July 15, 2016
BRUSSELS INSIDER by Sonja van Renssen
Germany and Denmark open up renewable support schemes to each other
July 15, 2016
Germany and Denmark are on the verge of signing a landmark agreement that will see them open up their renewables support schemes to one another in a historic first. Brussels has long pushed for such cross-border cooperation, but to little avail. One difference now is that new EU state aid guidelines are forcing member states into competitive tenders for renewables support – which in turn opens the door to a volume-controlled opening. Some say that Europe should first focus on getting more experience of auctioning and while it is true that the German-Danish experience has demonstrated the challenges of working together, it also shows that a lot can be done while still respecting local rules and models.
It’s been possible for years but European countries have hardly embraced the option of jointly developing renewable energy. Sweden and Norway have a shared subsidy scheme, but that’s pretty much it. There has been some half-hearted talk about “statistical transfers” of green energy from one country to another, but the idea of governments sitting down together to jointly fund wind or solar projects has largely remained a no-go. Until now. Next week, Germany and Denmark hope to sign a first-of-its-kind cooperation agreement that will see them open up their renewables support schemes to one another.
Not all of their schemes. Not for all technologies. And not exactly willingly. The agreement is in fact the result of pressure from DG Competition, one of the European Commission’s most powerful departments. It told both Germany and Denmark that they needed to partly open up their renewables support schemes to get these approved as state aid. DG Competition argued that this is only fair because a renewables levy is charged on all electricity, imported or domestically produced, but the funds are only used to subsidise domestic projects. That means “foreign” renewables are being discriminated against.
The verdict came despite a European Court of Justice ruling in July 2014 that member states are not obliged to open up their national renewables support schemes.
In practical terms, the cooperation agreement will underpin a pilot project in which Germany makes 50MW of subsidised ground-mounted solar capacity available to Danish bidders and Denmark 2.4MW available to German bidders. Although the numbers may seem very different, they are actually comparable: Germany is making 50MW out of 400MW available (12.5%) and Denmark 2.4MW out of 20MW (12%). Reciprocity is one of three legal pre-conditions that both countries have set for cooperation. The other two are that a cooperation agreement must underpin any project and that green electricity generated abroad can be “physically” imported. The latter is critical for public acceptance.
Let the market rule
Brussels has been pushing for more cross-border renewables cooperation for a long time. It is part of a bigger EU push for more competition and the completion of the internal market for energy. Regional fora such as the Pentalateral Forum and the Baltic Energy Market Interconnection Plan (BEMIP) are adding cooperation on renewables to their agendas. There is a strong efficiency argument for it: Siemens calculated in 2013 that spending on renewables in the “wrong” places was costing €45 billion in unnecessary investment. In a report in October 2015, consultancy Ecofys estimated that a joint feed-in premium system in Central and Eastern Europe could save 25% in support costs.
New state aid guidelines that the EU adopted in 2014, call on member states to make more use of cooperation mechanisms set up by the EU’s 2009 renewable energy directive. Marie Donnelly, Director for Renewables at the Commission’s energy department, gave a few reasons to be hopeful this will happen at an EU Sustainable Energy Week (EUSEW) event to promote the German-Danish cooperation. One, interest in cross-border trade will pick up as member states approach their 2020 renewable energy targets and some realise they are not on track. Two, the state aid guidelines give a fresh push. And three, it is only in the past year, with the launch of the Energy Union, that regional cooperation has become a political priority.
Others argue that the EU’s renewable energy targets are too weak to drive member states to look beyond their own borders. “There are no binding national [renewable energy] targets [for 2030],” said Marcus Franken, Head of the EU Office for E.ON at the EUSEW debate. “Where is the pressure to cooperate?” Member states will need to see clear benefits and the Commission will need to impose good governance for it to happen, he suggested.
There is one very practical reason why the prospects for renewable energy cooperation suddenly look brighter. That is a requirement in the state aid guidelines for all member states to move to competitive tenders for renewables support. As of 2017, all member states will use auctions to decide which projects get support and at what level (minus a few exceptions, such as for very small installations). The idea is to be able to control renewables costs and volumes, in a way that was not possible under the previous system of feed-in tariffs. “Having a tender system makes cross-border cooperation much easier,” explains André Poschmann, in charge of electricity market integration at the German Energy Ministry. “You can control your opening.”
Getting auctions right
A new report by Ecofys (the “AURES” project) shows that eight member states had already introduced auction schemes for at least some technologies as of March 2016. They were: Spain, France, the UK, Germany, the Netherlands, Denmark, Italy and Cyprus. Ecofys explored different auction designs with a view to making recommendations on best practice. As well as looking within Europe, it examined schemes in South Africa, Brazil, California and China.
“In the past our experiences with auctions have been quite mixed,” says Corinna Klessmann, coordinator of renewables energy policy research at Ecofys. “One of the problems was that projects that were successful in auctions were not realised.” In Brazil, Italy and France, for example, less than half the projects set to start operations have been realised. Ecofys says it is “too early” to judge the success of the latest revival of auctions in Europe, driven by the state aid guidelines. But it already points to one lesson: pre-qualification requirements and penalties raise the chances of projects actually happening, even as they diminish the number of bidders and competition.
Alexandre Roesch, head of policy at Solar Power Europe, representing the European solar industry, says that the EU should first focus on gaining experience in auctioning, before trying to take it cross-border. “Less than 5GW of solar capacity has been tendered today,” he said at the EUSEW event. “We have limited experience with tenders. First, we should get tender design right then think about cross-border”. For Denmark, the upcoming pilot project with Germany is its first solar PV auction as well as its first foray into cross-border renewables support.
“Thinking that investments will flow to where renewables are best is only true if you think other conditions are similar,” Roesch continues. In other words, opening up support schemes will not necessarily get wind farms built where there is most wind. In practice, it is cost of capital and indeed country risk that are the greatest determinants of where renewables appear. “As the cost of equipment for wind and especially solar goes down, so other costs go up in relative terms,” Roesch adds.
Nevertheless, all auctions schemes deliver sometimes “remarkable” efficiency gains, say the Ecofys researchers. The latest testament to this came from the Netherlands on 5 July when it announced that it will be hosting the cheapest ever offshore wind farm. The 700MW Borssele farm will be built by DONG Energy for a record low €72.7/MWh, substantially below the previous low set last year of €103/MWh for a project off the Danish coast. Four more farms are in the planning.
Roesch argues that you need the same basic auction design at national level for two countries to hook up cross-border. For example, in Europe, auctions are generally based on price, although multi-criteria auctions prevail elsewhere. This fits with the Commission’s push in the state aid guidelines for greater efficiency. It means that exceptions like France, which do include environmental, local content etc criteria in auctions, should ideally move these into pre-qualification requirements in future, Roesch says.
In the negotiations between Germany and Denmark on their cross-border pilot project, a key question that has emerged is: which parts of a joint project should fall under “auction design” – and be mutually agreed – and which parts can fall under “local conditions” and remain distinct? Jane Glindvad Kristensen, Head of Division at the Danish Energy Agency’s Center for Supply, summed it up thus: “How to balance a tender that is open and non-discriminatory and at the same time respects local conditions?” Her worry is that “DG Energy says it’s fine but what if DG Competition calls it discriminatory and unfair”? There is some evidence that the two departments have different visions for the European energy market.
Germany and Denmark are testing out a cooperative model of mutually opened auctions with the basic principle that installations are subject to the rules of those countries where they are built. But very different national circumstances are a challenge, admits Kristensen. For example, Germany has restrictions on where PV may be located to get support; Denmark does not. In this case, each respects the other. But the two governments have also agreed that remuneration during periods of negative prices is an auction design element and needs a joint, upfront decision.
Cooperation “is possible but it takes time and is not easy”, concludes Kristensen. Denmark is not yet sure about how it will follow up on the pilot. The government definitely wants to retain control over how much it opens up and to whom, she says. It may look at alternative ways of appeasing the Commission’s state aid concerns. Germany, on the other hand, has already committed to opening up 5% of its support scheme from 2017. For Poschmann, the next step is a real joint auction. Germany is investigating this possibility with Luxembourg. The idea here is for two or more countries to hold one auction that is open to all. This requires a single auction design, but national support schemes could be “clicked” together, with every installation assigned to one support scheme or another by a random key, rather than requiring an actual pooling of funds.
Blueprint for action
Whichever cooperation model is chosen, citizens will want to see evidence that their money is getting them green electricity. Public enthusiasm for funding foreign installations is low. The Dutch government proposed it and the Dutch parliament rejected it (although the Netherlands is behind on its 2020 renewables target). The problem is that it is essentially impossible to trace electricity flows back to individual installations. Nevertheless, Poschmann and Kristensen both say some kind of “proof of import” will need to be devised to make cross-border projects palatable.
Klessmann believes that cross-border cooperation to build new renewables “probably won’t happen without pressure or incentives from the Commission”. Ecofys has in the past suggested that the Commission could either simply mandate some opening up or incentivise it by linking it to access to EU funds, credit or letting it count extra towards (currently non-existent) national renewables goals. Franken from E.ON was candid at the EUSEW event: “We need a kind of pressure and we would prefer pressure from the renewables directive and market design [proposals], not DG Competition.”
Poschmann is looking for a “blueprint” for cross-border renewables cooperation in the new renewables directive promised by the Commission for the end of this year. As well as creating incentives for it, this could set out what should be part of auction design and what should be left to local rules, for example. Commission officials like to say that all member states need to take part in contributing to Europe’s 27% renewables in 2030 goal. For Donnelly, initiatives like regional cooperation in the North Sea and the imminent German-Danish pilot project are opportunities to test “what differences can we live with?” Klessmann reminds us however: “It’s not a purely economic question – it’s political.”