Opinion of the Economic and Social Committee on the "Commission working document 'Electricity from renewable energy sources and the internal electricity market'"

(1999/C 368/03)

On 16 April 1999 the Commission decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned document.

The Section for Transport, Energy, Infrastructure and the Information Society, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 5 October 1999. The rapporteur was Mr Morgan.

At its 367th plenary session on 20 and 21 October 1999 (meeting of 20 October) the Economic and Social Committee adopted the following opinion by 107 votes to one with four abstentions.

1. Introduction

1.1. The Economic and Social Committee welcomes the Commission's Working Document as the first substantive initiative following the publication of the White Paper "Energy for the future: renewable sources of energy"(1). (It is also glad to see that the Commission Staff Working Paper "Energy for the future: renewable sources of energy (Community Strategy and Action Plan) - Campaign for Take-Off", SEC(1999) 504, has been published.)

1.2. The thrust of the Working Document is towards harmonisation for the internal electricity market(2). Concern is expressed that the contemporaneous existence of different support schemes appears likely to result in distortion of trade and competition. The role of renewables in the EU will clearly increase in the coming years, given the Kyoto commitments. Thus, potential market distortions will accordingly increase. Whilst the trade and competition distorting effects of different renewable support schemes is rather limited at present, given the limited EU market share of electricity from renewable sources, this negative effect appears likely to significantly increase in the coming years.

1.3. It is the opinion of the ESC that this concern with harmonisation is valid within the context of a liberalised energy market. Progress can best be made towards the EU's goals if each technology is subject to a separate support regime.

2. The Commission's approach: fundamental options

2.1. The objectives of the Community and Member States, as stated in the document are listed below:

- The establishment of regulatory framework that is (i) rational and efficiency enhancing (and thus cost reducing and innovation promoting), (ii) long term (i.e. not subject to frequent regulatory change), and (iii) effective in producing significant growth in renewable sourced electricity.

- A gradual and progressive movement towards any such regulatory framework to ensure that progress made to date in increasing renewable levels is not jeopardised and those key environmental objectives are met.

- A significant push, across the Community, by all Member States to increase renewable penetration in all EU markets, thus increasing economies of scale particularly in manufacturing costs, and thus driving down costs.

- A number of measures to facilitate access of RES-E to the internal electricity market. Such measures, which should be taken by all Member States, should, for example, aim at ensuring that planning, administrative and grid connection rules reduce to the minimum constraints in these areas on the growth of renewable sourced electricity in the EU.

2.2. In large measure the ESC agrees with these objectives. It is essential to have a stable framework. The document presents two options for the development of regulation:

2.2.1. Option 1: Gradual achievement of an internal market through continued application of the EU Treaty rules

Under this option, each Member State would continue to freely choose the support system that it views as most appropriate in the light of its particular circumstances; subject, however, to the continued application of the EU Treaty rules, notably those with respect to state aid. The arguments in favour of such an option include the following:

- The physical conditions relevant to the development of renewable generated electricity differ significantly across the EU. It might be considered appropriate to limit the pro-active development of a single market in this area to ensure that each Member State takes the measures most appropriate to its particular situation.

- As mentioned above, one argument in favour of a fixed-price feed-in tariff system, is its possible appropriateness to ensure the rapid take-off of renewables generation from very low levels, which is the existing situation for most EU Member States.

2.2.2. Option 2: Proactive creation of a single market through Community action

Under this approach one might envisage the adoption of a basic Community framework, probably in the form of a Directive. Member States would have to ensure that, after an appropriate transitional period, their direct support schemes for renewable generated electricity would comply with a number of basic requirements, in such a manner that would ensure that the different schemes were sufficiently compatible with one another, permitting effective trade and, thus, competition.

2.3. The ESC inclines towards option 2. Its opinion is outlined in section 5.

3. The ESC's approach: technology focus

3.1. We are profoundly influenced by the vast differences between the various technologies. The ESC believes that there is a case for a separate regulatory regime for each renewable technology.

3.2. There are fundamental differences between Member States in the scope and opportunity for exploiting the different technologies. As a matter of priority, the Committee feels that it is important for Member States to scope and scale the potential they each have for each of these technologies.

3.3. The Working Document focuses on the various regulatory mechanisms which Member States can employ to promote electricity generation from renewable energy sources in the future. However these do not address the massive legal, cultural and technological changes needed to bring the programme to fruition. Ultimately the development of renewables will depend on acceptance by society as a whole - both the community and planners. In this respect, the Member States and EU institutions could play an important role in co-ordinating educational schemes, thus helping the public to make an informed choice between environmental impacts at the local level and at other levels e.g. the threat of global warming.

3.4. So, while the Committee agrees with the goal of effective trade and competition, in the framework of a Community-wide electricity market, any proposals for harmonisation should be dealt with on a technology-by-technology basis.

3.5. In the first instance the development of the necessary renewable generation capacity needs to be promoted in order to achieve sustainability. In parallel, the regulation of each technology should be harmonised so that the benefits of internal market scale can be achieved.

3.6. A further vital factor specific to each technology is R& D. There is support available in the Fifth Framework Programme(3) but this must be targeted, directed, led and disseminated in an effective way appropriate to each technology.

3.7. For maximum impact, the development of many technologies needs to go hand-in-hand with related energy saving schemes. Regulatory regimes need to take this consideration into account.

3.8. The main technologies

An examination of the main technologies shows the different and specific challenges that each has to face and also demonstrates the need for some harmonisation of the way in which these challenges are addressed.

3.8.1. Wind

Local planning permission is vital for the development of wind farms. State, regional and local governments must streamline the processes needed to allow the generation of electricity from wind. It is also necessary to secure support from the environmental. Grid connection contracts need to be harmonised as do the provisions related to supply interruption.

3.8.2. Biomass

The need for Member States and the EU to adapt the CAP for electrical generation from biomass has been well rehearsed. In view of the timescales involved in the production of certain crops, coherent contractual relationships need to be established between farmers, generators and the electricity grids. As far as forest products are concerned, the management and organisation of the processes needs to be considered. Overall it would be important to maintain the health and fertility of the land.

3.8.2.1. In order to stimulate the establishment of CHP (combined heat and power or co-generation)(4) at facilities based on heat and power generation using renewable energy sources, consideration needs to be given to facilitating planning approvals for industrial, urban and suburban development.

3.8.3. Solar power

Solar power is constantly evolving technically and its exploitation is dependent on planning, building regulations and linkages to energy efficiency programmes.

3.8.4. Small hydro

The Commission's exclusion of hydro projects exceeding 10 MW may have the unwelcome effect of deterring new hydro schemes over 10 MW. It seems arbitrary and is likely to introduce unnecessary distortions into the market. For instance, developers could be encouraged to divide larger projects into units of less than 10 MW in order to qualify for support. Further hydro-electric power projects may be needed if the EU's target of a 12 per cent penetration of energy generated from renewable sources is to be met. Larger projects will certainly raise planning and environmental issues. However, funding should not extend beyond recovery of extra costs over conventional schemes.

3.9. For each technology therefore a number of specific issues need to be addressed

3.9.1. Planning permission

Each technology involves different concerns and issues. The EU should encourage Member States to adopt clear and authoritative frameworks with guidance for all involved, whether developers, planning authorities or inspectors. One option could be to foster a national planning system which acts in a sympathetic fashion to renewable energy by zoning areas where renewable technologies would be appropriate and grid access less costly.

3.9.2. Pricing

Each technology generates electricity (and/or heat) at different costs and involves different considerations as far as subsidies are concerned. This is particularly so since the rate at which the price of RES electricity comes down will be different for the different RE technologies.

3.9.3. State aids

The development of each technology has been heavily subsidised so far. There will need to be a lot more public investment and direction before RES electricity is fully competitive. In order to encourage the development of the internal electricity market it is likely that a co-ordinated state aids regime will be needed for each technology.

3.9.4. Grid connection

The issues will differ by technology. The two principle issues relate to the distances over which connection must be made (wind is often remotely located) and the possibility that supply (e.g. of wind) may be interrupted. The scale of input may be hugely different e.g. as between hydroelectricity and small-scale embedded solar energy. The ESC supports an open and transparent methodology for connection to the network and standard connection rules for renewables.

3.9.5. Timescales

Before a project comes to fruition and before an economic return is achieved a variety of contract issues specific to each technology can arise.

4. Future issues

4.1. Pricing options

4.1.1. Definitions

The Commission's Document seeks to define RES electricity so that only those renewables producers which need support actually receive it. The ESC is concerned to promote the concept of renewables as part of a general drive towards sustainability. Accordingly the definition of renewables should include all sources of renewable heat and power, while any financial support regime, as it applies to renewable electricity only, should by design only give support where it is needed. This is achieved when each technology has its own regime.

4.1.2. Subsidies/fixed pricing

The use of guaranteed price subsidies and purchase obligations at fixed prices, in some countries, has delivered large numbers of renewable projects and supported product suppliers, but at a relatively high cost. In particular the aim of degressive costs is not always promoted in an optimum way because of price subsidies. The Commission has shown that this approach does not inherently encourage efficiency and long-term sustainability. There is a tendency for a fall-off in project starts following removal of subsidies.

4.1.3. Green tariffs

Offering green tariff options is compatible with a competitive market; it avoids distortion through subsidies; it increases customer awareness of their indirect environmental impacts; competing tariffs ensure efficiency gains are made. However, it may be difficult to secure consumer acceptance of green tariffs.

4.1.4. Renewable energy certificates

If there are to be subsidies, or exemptions from any energy taxes, some form of policing system, including certification, will be essential. This will also allow Member States and the EU to monitor more accurately the amount of electricity produced from renewables, while at the same time putting in place a mechanism that could in future lead to trading.

4.1.4.1. A certification system linked to a renewable energy quota would enhance international trade in renewables and create a level playing field; it gives incentives for the building of projects in the most advantageous locations and it allows greater flexibility in meeting any targets. Such a system would require some regulation and central registration; investment risks for project developers may be higher.

4.1.5. Bidding schemes e.g. the UK "Non Fossil Fuel Obligation" (NFFO)

These schemes encourage efficiency, exert downward pressure on prices, and lead to market convergence. Banded bidding allows support for a variety of technologies, (see 3.9.2, above). Long-term (but defined) contracts allow developers to negotiate loan rates with financial institutions still as yet unfamiliar with such new (and perceived as financially risky) technologies. However, bid success does not guarantee projects receive planning consent (see 3.9.1, above); and network/grid decisions are complicated by this uncertainty (see 3.9.3, above).

4.2. Implementation criteria

From the above analysis, the ESC proposes the following criteria as a basis for any ultimate EU regime, to be phased in over time:

4.2.1. Internal competition

In order to achieve cost effectiveness, there should be some form of internal competition among renewable producers.

4.2.2. Cost competitiveness

Any support for a technology should reduce over time, to lead to cost competitiveness for the technology. A bidding system would do this inherently or appropriate rules could be used in other systems.

4.2.2.1. The cost of any subsidy for renewables should be compared with the cost of support to other schemes for the reduction of CO2 emissions. Clearly support for renewables should not be allowed to get seriously out of line.

4.2.3. Time limits for project funding

This contributes to continued improvement of technologies and to the concentration of resources on promising technologies. Also on individual projects, funding should not extend beyond recovery of extra costs over conventional plant.

4.2.4. Focus on most promising technologies

The scheme should focus on those renewable technologies most likely to reach competitiveness with conventional sources in the short or medium term. Longer-term options should be addressed through Fifth Framework Programme research.

4.2.5. Open access

To maximise penetration, no potential investors and/or operators should be excluded from support schemes. Commercial and industrial energy users and, particularly, intensive energy users, should be encouraged to invest in renewable energy systems to meet their own power, heat, cooling and air conditioning needs.

4.2.6. Minimum bureaucracy

To avoid waste of available funding, support schemes should be non-bureaucratic and transparent.

4.2.7. Grid connection and reinforcement issues

There is an obvious need for harmonised, open and transparent methodology for connection to the network and standard connection rules for renewables. As a general principle, the rules for network access applying to renewables should be the same as those applying to any other generator. Renewable generators should not be exempted from paying for those network services which they receive. For instance, connection should not be subsidised either by other network users or by the network businesses themselves. Instead, true costs should be included in the total project costs to be supported by subsidy. Network operators should be able to recover the additional costs incurred e.g. administration costs, network studies and reinforcement.

5. Conclusion

5.1. The Commission's Working Document asks two questions in its conclusions:

- First, is Community action in the form of a Directive or other initiative necessary to meet the EU's objectives in this area?

- Second, if so, what approach would be appropriate?

5.2. The ESC's response to the general question of the appropriate regime is framed in the context of the two options described in section 2.

- As far as option 1 is concerned, the Committee would favour a gradual achievement of an internal market. However, this is unlikely to be achieved unless a market-wide regime is developed for each technology.

- Accordingly a version of option 2 is needed. There is a case for the proactive creation of a number of separate technology support regimes. This would advance the internal market for each technology as far as their relative maturities had already been proven. (see section 4.2.4)

5.3. Whatever instrument is chosen by the Commission to achieve the goals of option 2, this by itself will not be enough to meet the EU's objectives for 12 per cent penetration of renewables by 2010. For this the actions detailed in 5.4, 5.5 and 5.6 are also needed.

5.4. A fundamental assessment of how the 12 per cent target by year 2010 is going to be met in terms of each technology across the EU as a whole is still needed.

5.5. The EU, Member States and supply industries need to make a commitment to this target and to the scale of this undertaking e.g.:

- Member States and the Commission need to address the CAP issue;

- Member States need to put in place planning regulations and processes appropriate to the scale of the technological penetration which is desired;

- the EU and the supply industry need to direct Fifth Framework Programme funding to development priorities, identified by Member State and by technology commitment;

- Member States with the Commission need to develop contract and pricing frameworks to promote an internal market in each technology;

- the EU and the supply industry need to establish technical standards for each technology so that the internal market can be developed;

- essential drivers of demand and acceptance of RES heat and power will be Member State publicity and information dissemination.

5.6. In parallel with all of the above, the EU and Member States need to reformulate building regulations to meet energy efficiency targets and encourage CHP, solar power and photovoltaic technologies.

Brussels, 20 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

(1) Energy for the future: renewable sources of energy. White Paper for a Community strategy and action plan, COM(1997) 599 final; ESC opinion, OJ C 214, 10.7.1998.

(2) Directive 96/92/EC concerning rules for the internal market in electricity, OJ L 27, 30.1.1997; see ESC opinion, OJ C 73, 15.3.1993.

(3) "Fifth Framework Programme for RTD (1998-2002) - Specific programmes"; ESC opinion, OJ C 407, 28.12.1998, p. 123.

(4) see also: A Community strategy to promote combined heat and power (CHP) and to dismantle barriers to its development (COM(97) 514 final); ESC opinion, OJ C 157, 25.5.1998.