Bedeviled by boom and bust, the renewable energy industry got what it wanted from political agreement in June on the EU’s 2030 renewable energy targets: not just a higher EU target than expected – but also visibility and transparency for investors.
“Member states are mandated to now give five years of visibility to investors on the volumes, timing of auctions, and the budgets allocated to renewable energy, and must draw up 10-year plans setting out their climate and energy objectives,” says Pierre Tardieu, Chief Policy Officer at the industry association WindEurope. “It’s very positive.”
The agreement reached in June between member states and the European Parliament on the EU’s second Renewable Energy Directive (REDII) sets an overall target of 32% of gross energy consumption to be sourced from renewables by 2030 – up from the 27% previously proposed by the European Commission, although less than the 35% Parliament sought (and, inevitably, less than environmental groups wished for). “This is higher than expected even six months ago,” says Tardieu.
Renewables lobby groups also welcomed a raft of more technical decisions that went in their favour.
Tardieu highlights a provision allowing member states to continue to run technology-specific auctions, while solar lobby group SolarPower Europe welcomed protections for residential and small business owners of renewable power systems.
Following intense debate, REDII includes provisions that protect owners of systems below 30kW in capacity from taxes on self-consumption, such as Spain’s notorious “sun tax,” which is now being repealed, says SolarPower Europe’s Policy Director, Aurélie Beauvais. It also recognises the role of new business models, such as renewable energy leasing and peer-to-peer trading, she adds.
It also strengthens the Guarantees of Origin (GO) system, which traces the generation of green energy and is crucial to the corporate power purchase agreement (PPA) market.
“It makes their use mandatory, rather than voluntary, and the sole source of making renewable energy claims,” says Tom Lindberg, Managing Director of ECOHZ, a Norway-based provider of GOs. In addition, GOs can be issued from power plants receiving subsidies, without mandatory central auctioning – which had been proposed in a previous draft, – which means they can be bundled with corporate PPAs if countries choose to allow this.
The directive also requires member states to report progress on removing administrative barriers to corporate sourcing of clean energy. Corporate PPAs, which allow companies to contract directly with renewable power projects, are expected to account for a significant new demand for renewables, especially as government subsidies decline.
In one respect, however, the directive can be seen as weaker than its 2009 predecessor.
The previous directive imposed legally-binding national targets on each member state, but REDII sets an overall EU target plus an accompanying Governance Regulation that requires states to draw up National Energy and Climate Plans (NECPs) by the end of 2018 which the European Commission will assess to see whether they collectively deliver the 2030 target.
If they do not, it will enter into discussions with laggard member states during 2019 and 2020 to persuade them – publicly – to increase their ambitions.
“Legally it’s weaker, but politically it’s much stronger,” says Quentin Genard, Senior Policy Advisor at think tank E3G in Brussels. Crucially, member states must consult with neighboring countries when drafting their NECPs. “A lot of diplomatic movement and bilateral pressure is expected,” Genard says. He notes that if the final NECPs do not achieve the target, the commission can propose “additional measures” at EU level.
While renewables groups welcomed the 32% target, environmentalists warned that it is insufficient to reach the Paris climate agreement goals, and Hélène Lavray, Senior Advisor Renewables & Environment & Public Affairs Coordination at power industry association Eurelectric, argues that a target alone is not enough, and should be complemented by other measures to provide a “sufficient signal” for the investment needed to decarbonise Europe’s power system.
However, some renewables advocates believe the system has been designed to encourage over-delivery, especially as renewable energy costs are likely to continue to fall.
“The target won’t kick-start the market, but it will ensure renewables’ continuing deployment,” says Genard. “But the real change is that investors will have more transparency, they will be better informed about what member states have committed to, and when, and that’s how we could overshoot the targets,” he says.
Alexis Gazzo, a Paris-based Partner at Ernst & Young et Associés, argues that “renewables have moved from being policy-driven to market-driven,” noting that growing volumes are likely to be developed under corporate PPAs or as small-scale installations that otherwise bypass state-owned grids and government support programmes.
“The importance of the directive – and it is important – is to give long-term visibility to the sector rather than to micro-manage delivery”, Gazzo adds.
As renewables continue to fall in cost, decisions by consumers – as much as those in NECPs set by governments – will become increasingly important, notes Andrew Horstead, Lead Analyst within EY’s Global Power & Utilities Team. EY’s Countdown Clock project, which tracks key tipping points in the low-carbon transition, has shown off-grid electricity reaching cost parity with grid-delivered energy in the EU by 2022.
“At that point, a lot of the challenges in ensuring the lights stay on become the responsibility of the local network operator,” Horstead says, with potentially large volumes of distributed generation entering the system. “Regulators and policymakers must ensure that these distribution system operators have the flexibility at a local level to manage this change.”
Beyond the regulatory sphere, other factors are working to support renewables, with their deployment increasingly influenced by power, gas and carbon prices, and an increasingly integrated European electricity system.
The carbon price in particular is trading above €20 per tonne of carbon dioxide – levels not seen for a decade – after EU policymakers introduced a mechanism to remove the overhang of surplus allowances that has weighed on the market since the financial crisis.
The price is likely to rise, argues Mark Lewis, Head of Research at financial think tank Carbon Tracker. In a recent report, he forecast that average prices will need to rise to between €35/t and €40/t over 2019–22 to incentivise electricity generators to switch from coal- to gas-fired generation, and meet new demand for allowances from the aviation sector.
“What’s different from 10 years ago, when carbon prices were last at these levels, is that the economics of renewables have improved extraordinarily,” says Lewis.
But past carbon price volatility – and a lack of future certainty – makes it difficult for renewables developers to rely upon. Lewis notes that it is impossible to forecast carbon prices more than three or four years into the future, “because there are so many moving parts.”
Not least of these is the “dynamic feedback loop” by which high carbon prices prompt new renewables capacity and early coal-plant closures. “That cannibalises the carbon market by reducing demand for allowances”, Lewis says, adding that this is why the idea of a carbon price floor (as introduced in the UK for its power sector in 2013) “isn’t going away.”
The UK poses another major source of uncertainty for the EU’s entire energy and climate package.
UK diplomats have been involved in the REDII negotiations, but its Government has not set out a post-Brexit position on renewables or carbon targets.
A key concern, according to a coalition of trade associations, investors and large corporations, including French utility EDF and consumer goods giant Unilever, is that a disorderly Brexit would disrupt energy trading between the UK and the rest of the EU.
Interconnectors between the UK, Ireland, France and the Netherlands currently provide around 6% of the UK’s power – a figure the UK Government forecasts could rise above 20% by 2025. Interconnectors are also now planned to connect the UK to the Nord Pool power market, through Norway and Denmark.
Indeed, the ability of generators and grid operators to move electricity around the EU will prove crucial to integrating growing volumes of renewables – and avoiding price volatility caused by, among other things, drought in Scandinavia hitting hydro generation and wind turbines calmed by stable, low-wind weather patterns.
“There is clearly an acknowledgment that we need more interconnection in the context of the energy transition,” says Beauvais at SolarPower Europe. “The main issue is the financing; the key here will be the discussion around the [2021–27] European Budget.” While the European Commission has earmarked 25% for decarbonisation and clean energy, “we’ll have to see how much of the cake is directed toward electricity transmission and distribution lines as well as the necessary interconnectors,” she adds.
Gazzo at EY agrees: “An integrated electricity network is vital to balance a market with high levels of renewables, with solar resources in southern Europe complementing wind power in the north.
“But policymakers also have to grapple with a market which is profoundly changing, where an abundant supply of renewable energy is reducing the cost of generating electricity, and more and more of the value is in services around electricity, and guaranteeing capacity and security of supply.”