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.
EU-wide auctions
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.
Obstacles
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
Optimal solution
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.
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Frans Rusting says
Thanks for these interesting considerations! I suppose this approach would be applicable to, e.g., ´wind´ as well.
When you talk about ’the effects the new variable sources of energy` you state:
’It is obviously not desirable to have a country with very high fluctuations of green power production without balancing interconnections to other countries’.
My comment is triggered by this remark, which is very much true of course.
In fact I strongly believe that, what I call, ‘direct interconnections between all countries’ are required. This is also a good way to realise one market for electricity, which stimulates competition between producers and innovation.
Although we don’t use the term ‘direct interconnections..’: this is what we propose in our article:
https://energypost.eu/exclusive-overlay-network-telecom-experts-present-revolutionary-plan-integrate-eu-power-market/
The setting up of the network we propose does require coordination at the European level.
In the present political reality this cannot be done by creating some sort of EU institution.
We propose a different approach which stems from the ‘pre-EU era’, from around 1970.
Then, there was a requirement for telecom operators (who were generally state-owned) to join forces in order to realise long-distance (mainly telephone) connections via satellites. The importance for the national economies of telecommunications and the fact that countries were ‘very sovereign’ were the main reasons for the creation of a cooperative company as owner and operator of satellites for telecoms. The company was owned and governed by the telecom operators, and controlled by the governments of the participating countries.
Although of course technically and operationally very different, such a cooperative (with TSO’s as owners etc.) is a solution for realising the ’direct interconnections’ mentioned above, while safeguarding the national ineterests of participating countries and without transferring any power to a new (EU) institution.
Frans Rusting
Frans Rusting says
First of all I have to apologise. I did not read carefully enough; you did mention ‘wind’!
I still believe that this article contains many interesting observations.
In the last paragraph you say that “we should start debating options as soon as possible“.
Very true! Will not be easy; I have many times seen that we Europeans are masters in debating things and in knowing how to do something. But we often don’t follow-up by really doing it!
Nevertheless: as you rightly say, a debate must start as soon as possible.
Not necessarily as a EU-discussion; this would complicate matters in today’s political realtity.
A conference of some sort might be very useful, and my guess would be that involvement of specialists of the European Commission, with all the knowledge they have, as catalist might be helpful.
One scheme that was not mentioned as an option is to have no support at all. If a network like the one we propose were implemented, there would be ‘direct interconnections’ between all countries, not only between neighbors. This should lead to real competition between producers everywhere in Europe and to real innovation; production would take place on the best locations and in the best way possible.
Of course, the transmission costs from ‘producer’ to ‘consumer’ will play an important role. In our proposal a tariff would have to be paid to the cooperative company which owns the network;the company itself would be jointly owned by the TSO’s. The tariff would be decided on the basis of a transparent tariffing policy as decided by the cooperative. It would not depend on the policies of individual countries, but only on distance and ‘volume’.
S. Herb says
The article completely ignores the issues of grid interconnections and possible HVDC interregional transmission. If power is ‘regional’, e.g. no large-scale transmission capability between Spain/Portugal and Germany, then Germany ought to try to do as best it can in its own neighborhood, rather than, say, extending the run time of its lignite plants in exchange for support of solar in Spain. HVDC would make optimal placement of generation more useful, but it is politically at best on the far horizon.
If the price of solar and wind drop as expected over the next 6-8 years, the national support schemes will become much less important in the Sunny and Windy places, and cross-border investment should thrive, given half-way sane national policies (e.g. grid support for renewables).
Frans Rusting says
S. Herb,
Please read my comment above carefully. I am NOT talking about a solution involving any EU-institution. This is about a solution to be implemented by sovereign states and their TSO’s and by those states and TSO’s only!
One of the reasons why the proposal should be attractive is precisely the fact that the present political reality, like it or not, does not allow EU-involvement.
Frans Rusting
Bas says
Considering the Brexit referendum, it would be wise if Brussels doesn’t doesn’t go forward with this.
Tilleul says
Err… Germany is spending 1,3 billions euros of ice creams every year while Spain is only spending 884 millions euros… Should we also find a way to obtain an optimal consumption of ice creams based on how warm the weather is in each european countries ?
As I recently heard a scientists says to a similar idea : “who gave you the right to optimize me ?”
Karel Beckman says
Not a fair comment. The author rightly points out that an EU-wide scheme would be more efficient, but also explains in detail why things aren’t as simple as that. You ignore all the nuances he discusses.
Tilleul says
Sorry but “we should build renewable energy sources in the regions where they enjoy the best conditions and therefore produce at the lowest cost” is exactly the same argument as “we should eat ice cream only in sunny places”.
The fundamental hypothesis of his article is that using the cheapest solar or wind will result in the cheapest price of power for the consumer…which is technically false.
1) because the cost of electricity today is network charges and taxes… not energy… So it won’t change anything specially as the difference of insulation between european countries are like 1 to 1,5… which is basically nothing (just look at the difference between producing oil in Saudi Arabia or with tar sands in Alberta).
That means what you win in the energy cost, you will lose it in grid costs… Overall there is no difference…
2) Wind and solar don’t produce according to the demand they produce according to meteorological conditions. You can’t use the hypothesis that wind or solar produce at the same time all over Europe or that there is an unlimited demand on the power grid…
If you put all the renewable capacity of Europe in the same place they will simply will be curtailed all the time because they will be producing all at their full capacity all the time ! The performance ratio will be decrease dramatically which will in turn increase the price of renewable energy production.
3) You can’t maximize two variable at the same time… Who decided what is the value who should be optimized ?
Jakub Kucera is telling us he consider an optimal system as the one where the cost of production of energy is the cheapest.
In my two points I considered the optimal system to be the one which is the cheapest to the consumer.
But Gussing would object and say an optimal system is the energy system which brings more local job (because what’s the point of having a cheap energy bill if no one can afford it because every one is unemployed and all the money is flowing to Qatar ?)
The fundamental principle of the European Union is the principal of subsidiarity .Taken directly from the european commission : “The principle of subsidiarity is defined in Article 5 of the Treaty on European Union. It aims to ensure that decisions are taken as closely as possible to the citizen and that constant checks are made to verify that action at EU level is justified in light of the possibilities available at national, regional or local level.”
As the author states himself the renewable energy directive allows for cross country cooperation (which will be used by Luxembourg if I recall correctly). If the democraticaly elected government of Germany decide they do not want to do that, the EU needs to comply.
Tilleul says
*If you put all the renewable capacity of Europe in the same place they will simply be curtailed most of the time because they will be producing all at full capacity at the same time*
Karel Beckman says
You simply refuse to read what the article says. There is no such “fundamental hypothesis” in the article that you refer to. You seem to be unable to take in nuances. The author notes that the way solar power has developed in Europe is economically inefficient in one sense. To address this by a EU-wide support scheme, say auctioning, causes a number of other problems, however, he notes. This is what the whole article is devoted to. Then you start being clever by attacking straw men and making the same arguments the author has already made.
Bas says
The author favors one EU wide target with one EU wide support mechanisms.
Taking into account the still existing cultural differences between countries, it’s at least one bridge too far.
Countries won’ t agree with the transfer of more decision power towards external bodies in the present climate.
Even the adaptation of the regulatory structure (agreed to be adapted to a free market decades ago), still isn’t fully implemented in a number of EU countries. Worse, that adaptation is halted in a number of countries…
Karel Beckman says
Why don’t you read the article before commenting? “The author favour one EU-wide target with one EU-wide support mechanism”. Where does it say that?
Bas says
In the first three sentences of the last paragraph before the (colored) heading “Obstacles”.
I summarized those in one sentence, which may have taken some nuances away.
Karel Beckman says
Well, read it again. The sentences you refer to say: “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.”
But then he goes on to write: “Unfortunately it [such a single EU-wide support scheme] would also face manifold problems.” And he goes on to list no less than FIVE problems with such a scheme.
He concludes: “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. ”
I would also recommend that you read the intro to the article again:
“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.”
So it is obvious your claim (“The author favors one EU wide target with one EU wide support mechanisms”) is just plain false. Why not have the grace to admit it?
Bas says
Agree, I admit that my statement was far to simple, and thus wrong. Sorry.
Mike Parr says
Good article. It predicates that RES needs on-going (financial) support. Recent action by companies such as Gas Natural Fenosa (300MW on-shore wind pipeline Spain – no public support) suggests that the need for subsidies for RES in the right place are (slowly?) coming to an end. In fairness, the article sort of pointed in that direction.
Much RES development has been ad hoc both financially/politically and from a planning point of view. Ad-hoc approaches carries costs – as the article shows with respect to PV in Germany. I’d suggest that planning also carries costs. One key reason why Danish off-shore wind projects are coming in at Euro76/MWh (LCOE) vs UK at Euro150/MWH is because Danish projects are auctioned as “shovel ready” – by contrast each UK bidder needs to independently get the right permissions.
There is an argument for governments to carry inventories of locations for projects – coupled to an on-going process to apply for the permits for projects at those locations. The governments could then auction each location as shovel ready. It would be interesting to see how this impacted on RES costs & the need for subsidies. Such an approach would carry with it the implication that governments would focus on locations where a given RES tech has the best cost/benefit balance. What I see at the moment is mostly capacity auctions which seems rather crude.
Frans Rusting says
Good idea! Would be a fair, hopefully non-political way to stimulate RES. Something like this, together with our proposal to unite the European market in a politically acceptable way, would help the industry to mature.
Bas says
Putting up high capacity transmission lines (HVDC’s) over long distances, e.g. S-Spain (cheap solar) to Germany, may be so expensive (investment + ongong maintenance and ‘right of way’ costs) that it may be cheaper to install the PV-panels in Germany in 2050.
Agora predicts a cost price of 2-3cnt/KWh for PV-solar in 2050 in Germany. As then PV-panels are no longer the major cost component, S-Spain may produce only 1cnt/KWh cheaper in 2050.
It’s dubieus whether 1KWh can be transported over such long distance for 1cnt.
Add the political risks: Germany has negative experience with gas fom Russia passing other countries who suddenly started to increase the ‘right-of-way’ costs (the major reason for Nord-Stream through the Baltis sea).
France may (threat to) do similar to enforce concessions when it has a discussion with Germany about other issues…
Frans Rusting says
The politicak risk is one of the reasons why a ‘supergrid’ or whatever you may call it needs to be owned by the kind of cooperative company we are proposing.
About costs: it would be great to see real calculations, about a complete system instead of a remark that someting is “dubious”.
Bas says
Those polical risks are minimized by present arrangements in which national entities / utilities trade crossborder electricity, earning good money.
E.g. Buying cheap electricity in Germany and selling in UK where wholesale prices are much higher than the av. ~3cnt/KWh in Germany and ~4cnt in NL. Big increase of the interconnection capacity between NL and Germany is under construction.
Don’t see the added value of involving a third organization.
Note that the political risks also concern Spain.
Especially since Spanish incumbent utilities have major political influence as shown by the retro changes in the law regarding privately owned PV-Solar. Those changes not only implied that Spanish people took their PV-panels off their roofs, but owners of PV-solar parcs had to return most of the money they received selling the produced electricity in past ~5years. So they end with big losses (the legal battle in Spanish courts against the retro part of the rule changes isn’t going well for them, Luxembourg may help but that’s still a long route).
BTW
At the moment there is no business case for buying in Spain and selling in Germany, as German electricity prices are in general lower.
Future’s at the Leipzig power exchange show that those prices will decrease towards an av. of ~2.5cnt/KWh in coming years (~ the cost price of the new lignite power plants). So that situation won’t change soon.
Bas says
Sorry, I stated the price decreases of German electricity too strong:
The futures only show a continuation of the price decreases for next year’s.
The 2.5cnt/KWh is a speculation I got from an expert, which I share.
Frans Rusting says
Not useful to discuss details without talking about the same Big Picture. My Big Picture is that there will be one market for Europe.
Nevertheless, one detail: “arrangements in which national entities / utilities trade crossborder electricity, earning good money.”.
Yes, TSO’s make money this way. Great. Means, in the end, that consumers)/taxpayers pay too much and bear the risk.
TSO’s play ‘commecial company’ which they are not.
Jakub Kucera says
It is a bit embarrassing but only now I have found some time to respond to the comments under this text.
I will not react to all of them since it would be pretty time-consuming so just only a few remarks.
a) We should always keep in mind that one of the primary goals of renewables development is reduction in carbon oxide emissions. It is a global issue so it makes sense to introduce renewables in the places where it is currently cheapest. You can be as green as a weather frog but does it make sense when the others are still dirty? Going global is, of course, pretty hard to sell to the consumers/voters, so let´s stay within the EU. Furthermore, there is an EU-wide goal for emissions reduction and also internationally the EU will be judged as a whole (important when trying to persuade other big countries into reducing emissions).
b) Of course, it would not be the best idea to put all renewables in Spain, for example. However, a part would still be sensible and manageable. I do not have detailed data on the situation in the grid of the Southern member states but I assume there is still some room to integrate more RES, whereas it is pretty certain that Germany has to curtail an increasing share of output from wind turbines in the Northern part of the country due to grid congestion. Incidentally, correlations in RES output in Europe is a very interesting topic. I have not seen a robust study on this but I am afraid the correlations are quite high in fact (at my company, we did some calculations but with inconclusive results). Wind patterns tend to be quite similar over large areas. As for sunshine, there is no sun in any place in Europe at midnight (Ok, we do not need much electricity then but obviously it influences the correlation).
c) I do understand the principle of subsidiarity in the EU. But, is this not an issues (meaning emissions reduction, power markets, energy policy, etc.) larger than even the biggest national state in the EU?
d) An EU-wide support scheme should not be too complicated. I agree with this notion. I do not rule out that for such a scheme to make sense we would need too many rules. In the end, it could indeed be better to drop it. (The ETS with all its special rules, provisions and exemptions comes to mind. In itself, a brilliant device taking care of everything and simultaneously a system too complex to steer, let alone for outsiders to understand.)
e) It is true that German power prices are lower than those in Spain. As the huge development of renewables in Germany is a reason for this, “migration” of some of these sources southward could lower the prices in the South, could it not?
I am grateful for the other comments too.
Bas says
Thank you for your reaction to the comments!
But sorry, some of your points look a little outlandish. E.g.:
e) Migration of part of new German renewable to the south, e.g. Spain.
Consider what Spanish government did with, also foreign, investments in solar farms. They installed new law which changed the conditions retroactively for ~5years. So investors had to pay back a huge amount of money and their solar farm production delivered hardly enough money to cover the very low operational costs.
So many sold their solar farm to the local utility accepting a major loss on their investments!
Small rooftop solar owners took their PV-panels off their roof and stored them, hoping a new government will change the law again…
The German Energiewende is a success because investors trust that German government won’t change the rules for their investment, but in the south they have a different culture.
d) An EU-wide support scheme will become very complicated due to the huge local differences. Not only regarding weather but also regarding investment climate, etc.