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Wednesday, August 21, 2013

European Union Wind and Solar Electricity Policies: Overview and Considerations

Phillip Brown 
Specialist in Energy Policy

European Union (EU) countries have provided support for the development and deployment of renewable energy technologies, dating back to as early as the 1980s. Today, the European Union has established binding renewable energy targets with the goal of having the entire EU derive 20% of total energy consumption (electricity, heating/cooling, and transportation) from renewable sources by 2020. EU member countries have discretion to decide how best to achieve EU-level targets. Each country uses a unique set of policies and financial incentives to stimulate renewable energy production. While EU and U.S. energy markets are very different, knowledge of the history, evolution, financial mechanics, and market impacts of EU renewable electricity policies may be useful to Congress during future debates about renewable electricity policy in the United States.

Renewable electricity generation is one component of the EU energy sector that has been emphasized. Several member countries have designed and implemented various mechanisms to encourage renewable electricity production. To date, the majority of renewable electricity deployment has been in the form of onshore wind and solar photovoltaic (PV) power generation. Feed-in tariffs (FiT) are the most commonly referenced incentive mechanism used by EU countries. However, other mechanisms, such as market premiums, green certificates, and reverse auctions are also used to motivate renewable electricity generation.

Germany, Spain, and Italy are EU countries that have deployed renewable electricity generation systems at a relatively large scale. At the end of 2012 Germany and Italy were the top two countries in terms of cumulative installed solar PV capacity with 32 Gigawatts (GW) and 17 GW, respectively. Spain was the largest global solar PV market during calendar year 2008. Those high deployment levels have established these countries as leaders in renewable electricity generation. However, political, economic, and power system concerns are causing these same countries to adjust, modify, and often reduce financial support incentives. Further, the policies, deployment profiles, financial mechanics, and incentive modifications differ for each country.

To control escalating surcharges on consumer electricity bills, German policy officials have been rapidly reducing financial incentives for solar PV and have instituted a solar PV capacity support limit of 52GW, at which point incentives will no longer be available for new projects. Similarly, Italy has placed limits on financial support—also paid through consumer surcharges—for all renewable electricity generation. In 2012, Italy’s renewable electricity surcharge represented approximately 20% of the average electricity bill. As of June 2013, financial support limits for solar PV in Italy were reached and feed-in tariffs are no longer available for new projects. Spain has completely suspended FiT incentives for renewable electricity and has implemented retroactive incentive reduction policies that affect revenue, cash flow, and investment returns for existing operational projects.

EU countries are transitioning from electricity production-based incentives (i.e., feed-in tariffs) to market integration incentives such as market premiums, bonus payments for remotely controlled wind and solar projects, and flexibility premiums for renewable generation that can reduce grid instability. Power market integration of renewables, combined with declining costs of renewable electricity, may result in a more stable, albeit smaller, competitive market for renewable electricity generation. A second trend in EU countries is the implementation of retroactive incentive reductions to control costs associated with renewable electricity support. While retroactive measures may be fiscally necessary, they will likely affect future renewable electricity deployment by introducing an element of policy risk that causes financing costs, and thus production costs, to rise. These trends are likely to result in lower EU renewable capacity additions for some member countries. However, carbon policies and declining technology costs may support future EU renewable electricity market growth.

Date of Report: August 7, 2013
Number of Pages: 44
Order Number: R43176
Price: $29.95

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