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ELECTRICITY MARKET REFORM Keeping the lights on in the cheapest, cleanest way
ENERGY PRICES Without reform, we’ll all be in the dark - The economics of climate change - New Feed-in Tariff levels for large-scale solar announced
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Contents 4 News 6 Products 10 Project Focus Chris Whitmore
26 Policy recommendations for European photovoltaic markets
12 Electricity Market Reform: Keeping the lights on in the cheapest, cleanest way 15 Energy prices: Without reform, we’ll all be in the dark 20 The economics of climate change 23 New Feed-in Tariff levels for large-scale solar announced 28 Ur abore dolorum sedisqui ut et voles nem nis eatio tem 36 sundis sequam ut et ellorem in cullati onsequas reium am
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42 Wind energy to power UK by 2020? 42 Wind energy to power UK by 2020?
46 New Feed-in Tariff levels for large-scale solar announced
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Contents
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Publicity around the challenges presented by climate change has forced the UK government to take action through policy. Government policy has a profound effect on the way public sector institutions manage their day to day business in an increasingly difficult funding environment.
Contents
Inprint
Solar Energy
Policy recommendations for European photovoltaic markets Marie Latour, European Photovoltaic Industry Association (EPIA), Brussels, Belgium The behaviour of PV markets over the last decade in Europe has taught us that not only it is necessary to optimally design support schemes, but that priority access to the grid for renewable energy sources and the reduction of administrative barriers are the key market drivers for sustainable development and essential for the markets to sustainably develop in the long term. This paper provides an overview of Europe’s PV market performance and delivers policy recommendations by means of EPIA’s PV Observatory model.
INTRODUCTION The monitoring of support schemes and the consequent development of markets throughout Europe has, until now, led to the conclusion that for a market to develop in the long term three essential conditions need to be met, otherwise the attempt will fail. These are: 1. The support scheme in place needs to be sustainable in the long term. 2. The administrative authorization process needs to be streamlined. 3. The grid-connection process needs to be efficient.
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M a ny of the le s sons that have already been learnt come from Germany which has the longest and most successful experience so far. Furthermore, the Spanish case in 2008 and the Czech Republics more recent experience have shown th at h ad th e s e c o u ntr i e s b e e n given the chance to benefit from a larger experience in more advanced markets, the situation could be vastly different today. Other markets are opening or reviewing their support in Europe, but on a global scale, EPIA believes that to sustainably develop in the long-term, these markets could learn a lot from the experience of their predecessors. The details of these recommendations are as follows.
IMPLEMENTING SUSTAINABLE SUPPORT MECHANISMS E xperience has shown that the most ef fective suppor t schemes so far for developing a PV market has been via feed-in tariffs (FiT) or similar mechanisms. These should be we ll de signe d a nd adjuste d to a level which allows a market development. Feed-in tariff laws introduce the obligation for utilities to conclude purchase agreements for the solar electricity generated by PV systems. The cost of solar electricity purchased is passed on through the electricity bill and therefore does not negatively af fect government finances. In markets where FiTs were introduced as reliable and
Insufficient support Sustainable support Unsustainable support
Private investor
<6%
6-10%
>10%
Business investor
<8%
8-12%
>12%
Table 1. Internal rate of return levels.
predictable market mechanisms, they have proven their ability to develop a sustainable PV industry that in return has progressively reduced costs towards competitiveness. In order to be sustainable, it is critical that FiTs are guaranteed for a significant period of time (at least 20 years), without any possibility of their being retroactively reduced. Feed-in premium (FiP) is a new mechanism that may prove to be a viable alternative to FiTs. Under the FiP, utilities pay a premium on top of the price of electricity while the invoice of the consumer is reduced by the amount of PV electricity produced. If PV electricity exceeds consumption, the difference should be eligible for a FiT. However, the FiP concept is new and is yet to be proved. It should be carefully considered and worked out in more detail before it is tested on the market. With the growing penetration of PV in many countries, support policies can be fine-tuned in order to drive the development of a specific market segment where this is relevant. D i r e c t c o n s u m pt i o n p r e m i u m s, additional incentives for buildingintegrated PV (BIPV), compensation for regional irradiation variations, orientation premiums such as east or west-oriented PV systems, as well as storage premiums are all examples of possible additional provisions.
policy adjustment; while the blue line illustrates a stagnating market due to an incentive deemed insufficient. Assessing the profitability through IRR calculations All available suppor t scheme c o m p o n e nts ( i n c lu d i n g F i T, ta x rebates and investment subsidies) must be taken into account when c a l c u l ati n g th e i nte r n a l r ate of return (IRR) of a PV investment. Its sustainabilit y must be assessed by considering all local factors that impact the relative profitability of a PV investment. Table 1 presents an estimate of average sustainable IRR levels in a standard European country. T hose pe rce ntage s ne e d to be adapted depending on local market conditions.
Guaranteeing gradual market development
An uncontrolled market evolution tends to create â&#x20AC;&#x2DC;stop-and-goâ&#x20AC;&#x2122; policies that risk undermining stakeholdersâ&#x20AC;&#x2122; confidence and investor appetite for PV. In that respect, there is need for a flexible market mechanism that is able to take more rapid cost digressions in the market into account and to adapt support schemes in order to ensure a sustainable growth path. The market corridor (as introduced in Germany for example) regulates the FiT based on market development over the preceding period (i.e. quarter, semester or year). This allows FiTs to be adapted as to maintain growth
within predefined boundaries. The FiT level is decreased on a regular basis in relation to the cumulated market level over a period passing below or above a set of predefined thresholds (quarterly or semi-annual revisions). The review periods should typically be set once a year to keep the administrative burden manageable for gove r nme nts and to re main compatible with the visibility needed for investment cycles.
Solar Energy
Developing a national roadmap to PV competitiveness
With the ongoing decrease in installed PV system costs and the increase in conventional electricity prices, the use of financial incentives will be progressively phased out as competitiveness is reached. A realistic roadmap to grid parity should be defined for every country along with concepts for market mechanisms that treat all electricity sources equally.
Ensuring electricity costs for consumers
As the cost of renewable energy sources such as PV is ver y transparent to the consumer through the FiT component on the electricity bill, the same transparency should exist for the cost of electricity from other conventional sources. These t ypically benefit from significant government support schemes that are not always reflected in the electricity price but are financed through other public means; in par ticular ta xes paid by the same consumers but not accounted for on their electricity bill. On average, estimates suggest that conventional sources of electricity generation benefit from seven times as much suppor t as renewable energy sources. In addition the lack
Encouraging development of a sustainable market
Sustainable market growth allows the industry to develop and creates added value for society and the economy as a whole. A critical aspect of sustainable development is ensuring adequate levels of profitability that in turn ensures the availability of capital for investments while avoiding speculative markets. Consequently, investments in PV projects need to be on a par with other investments of equivalent risk levels. Fig. 1 illustrate s mar ket developme nts under different support strategies. The green line represents sustainable market growth; the red line shows a rapid and uncontrolled market peak, followed by a collapse due to sudden
Figure 2. Administrative lead time.
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Solar Energy
analysis are detailed in the following section. In order to identify the major obstacles to the success of the legaladministrative process, a series of key characteristics need to be assessed thoroughly: yy Transparency: the process must be clear and understandable; the information necessary to complete e ac h ste p must b e ava ila ble, complete and exhaustive.
Figure 3. Sample picture
of transparent carbon costs indirectly supports non-renewable energies. The increased mix of energy from renewable sources such as PV has raised a greater awareness among consumers about the need to increase the ef ficiency of their electricity consumption. While the FiT has a visible impact on the electricity bill, it is at least partially compensated by the decrease in electricity demand. In addition, marginal cost of electricity produced from PV systems after the expiration of the FiT period is close to zero, therefore electricity prices will benefit in the long term. Most impor tantly, and in view of continued reduction of FiTs over time, the PV industry is committed to significantly reducing the cost of PV systems to make it an affordable, mainstream source of power.
STREAMLINING ADMINISTRATIVE PROCEDURES Although many countries have implemented support policies favourable to PV, when it comes to realising PV projects the bureaucratic issues and highly complex procedures and requirements (such as notification, registration or permits) tend to significantly hold back installation processes. As a result, the cost of projects is kept artificially high, hampering PV market development or requiring unnecessarily high levels of FiTs to compensate. In order to assess the situation in a given countr y and facilitate comparisons with identified best practices EPIA – as partner of the PV LEGAL project – has been involved in the collection of information on administrative frameworks by national PV associations and system developers. T he main recommendations drawn from this 31
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yy Linearity: when multiple institutions must be contacted, it is essential that each institution’s approval does not depend on the decision of the following one. yy S i m p l i c i t y : t h e n u m b e r o f institutions required in the process must be justifiable and reduced to a minimum; redundancies must be avoided. yy Proportionality: the procedure must be proportionate and wellsuited to the specific features of each market segment. yy Cost effectiveness: the total cost of the administrative process should not represent a consistent share of the entire cost of the project. yy Reasonable duration: the time necessary to complete the whole process must not exceed a few weeks, par ticularly in the case of small a nd me dium roof top installations.
CONCLUSION: OBSERVING MARKET DYNAMICS TO ENSURE RAPID PV EVOLUTION In the context of the fast evolution of the European PV market in recent years, the need to permanently monitor market dynamics has led to the creation of the Photovoltaic O b s e r v a t o r y. T h e P h o t o v o l t a i c Observatory identifies recommended conditions for market development and best practices for the sustainable development of PV by basing its analysis on examining existing policies of several key countries. The Photovoltaic Observatory also focuses on relevant regulatory issues, financial incentives, administrative barriers and grid connection procedures. The Photovoltaic Observatory aims to: yy Identify best practices among existing support policies in Europe;
yy Promote market transparency and PV deployment in the energy sector across Europe; and yy Advise national decision makers on the successful implementation of their support policies. The methodology of the PV O bse r vator y is base d on the s y s te m a ti c s tu d y of r e g u l a to r y frameworks in European countries and their impact on market development. In this respect, the administrative barrier analysis refers partly to the PV LEGAL project while financial schemes are analyzed using, among other indicators, the Internal Rate of Return (IRR) methodology. The system price evolution is also assessed on a regular basis.
About the Author Marie Latour is national policy advisor at EPIA. W ithin EPIA’s policy department she takes care of coordinating the activities with national European policy stakeholders and makes sure the position of EPIA are conveyed at a national level. She deals with national policy developments, supports national associations and manages the participation of EPIA in the PV LEGAL project. Latour led the communication activities of EPIA until 2008. She holds a Master’s degree in European Management f ro m t h e B o rd e a u x E c o l e d e Management and Madrid Cámara Oficial de Comercio. She also holds a Master’s in European Affairs from the Institut Catholique de Paris.
References [1] PV LEGAL [available online at: http://www.pvlegal.eu]
Enquiries: European Photovoltaic Industry Association (EPIA) Renewable Energy House 63-67 Rue d’Arlon 1040 Brussels, Belgium Tel: +32 2 400 10 13 Email: m.latour@epia.org Web: www.epia.org/pvobservatory