Recently, the European Union adopted more determined climate goals for 2030 and the implementation of these goals is currently the focal point of debate.
A new study illustrates how crucial it is for the governments of member states to coordinate policy reforms to promote renewable electricity.
Otherwise, several investors could probably shift their focus to technologies that will remain subsidized or to countries that still offer subsidies. This would lead to an increase in the overall costs of widening the production of renewable electricity in Europe.
In the past few years, several European nations have gradually eliminated fixed remuneration feed-in tariffs and substituted these with auction schemes that grant supply contracts to the lowest bidder.
The cost of renewable electricity has been decreasing considerably over recent years and there has been a consequent increase in political pressure to cancel fixed-price tariffs entirely and to push renewables onto the free market.
This problem has been the subject of debate among researchers. However, it is not clear how various models of support would impact the decision-making of investors. Marc Melliger and Johan Lilliestam, researchers at the Institute for Advanced Sustainability Studies (IASS), have analyzed this question.
Large Investors Respond More Flexibly to Political Reforms
The preferences of the investors are evident: if they were free to select, a majority of them would invest in their home country in onshore wind or photovoltaic projects with the least possible cost risks.
Several investors would instead invest abroad or in a different technology if this would allow them to tap into fixed cost support schemes. Huge investors are more ready and able to shift their activities to new countries upon identifying a low-risk and appealing market situation.
In other words: larger projects would relocate. These shifts could skew the European energy mix in a way that fosters dependency on a single, less mature technology or a specific generation region. For example, photovoltaics first became competitive in the sunnier countries of southern Europe.
Marc Melliger, Study Lead Author and Researcher, Institute For Advanced Sustainability Studies
“If these countries were to phase out their support schemes, investors would favour photovoltaic plants in northern European countries that still provide subsidies. This would increase the overall cost of the European energy transition,” added Melliger.
It is necessary for reforms to be coordinated throughout Europe under these conditions.
Strengthening Coordination can Keep Investment “on Track”
Although there has been an increase in policy coordination throughout the European Union over the past few years, countries retain a high degree of freedom in policy design and implementation.
“Increased coordination between countries would add complexity and raise the required policy effort, but it could also help keep investments on track,” notes co-author Johan Lilliestam.
Policy changes seeking to expose renewables to the free market aim to reduce costs. But if these reforms are not coordinated, there is a risk that costs will ultimately be higher.
Marc Melliger, Study Lead Author and Researcher, Institute for Advanced Sustainability Studies
Melliger, M & Lilliestam, J (2020) Effects of coordinating support policy changes on renewable power investor choices in Europe. Energy Policy. doi.org/10.1016/j.enpol.2020.111993.