower carbon price by weakening the demand for emission allowances in the EU ETS. In view of such potential impacts, various stakeholders have recently argued that there is a need to ensure that adjustments can be made in the ETS to address the full impact of general economic conditions as well as overlapping EU and national policies on the ETS price.

The strengthened and revised EU ETS, with a functioning Market Stability Reserve (MSR), will play an increasing role in providing a stronger investment signal for lower carbon technologies including renewables, and will ensure that synergies between renewable energy and climate policies are better reaped. However, such impact will only build up gradually. From 2019, the introduction of a MSR will respond to major changes in the demand of allowances, regardless of whether these are the result of economic factors or due to policy developments. The architecture of the reserve is such that it automatically and in a gradual manner reduces the auction supply if there is a significant oversupply of allowances. However, as the reduction realised by the MSR will be gradual, if, for any reason (including a fast deployment of renewable electricity), the existing imbalance between supply and demand would not be reduced, it might need to be considered as part of the first review of the MSR parameters foreseen by 2021 whether this justifies a change to the parameters (e.g. an increased MSR feeding rate) to preserve the overall policy coherence in delivering the climate objective in a cost effective manner, as agreed by European leaders. The ETS will provide an increasingly stronger investment signal as the scarcity in the carbon market will gradually resume and a reformed energy only market would support the integration of renewables, but ETS may in itself not ensure that all necessary investments in renewables would occur, in particular for certain non-mature technologies. Overall, a number of elements, normally beyond the control of renewables producers, will determine the moment when "RES parity" is achieved – i.e. the moment when the levelised cost of electricity (LCOE) decreases to the level of the actual market value of the asset to be financed. Such conditions include: (i) continued decrease in technology costs; (ii) the availability of (reasonably cheap) capital, which is a function of many variables, including project-specific and renewables framework-specific risks, but also general country risks; (iii) social acceptance (which could impact the availability of high potential locations); (iv) sufficiently high and stable fossil fuel prices. Additionally, the "RES parity" moment will depend on the extent to which and the speed at which the market re-design and the reformed ETS deliver on: (i) addressing the current surplus of carbon allowances that would strengthen the carbon price signal; (ii) reducing the occurrence of low or negative market prices; (iii) reducing balancing costs for renewables producers; (iv) bringing additional revenues to renewables producers in balancing and ancillary services markets; (v) ensuring a timely and sufficient deployment of all sources of flexibility limiting the renewables "cannibalisation effect"; (vi) any electricity over-capacity effectively exiting the market; (vii) renewables market integration not translating in a substantial upward pressure on renewables projects' access to and cost of capital. Until these conditions are in place, a funding gap for investments in renewables will remain, as evidenced by both the Market Design and this Impact Assessment, and is dependent also on future price expectations that may be uncertain. This is the starting point of the this Impact Assessment, which then will consider the best way of addressing investment uncertainty against this funding gap. Driver 2: Uncertainty over the post-2020 policy framework for support schemes Investors, Member States and other stakeholders have called on various occasions for clarity to be provided in the revision of the RES Directive on the future framework for support schemes after 2020 by spelling out framework principles on support schemes that facilitate a Europeanised and market based approach to renewables. The RES Directive allows Member States to opt for support schemes to facilitate renewables deployment and target achievement, but leaves the choice of support scheme design entirely to Member States, reflecting the consensus at time of adoption that there was no one-size-fits-all system. State aid rules set out general requirements until 2020, but for instance do not contain any principles on the design of tenders (apart from the technology-neutrality principle), nor on cross-border co-operation. They also leave an element of regulatory uncertainty as assessment is done on a case-by-case basis after a state aid scheme has been put in place. Support for renewable energy may conflict with system-friendly and market-responsive dispatch, investment decisions and technological designs – in particular through insufficient exposure to market price signals that, together with an adequate definition of bidding zones, reflects the value of generation to the system depending on time and location. The type and level of support needed to promote emergent technologies representing a small share of the power generation mix, such as what was required to promote initial deployments of wind onshore and solar PV in the second half of the last decade, is not justified anymore when such technologies become much more mature and deployment reaches a significant scale. This is all the more true in view of the negative impact this might have on market functioning and investment incentives across power generation markets, including downward pressure on ETS prices. Retroactive changes and retrospective moratoria on renewable-related support have taken place in several Member States. These changes took place for several different reasons but often led to uneven fees and subsidies distribution, loss of confidence in the sector, sometimes even bankruptcies and employment losses. This insecurity in the renewables sector and the lack of access to finance for new renewables installations may similarly not only endanger achievement of the binding 2020 national renewable energy target of the respective Member State and the overall renewables target of the EU, but make it more expensive. These measures also resulted in numerous lawsuits at national, European and international level. Several Member States were able to negotiate with investors a deal which diminished the amount of support provided in exchange for regulatory stability, while other Member States made changes that eventually led to a complete stop of any new investment in renewables on their territory, due to the uncertainty they created. Rules on renewables support finally have to consider the type and nature of all categories of investors. Renewable energy communities A specific issue relates to the framework applicable to renewable energy communities. Renewable energy communities are entities through which citizens and/or local authorities own or participate in the production and/or use of renewable energy. With more than 2500 initiatives EU-wide, renewable communities have been key in triggering the energy transition in Europe. The local anchorage and ownership of such initiatives have brought substantial benefits in terms of social acceptance for renewable energy projects, especially for wind energy. They have contributed not only to increasing renewable shares and to reaching the targets, but also to lowering the cost of renewable energy deployment by making available the most adequate sites and providing access to cheap capital. In Germany for instance, where 50% of the renewable power capacity is owned by private individuals , the levelized cost of electrical capacity owned by energy communities and farmers is competitive with utility-owned renewables. Figure 4: LCOE by investor type and technology Currently, most renewables communities remain small-scale, either in terms of numbers of projects, members, turnover or capacity installed. This leads to specific issues, such as difficulties to face grid connection costs, especially for non-shallow costs . In addition, some specific elements of support schemes design such as tendering support might create some barriers to the development of community-owned energy, and therefore reduce local acceptance of projects . There is even a downwards tendency in the share of community-owned renewable energy in the system, mostly due to competitive tendering process where community schemes have difficulties in competing on equal footing with other projects. This has been confirmed by the results of the public consultation where 31% of respondents agreed upon the fact that support schemes, levies and/or administrative procedures should be adapted to the size of local projects and access to finance facilitated to enable cooperatives to compete on equal footing with other projects in the market. This analysis was mostly shared by cooperatives (91%), NGOs (69%) and public authorities (43%).

Driver 3: Uncertainty around individual Member States' contributions to the EU level renewables target and future governance Whilst currently national targets provide a clear indication on each Member State's development, it is unclear how the collective effort for post 2020 will be shared among Member States. The absence of binding national renewable energy targets as a policy tool in a post-2020 timeframe requires the exploration of other policy avenues to ensure an adequate ambition and distribution of Member States' efforts to contribute to the EU-level target of at least 27% renewable energy in 2030. Also detailed rules for the governance set up between the EU and Member States and monitoring are still being defined (the latter in the parallel Governance IA). The general approach is that governance provides the framework for planning and monitoring the development of renewable energy, whilst corrective measures if required would be part of the Revised RES Directive, which is a simple approach applied with other aspects of climate and energy policy such as the Effort Sharing Regulation and the Energy Efficiency Directive. The interaction between the governance process and the Revised RES Directive and the specific issues to be addressed are further explained in Chapter 5. Driver 4: Uncertainty regarding the sustainability rules applying to biofuels, including the role of food-based biofuels post-2020 As both the REFIT evaluation and the public consultation demonstrates, the policy discussion on Indirect Land Use Change (ILUC) associated to food-based biofuels and the prolonged adoption process of the ILUC Directive have negatively affected investments in biofuels, including in advanced biofuels. There is now a need to provide regulatory certainty and predictability concerning the role of food-based and advanced biofuels in general and, specifically, regarding the sustainability rules applying to bioenergy post-2020, including the role of conventional biofuels (see more below). Regarding the sustainability rules, there is a need to improve the sustainability criteria and the traceability rules in order to improve their effectiveness. In this respect, the European Court of Auditors found in an auditthat the way biofuel sustainability is currently verified entails weaknesses for instance regarding the supervision of voluntary certification schemes. The competences of the Commission and the Member States in this area are not set out clearly in current legislation. Furthermore, some provisions of the sustainability scheme and the traceability rules have proven to be difficult to implement and may need to be improved in a view to facilitate their implementation. Driver 5: Uncertainty regarding actions in the heating and cooling sector Even if the situation is quite homogenous at EU-level, with 18 Member States having heating and cooling shares representing more than 40% of total energy, there is currently an absence of promotion of heating and cooling measures across the sector in EU legislation, contrary to electricity and transport. In the absence of additional and coordinated policies, the current slow rate of progress in Member States is incompatible with a cost-effective achievement of the EU renewable energy target by 2030 and long-term decarbonisation goals. From the analysis of the public consultation, lack of integrated energy strategy and planning at the national and local level, lack of targeted financing and lack of supportive policies for decentralised energy, self-consumption and thermal storage in buildings and district systems are perceived as the three most important barriers to renewables expansion in the heating and cooling sector (respectively, mentioned in 84%, 80% and 74% of the public consultation replies). 2.2.2. Problem 2 - Need to improve cost-effectiveness of deployment of renewable energy The importance of a transition towards fully-market based and self-eliminating support of renewables has already been addressed in the previous chapter. In addition to that, there remain substantial benefits to be reaped by adapting the way in which renewables are currently deployed in the EU. Driver 1: Projected contribution of heating and cooling and transport sector not in line with cost-effective decarbonisation path Renewable technologies are being deployed across the three sectors - electricity, heating and cooling, and transport. Over the past decade, a lot of emphasis was put on the development of reneable electricity, possibly driven inter alia by the parallel efforts to open up EU's electricity markets. The 2030 and 2050 decarbonisations scenarios require however also accelerated reneables deployment in heating and cooling, and transport. Heating & cooling In the REF2016, renewable heating and cooling shares fall 2.3% points short of what would be needed for an overall cost effective path to 2030. Heating and cooling currently represents the most important single energy sector in the EU, with around half of the European energy demand. As explained in Section 2.2.1, there is currently an absence of promotion of heating and cooling measures across the sector in EU legislation, contrary to electricity and transport. Therefore, while the share of renewable energy in electricity has increased by more than 8 percentage points (pp) between 2009 and 2015, the share of renewables in the heating and cooling sector has only expanded by less than 3 pp in the same period. In the absence of additional and coordinated policies, the current slow rate of progress in Member States is incompatible with a cost-effective achievement of the EU renewable energy target by 2030 and long-term decarbonisation goals. In the absence of additional policies in heating and cooling, there might also be a risk that the entire burden would be transferred to the electricity and the transport sectors, which might jeopardize the cost-effective achievement of our 2030 target. Transport Energy efficiency, electrification and the use of renewable energy in transports have all been identified as important elements in order to contribute towards the reduction of the EU oil import dependency and of transport decarbonisation in a cost-effective manner. Modelling looking at options to achieve the 2030 climate and energy targets indicates the share of biofuels in transports is projected to increase up to 7.8% of total transport energy demand by 2030 (from 3.7% in 2010). Beyond 2030, modelling suggests the share of biofuels in liquid and gaseous transport fuels will need to increase significantly further, reaching around 46% by 2050 (equal to 36-37% of total transport energy demand). This also requires substitution of food-based biofuels by advanced biofuels with low effects on indirect land use change (ILUC) emissions. In particular, advanced biofuels are required to decarbonize the heavy duty, waterborne transport and aviation sectors that cannot be electrified with current technologies . Respective contributions from the various sectors

As described under the EUCO27 scenario, the challenge for the renewable energy sector is to increase the share of renewables in all the RES-E, RES H&C and RES-T sectors, compared to 2020 levels. Compared to projected developments under the REF2016, the increased use of renewables in the electricity sector would be substantial contribution to the overall increase in renewables. Contributions from the heating and cooling and transport sectors would also be necessary in absolute terms, and are will have to take place in the context of significant reductions in final consumption in these sectors, mainly driven by improved energy efficiency. These reductions imply that increases in RES-H&C and RES-T shares will not only come from additional assets (as is partly the case for RES-E), but also from replacement of incumbent technologies that will be pushed out of their respective markets through a mix of demand reduction and fuel-switching. In terms of evolution of energy consumption (Mtoe), this shows that: i) it is in the electricity sector that renewables consumption is projected to increase the most in absolute terms; ii) in the heating and cooling and transport sectors, in the context of an overall significant decrease in final consumption, an increase in renewables is still needed in absolute terms to reach the at least 27% target; iii) in the transport sector, the evolution presented in the table below also reflects the formula used to measure renewable energy consumption in transport, including double counting for renewable electricity for instance. Evolution of gross final energy consumption (total and for renewables) across sectors - Mtoe REF2016 EUCO27 Diff EUCO27/ REF 2020 2030 Diff 2020 2030 Diff 2030 Gross Final Energy Consumption - Electricity 289 302 +13 290 302 +12 -0.4 Gross final consumption of electricity from RES 103 128 +25 103 143 +40 +15 Gross Final Energy Consumption - Heating and Cooling 540 485 -55 541 454 -87 -31 Gross final consumption of RES for heating and cooling 123 124 +1 124 128 +4 +4 Gross Final Energy Consumption - Transport 287 274 -13 287 256 -31 -18 Final consumption of energy from RES in transport 32 39 +7 32 46 +14 +7 Source: PRIMES To conclude, this short descriptive analysis confirms that all renewable energy sectors are expected to contribute to the increased use of renewables by 2030, but in a differentiated manner, as this contribution is also influenced by the projected evolution of final energy demand. Driver 2: RES-E support not fully responsive to different technology potential and maturity Renewable technologies and potentials vary significantly. Ignoring these differences - e.g. by applying a strict technology-neutral approach - might result in either underinvestment or overcompensation. Certain long-established (e.g. biomass co-firing) or fast-growing (e.g. onshore wind, solar photovoltaic) renewable electricity technologies have now reached a considerable share of market thanks to the inductive regulatory framework. They may be considered as technologically mature according to certain metrics, for instance being broadly commercially available and their share of total installed capacity. It might however be sub-optimal for other reasons such as the energy system as a whole or land use concerns to only have these technologies as the winning tender. Other renewable technologies, like offshore wind and concentrated solar power, are increasing their market share, or are still in an earlier stage of the innovation chain, like tidal stream energy, ocean wave energy, deep geothermal, highly performing advanced PV and building-integrated PV. The same applies to most technologies capable of storing electric power. As these technologies have the potential, in a medium- to long-term perspective, to largely contribute to a decarbonised, secure and cost-efficient energy system, the combination of public support (in line with the priorities identified in the SET Plan and coordinated with the Member States' support) and private support is geared towards bridging the cost gap and pushing further technological and system innovation in Europe. The new renewable support framework will need to ensure that less mature technologies can continue their path towards market integration without abrupt stops. Driver 3: RES-E support not fully responsive to different potentials across Member States/regions There are clear benefits to be reaped from a more regional approach to renewables support. Energy systems, and electricity systems in particular, were historically built on a national or even sub-national basis. From an infrastructure point of view, this has translated into limited interconnections between, or within, Member States. Insufficient transmission grid capacities limit the flexibility of energy systems, and hinder further renewable penetration. From an institutional and political point of view, this is one of the reasons that have contributed to policies supporting renewables being largely developed on a national basis. Financial support for renewable generation, in particular, has taken the form of national support schemes. This has led to a situation where renewables are deployed where support is the strongest and the most secure, rather than where the most cost-effective potential from an EU perspective is available. What is more, the fragmentation of markets leads to higher transaction costs, as developers and investors have to apply substantially different models for investments across Europe and build the related capacity. The cooperation mechanisms introduced by the RES Directive allowed Member States to agree on cross-border support of renewables and to take advantage of another country’s more cost-efficient potentials in renewables and achieve efficiency gains in view of their renewable energy targets. However, Member States have so far not engaged in joint support schemes with the exception of Norway and Sweden. This is due to a number of reasons ranging from administrative complexities (regarded as important or very important by 74% of respondents in the public consultation) to political considerations, such as Member State reluctance to see their taxpayers money used for investments outside their country (94% - by far the most important consideration mentioned in the RES Directive public consultation). In particular, it is especially difficult to ask consumers to support renewables deployment in a different country when they do not see a direct benefit out of it. The opportunity given by the RES Directive of sharing the effort of the renewable energy targets more cost-effectively was, therefore, as of the time of this Impact Assessment, not yet utilised, despite ongoing negotiations between several Member States and declared intentions to finalise these negotiations in 2016 and 2017. However, a number of Member States are in the process of partially opening up their support schemes to cross-border participation. Within the context of a reformed market design, a more interconnected and integrated electricity market, all of which are important components for the further deployment of renewables, the renewables policy framework should facilitate a more cost-effective deployment of renewable electricity across the EU. This process of regionalisation of renewable policy is further underpinned by the political dialogue of Member States at regional level through, inter alia, the High Level Groups such as BEMIP and North Seas. Driver 4: Differences in cost of capital, national approaches to grid connection fees and administrative procedures undermine optimal RES-E allocation across EU There are significant benefits to be reaped from reducing national differences with regard to rules beyond support schemes affecting overall project cost, in the case of renewables mainly cost of capital, grid connection fees and administrative procedures. These differences can effectively undermine joint support schemes as was shown for the example of the NO-SE joint scheme in the evaluation. Addressing them for renewables specifically could be justified given the technologies' capital-intensity and linked higher risk premiums. Cost of capital Renewable electricity technologies face a number of factors that may make it hard for them to attract sufficient and affordable funding from investors, including but not limited to: capital intensity, resource risk, real or perceived technology risk, under-recognition of the long-term value of reducing variable fuel cost exposure. In the absence of perfect foresight (leading to myopic requirements for short term returns) and/or the presence of poor or asymmetric information or understanding (leading to overestimation of risks), renewables typically only have access to scarcer and/or more expensive capital than more conventional energy technologies. Such failures can apply to both large-scale and small-scale investors (e.g. households). Additionally, in the post-2020 context with high shares of renewables and deeper market integration, renewables should be increasingly integrated into the market and face obligations similar to those of conventional generators. This entails additional costs and risks for renewables investors (balancing costs, market price volatility), as these costs have so far been transferred to other entities, which translate into higher cost of capital, higher LCOE for the individual investor, and higher renewables deployment costs – all elements to be taken into account when assessing the benefits of better market functioning.

Only in a limited number of Member States some of the most mature renewables technologies have today access to capital at a cost that is comparable to that of more conventional technologies, although investments conditions for fossil fuel power plants have also been affected by higher operating costs and combined effect of low carbon and low wholesale electricity prices. Funding remains limited and/or costly for mature technologies in many Member States as well as for a number of less-mature technologies. As way of illustration, recent research estimated that the weighted average cost of capital (WACC) of a typical onshore wind project varied in 2015 from 3.5% to 12% depending on Member States. Given the capital-intensity of most renewable technologies, a higher WACC significantly increases the overall cost of a given renewable project. Additionally, it should be noted that significant variations in the level of WACC across Europe may hamper the deployment of renewables in the EU where the economic potential is otherwise the highest. A mere 1% WACC difference can increase the total cost of the project by 5%. Finance also typically remains scarce for the fragmented, smaller-scale renewable projects, which face high transaction costs relative to the amount of funding required – in addition to often facing split incentives between tenants and owners. The estimation of the required amount of capital expenditure in RES-E capacity to reach European targets varies a lot depending on the source and scope of the research. For instance, Bloomberg New Energy Finance estimates investments in new renewables electricity generation capacity to amount to USD 1.0 trillion over 2015 to 2030 (around EUR 57 billion per year), while the World Energy Investment Outlook concludes that roughly USD 1.2 trillion is required in the EU between 2014 and 2035 (around EUR 52 billion per year). Currently, there are no EU-level facilities dedicated to providing debt or equity financing to renewables generation projects only. The EU budget is supporting certain demonstration projects of new technologies under the Secure, Clean and Efficient Energy Challenge of Horizon 2020. European Structural and Investment Funds (ESIF) have a strong focus on low-carbon investments in the 2014-2020 period, including support for renewable energy projects and related research and innovation, which can take the form of grants or financial instruments (e.g. loans, guarantees or equity). Additionally, the NER300, funded through the sale of 300 million emission allowances from the ETS, is a funding programme for the development of innovative low carbon energy demonstration projects, including innovative RES technologies in the EU. For the period after 2020, an Innovation Fund would be set up through the sale of 450 million emission allowances that could fund innovative RES projects. The EU is also indirectly investing in renewable generation projects via facilities such as the Marguerite Fund and the European Energy Efficiency Fund. Finally, the European Investment Bank (EIB) is providing debt and equity for renewable energy generation and grid projects, across all Member States – and the European Fund for Strategic Investments (EFSI) is providing the EIB with additional risk-bearing capacity. Public support in the form of debt or equity support is mostly taking place at national or sub-national level. Some Member States have developed specific renewables financing programmes, often through their National Promotional Banks (NPBs).. Existing funds such as the Marguerite Fund and the European Energy Efficiency Fund currently have their investment strategy defined not only by the EU, but also by their other sponsors (national public banks or private investors). EIB's renewables investments are driven by the EIB's sectorial strategies and credit policies. As for the EFSI guarantee, while renewable projects have to date represented a large share of total EFSI funding, its use is governed by the overall economic recovery-focused objectives of the EFSI; importantly, the EFSI is currently not foreseen to exist post-2020. Costs related to administrative procedures Administrative costs vary between Member States but non-economic barriers can be costly. They currently account for around 15% of the overall development costs of wind projects in the Member State analysed. Administrative barriers bring uncertainty and delay to investors, artificially increase the costs of renewable energy projects, create distortions in the allocation of investments within the EU, and therefore hamper building a single integrated market for renewable energy and reaching a cost-effective deployment. Given that the Revised RES Directive will not feature binding national targets but only a binding European target, enablers for a cost-effective deployment of renewables also at national level become more relevant. Article 13 of RES Directive mandates streamlining, expediting and coordinating administrative procedures but more progress in the EU needs to be made. There is overwhelming support for a further reduction of administrative barriers among stakeholders. 79 % of respondents to the public consultation who expressed an opinion on the issue identified the creation of a one stop shop as the centrepiece of this simplification and 85% are in favour of fixed time limits. The REFIT Evaluation of the RES Directive found that depending on the Member State, region or technology, issuing of renewables permits can take from less than 5 weeks in one Member State to 7 years in other Member States Additionally, the current Article 13 of t