The European Commission has presented a Communication which gives guidance to Member States on “how to make the most of public interventions” in the electricity market. The Communication discusses “how to reform existing” interventions, especially renewable energy subsidy schemes, and how to effectively design new ones, especially for back-up capacity schemes.”
The Commission notes that “in some very specific cases public intervention might be necessary to attain public policy objectives”, but adds that “if they are not carefully designed they can severely distort the functioning of the market and lead to higher energy prices both for households and businesses.”
One noteworthy recommendation Brussels makes is that it advises Member States to replace “feed in tariffs” with incentive-based schemes. Feed-in tariffs are the mainstay of the German Energiewende.
Renewable energy support schemes
According to the Commission, “renewable energy – both wind and solar – was for a long time a new technology that needed state intervention to develop.” However, “with technological progress, investment costs in solar panel falling and production expanding, many Member States have started a reform of their support schemes for renewables.”
In particular the Commission recommends the following “best practices”:
- “Financial support should be limited to what is necessary and should help making renewables competitive.”
- “Support schemes should be flexible and respond to falling production costs. As they mature, technologies should be gradually exposed to market prices and eventually support must be fully removed. In practical terms this means that feed in tariffs should be replaced by feed in premia or other support instruments which give incentives to producers to respond to market developments.”
- “Governments must avoid unannounced or retroactive scheme changes. Investors’ legitimate expectations concerning the returns on existing investments must be respected.”
- “Member States should better coordinate their renewable energies strategies to keep costs low for consumers – in terms of energy prices and taxes.”
Back-up capacities for renewable energy
With regard to backup capacity schemes which many Member States are planning to introduce, the Commission makes the following recommendations:
- “Before deciding on capacity mechanisms, governments should first analyse the causes for inadequate generation.”
- “Secondly, they should remove any distortions that may in the first place prevent the market from delivering the right incentives for investment in generation capacity. Such causes can be: regulated prices, high subsidies for renewable energy.”
- “Governments should also ensure that renewable electricity producers react to market signals and promote flexibility on the demand side, for example by promoting different tariffs to consumers and therefore giving an incentive to use electricity at other times than peak times.”
- “Any back-up capacity mechanism should not be designed having only the national market in mind but the European perspective.”
Follow up
The Commission notes that while the Communication published today “is not a legally binding act, it does set out the main principles which the Commission will apply when assessing state interventions relating to renewable support schemes, capacity mechanisms or measures to ensure consumer demand response. They are therefore relevant to the future enforcement of EU state aid rules or EU energy legislation. The Commission will also consider whether to propose legal instruments to ensure that these principles are fully implemented.”
More information
Click here for the full Communication on “Delivering the internal electricity market. Making the most of public intervention” and here for a Memo on the Communication.