The development of green energy in the EU is taking place in a highly inefficient way, with much of the renewable energy sources built in the least productive locations, writes Jakub Kucera, economic analyst at RSJ, a Prague-based investment company. To address this problem, an EU-wide support scheme could be envisaged, but that also has many drawbacks, notes Kucera. He suggests that a combination of an EU-wide scheme with national support schemes could be the answer.
It is fairly simple to demonstrate that green energy sources in the EU, particularly solar panels, have not been built in the most efficient way so far. This is a pity since the possible savings are huge.
First, let us have a look at the European leaders in installed PV capacity. Not surprisingly, the first place goes to Germany with a very generous subsidy programme, resulting in 38 GW, over 40% of the EU´s total installed capacity at the end of 2014. The next four countries are Italy with 18 GW, France with 6 GW as well as the UK and Spain with approximately 5 GW each.
Since these are large countries, this result is not surprising. To draw a more realistic comparison, I have calculated PV density by dividing installed capacity by territory. This leads to very different results, although Germany still holds a top position. Only Malta has a higher density of solar panels. The following places are occupied by Belgium, Italy, Luxembourg, Netherlands, Czech Republic and UK, respectively.
We could think of EU-wide auctions, in which support payments will go to the lowest bidder
Apart from Italy and Malta, all the top countries lie in the northern part of the continent. Far sunnier countries lying in the South can be found in the lower positions – see figure 1. This makes no sense. If we consider the actual power produced by the available capacity, moving solar panels from Germany to Spain could almost double the output. (See the capacity factors in figure 1.)
Suppose solar panels in Spain and Germany were installed at the same density, this would lead to a migration of approximately 20 GW from Germany to Spain, resulting in 16 TWh worth of extra electricity. This equals the annual output of two 1000 MW nuclear reactors or 7% of Spain´s annual consumption.
It is, of course, no great surprise to find out it is better to build solar power plants in the South. The figures and possible savings are, nonetheless, intriguing. Moreover it may be cheaper to erect the panels in Southern Europe with comparatively cheap labour.
One could object that it is not totally accurate to use data for existing plants when judging the potential of European countries for producing electricity from the sun. In this regard, it is worthwhile to mention a paper from the Institute for Environment and Sustainability (IES), An assessment of the regional potential for solar power generation in EU-28 (Energy Policy, 88 (2016), pp. 86–99), which quantifies the suitability of different regions for PV installations.
In addition to solar radiation, the authors take into account many other factors, such as protected and sensitive natural areas, built-up areas, wetlands, water bodies and forests, topographic parameters such as slope, aspect and elevation, as well as proximity to roads, electricity grids and population centres. Figures 2 and 3 show the results.
Incidentally, this paper also shows that at least within member states PV installations are indeed built in the most suitable places.
The question is, how can we make renewable energy sources “move” to more suitable locations?
What we could do when the 2030 renewable energy targets are divided among member states (at this moment there is only an EU-wide target of 27%), is to take into account the potential of countries, as was done with the 2020 goals. It will be necessary to divide the targets along national lines if we want to ensure that the EU target will be met since, under current conditions, the EU itself has no means to do so and we cannot rely on the member states´ own non-binding goals. However, exactly this approach has led to the current situation with far more solar panels in Germany than in Spain.
Another problem is that it will be anything but certain that the targets will be divided between the member states justly. Some may object that their share of renewables is set too high and the issue can be misused for Brussels-bashing (“EU telling how much green energy to produce”, many newspaper headlines would surely read).
A single support scheme and the subsequent migration of new sources to the most suitable countries would result in the other countries losing, at least partially, their renewable energy industries
One solution would be to formulate the targets for member states taking into account only their GDP and the current state of the renewables sector, and to supplement this by robust cooperation mechanisms in which member states could “trade” in their commitments. This way, countries with worse conditions for green energy production could pay a country with more favourable conditions to produce green power in their place (other cooperation options, such as exchange of power production for storage in pump-storage plants, are also possible). Such a cooperation mechanism exists in the Renewable Energy Directive but has not found wide acceptance yet.
Given the above-mentioned obstacles it may be better to keep only one EU-wide target, to prevent bickering among member states. How could this be achieved? The answer could be a single, EU-wide renewables support mechanism. We could, for example, think of EU-wide auctions, in which support payments will go to the lowest bidder. Logically, an investor who builds a green energy source in the most suitable place, translating into higher output per euro spent, can make do with the lowest subsidy. As a result, green sources would “migrate” to the regions with the best conditions for their development. Moreover, a single scheme would remove market distortions stemming from the present variety of subsidy programmes in the EU. Unfortunately it would also face manifold problems.
First of all, there is the question of funding. Either the EU would need to get the necessary finance directly from the member states, or electricity consumers would need to pay a surcharge for the green energy development. Both solutions have the same problem – member states or electricity consumers would send more money to Brussels which would distribute it, often to other countries. In the current situation with Europhobes gaining momentum this is politically risky.
Secondly, if we put all our eggs in one basket and we pick a faulty support scheme, this would stop the development of renewable resources in all of the EU, not merely in a member state.
Thirdly, a single support scheme and the subsequent migration of new sources to the most suitable countries would result in the other countries losing, at least partially, their renewable energy industries. According to the Paris Climate Agreement, all of us are supposed to stop burning fossil fuels in the future, so it could be argued that renewables should be developed in all EU countries.
Fourthly, it is doubtful whether a single support scheme would be able to take into account the effects the new variable sources of energy would have on the power system. It is obviously not desirable to have a country with very high fluctuations of green power production without balancing interconnections to other countries.
Last but not least, the auction results may be skewed towards a small group of countries that have the low cost of capital necessary to build new energy sources. The EU-funded DiaCore project, which Sonja van Renssen reported on in Energy Post in February, shows these differences are significant (see figure 4). For instance, the conditions for a wind turbine may be far better in Portugal than in Germany, yet it can make more sense for an investor to erect it in Germany since capital can be raised there for half the price.
True, a single support scheme would probably weaken some of the reasons for the huge differences in cost of capital. The single most important factor are after all the different support schemes in member states. Investors are also wary of possible retrospective changes in them. With a single support scheme, there would be one sole scheme dependent on EU policy, rather than on very changeable national policies. But other reasons, especially those not directly connected to renewable energy policies, such as a country´s general investment risk (think of the possibility of Greece leaving the Eurozone), would persist, making them a permanent threat to the single support scheme.
Figure4 – Weighted average cost of capital for an on-shore wind turbine in 2014
source: The impact of risks in renewable energy investments and the role of smart policies, Diacore Project, February 2016
There is no clear and optimal solution in sight yet so we should start debating options as soon as possible. On the one hand, we should build renewable energy sources in the regions where they enjoy the best conditions and therefore produce at the lowest cost. On the other hand, an EU-wide support scheme, which would bring about “migration” of renewable source to the most suitable places, faces many obstacles. Perhaps a combination of an EU support scheme with national ones is worth considering. This would lead to more renewable energy developed in the most suitable countries, but leave some renewable sources to be developed in all member states.