Sunday, June 1, 2014

Goodbye to FiTs

The European Commission is pushing for guaranteed price Feed In Tariffs (FiTs) to be replaced by more market-orientated funding schemes, despite their proposals being strongly opposed.  FiTs have been very successful at getting renewable capacity built, in Germany especially- about 70GW so far there.  But as renewable capacity grew, especially initially expensive PV solar, the FiTs had passed increasing amounts of surcharge on to consumer bills. The European Commission has now proposed new rules which will be phased in gradually, following a pilot phase from 2015-16. But from 2017 all member states will have to use tenders to support new green power facilities. The idea is to replace FiTs with auctions or bidding processes open to all green energy generators competing equally. In its draft paper ‘Services of DG Competition containing draft Guidelines on environmental and energy aid for 2014-2020’, it says, on ‘Aid granted by way of a feed-in-premium or feed-in-tariff’ that in future ‘aid is granted in a genuinely competitive bidding process on the basis of clear, transparent and non-discriminatory criteria’.

There are similarities with the Contracts for a Difference  (CfD) system now being introduced in the UK, which, in its latest variant, includes a competitive project assessment phases, and indeed also with the old  Non Fossil Fuel Obligation (NFFO) capacity auction system the UK started out with in the 1990s. That had proved very ineffective at getting capacity built:  some developers bid low to get the contracts but often were unable to go ahead with the project. Germany’s new premium market EEG system also has some similarities- FiT are mostly replaced by direct market competition. That has not gone down too well with critics like the World Future Council: With this reform the German government ends its success story by putting the energy system back into the hands of those who have a deep interest in remaining with conventional, dirty fossil energy sources. The German government with its reform is slowing the rapid expansion of renewable power, as it forces investors to take higher risks when investing in a future-just energy system.’

As with the new German scheme, the EC is proposing some exemptions for the EU wide scheme. As Reuters noted ‘Following extensive lobbying from companies, the new rules allow for exemptions in special circumstances, including sparing energy-intensive industries such as chemicals, metals, paper and ceramics from helping to pay for renewable power’ But, it added ‘That leaves ordinary household consumers to pick up the bill’, and, understandably, reactions from green groups have be very hostile. Claude Turmes, a member of the European Parliament representing the Green Party, told Reuters ‘Citizens will lose twice: they will pay for industries' new free ride and will continue to suffer from an outdated energy system.’ The European Wind Energy Association said that, while it was appropriate that the increasingly competitive wind industry be integrated into the market, the Commission should eliminate all fossil fuel subsidies as a priority. The EC was ‘ignoring the obvious market distortions that need to be tackled first, such as the majority of subsidies that go to fossil fuels and nuclear’.

Nuclear was included in an early draft of the proposals but, after protests, has now been excluded- developers/ governments have to make a special case for it, as in the case of Hinkley in the UK. But most of the rest of the proposals stayed. So now it’s goodbye to all the various variants of  FiTs . Instead, in most cases, there will be pressure to impose a one-size-fits-all market approach across the EU, with presumably the EC using the threat of baring other approaches under the ‘state aid’ subsidy rules, to police the system.

Views on all this will differ. Certainly the new market approach should reduce costs to consumers in the short term: that seems to be the ostensible aim, though that was not the result of the UK’s disastrous Renewables Obligation (RO) market orientated approach: that cost UK consumers  much more/kW and kWh than the FiTs used elsewhere. But just like imposing capacity caps (as in Germany and elsewhere), the market approach will no doubt slow the deployment of renewables- that’s how it will reduce costs. Though since increasingly expensive fossil fuel will therefore have to be used more, longer-term it will push prices up. However, despite the evidence from the RO and NFFO, devotees of market competition may argue that competition will lead to reduced renewable energy technology cost, so that may compensate, leading to more capacity for the same, or reduced, outlay. Place your bets!