How to create a single European electricity market – and subsidise renewables By David Buchan
★ National subsidy schemes for renewable electricity and back-up generation capacity threaten the attempt to integrate and liberalise Europe’s electricity system. ★ Subsidy schemes are necessary to boost investment in renewable energy and to ensure sufficient non-renewable back-up generation. But rising subsidy costs are straining public tolerance. ★ Renewables could be promoted at lower cost and at less risk to energy sector integration if member-states subsidised in the same way, even if the amount of subsidy differed.
The European Union’s energy policy-makers have a growing headache: how to achieve a low carbon economy that respects market principles of reasonable cost and efficiency. The headache is caused by renewable energy sources, especially wind and solar power. What makes the headache hard to treat is that renewables are, in a sense, its cure as well as its cause. Wind and solar power are part of the cure in that they are the fastest growing forms of renewable energy which is itself the fastest expanding element in low or zerocarbon energy, but they are still more expensive than carbon-based sources. So renewables require subsidies in the form of special tariffs. These subsidies distort markets in general, and because the 27 EU memberstates have different types and levels of subsidy, they distort the European energy market in particular. Most people care little about the purity of markets, but they do care about cost. And this is mounting. In 2010 German consumers paid S13.2 billion in ‘feed-in tariff’ subsidies to renewable generators, according to the latest 1 OECD, ‘2012 economic OECD report.1 This is, to put it gently, a de luxe way of avoiding survey of Germany’, February 2012. carbon emissions. The same OECD report estimated that in 2009 Germans were effectively paying S74 for every tonne of CO2 avoided through their renewables, or six times the carbon price on the European Emissions
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Trading System (ETS). Germany, with its large economy and high renewable ambitions, paid out nearly a third of all renewable subsidies paid in the 27 member-states in 2009.2 Yet in 2 Ecofys, TUWien, the same year Spain and Italy also Fraunhofer, Ernst and each spent S5 billion subsidising Young. ‘Financing renewables, France S3 billion, and renewable energy in the European energy market’, Sweden and the UK the equivalent January 2011. of S2 billion each. According to the UK Treasury, UK renewable 3 UK Treasury, ‘Control subsidies will rise from £2.09 framework for DECC billion in 2011-2012 to £3.87 levy-funded spending’, December 2011. billion in 2014-2015.3 Many governments have started to regret their expensive commitments to high tariffs for solar photovoltaic power generators, now that finances are stretched. Some have been scrambling to cut these tariffs for new projects as fast as they legally, and sometimes illegally, can. Last year, a judge ordered the UK government to temporarily reverse a cut to its solar feed-in tariff because it was made without completing a public consultation. Germany has been steadily cutting solar subsidies, with another 30 per cent reduction for new projects announced in April 2012. On taking office in January, the new Spanish government suspended all subsidy schemes for new renewable projects to arrest the growth of payments
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