Opting for renewables
According to IEA's factsheet, Renewables in global energy supply, the wind energy sector has grown at more than 52 per cent per annum since 1971, and solar power by 32 per cent per annum. Renewables in 2000 accounted for 13.8 per cent of the world's total primary energy supply (electricity, heat, transport fuels, commercial and non-commercial energy). Combustible renewables and waste (97 per cent biomass) comprised 80 per cent of total renewables, followed by hydro power (16.5 per cent). (see pie chart: Can grow)
"Renewables are the second largest contributor to global electricity production. They accounted for 19 per cent of production in 2000, after coal (39 per cent) but ahead of nuclear (17 per cent), natural gas (17 per cent) and oil (8 per cent). Most of the electricity generated from renewables, however, comes from hydro power plants (92 per cent) followed by combustible renewables and waste (5 per cent). Geothermal, solar and wind accounted for less than 3 per cent in 2000," says the report. Due to high share of biomass in total renewables, non-OECD regions like Asia, Latin America and Africa are the main renewable users. OECD countries used 70 per cent of new renewables like wind and solar in 2000.
Renewable energy can't become the world's powerhouse unless governments stop subsidising fossil fuels and promote policies that encourage investments in renewables. Governments across the world have been experimenting with various schemes to encourage renewables (see: The world: set to surge?). Germany's feed-in-tariff system increased the share of renewables in the country's total energy supply and decreased the cost of wind energy turbines. UK wasn't very successful when it first experimented with tenders, but it expects a lot from the new promotion system of renewable obligation. The experience of these two countries shows the intricacies of promoting renewable sources.
Between March 30 and April 4, 2004, the German government took two completely opposite decisions regarding the energy sector. Following a European Union directive (2003/87/EC) on emissions trading, the German government on March 30 announced its 'national allocation programme' to reduce carbon dioxide emission. As part of this directive, member states had to submit national allocation plans detailing the carbon dioxide emissions targets they would achieve by 2007 and 2012. Germany's ministers fought hard: the economics minister wanted low reduction targets and the environment minister higher ones. Neither was willing to budge, and agreement was reached only after Chancellor Gerhard Schroeder intervened.
Experts say this agreement is "not very ambitious": economics has won over environment. According to Germany's allocation plan, it will reduce emissions from the current 505 million tonnes of CO2 to 503 million tonnes by 2007 and 499 million tonnes by 2012. "This is a very bad plan. At times, the influence of coal lobby is amazing," says Danyel Reiche, of the Environment Policy Research Unit, Free University of Berlin.
The allocation plan seems to be industry's victory over environment. But it is not. The plan is a compromise between industry and environment. This was proven when on April 2, 2004 the German parliament approved an amendment to the Renewable Energy Sources Act of 2000 (Erneuebare-Energien-Gesetz or EEG Act) guaranteeing a higher and fixed feed-in-tariff for many renewable energy resources. It is seen as the next big step in encouragement. "This is a typical German compromise. Within the same week they passed a plan to promote coal (national allocation plan) and also made a very nice law for the renewable sector," says Reiche.
According to the German Federal Ministry for Environment, Nature Conservation and Nuclear Safety, the feed-in-tariff system has greatly encouraged renewable energy. By 2002-end, the sector comprised 9 per cent of the electricity produced in Germany; by October 2003, about 50 per cent of the world's installed wind energy capacity was in Germany. It leads the world in the sale of bio-diesel (with a share of 2.5 per cent in the German fuel market) and has the second largest installed solar photovoltaic capacity in the world. All this in just 14 years.
LAW, LOANS AND POLITICS: Germany started encouraging renewable energy in 1974, but it was in 1991 that it gave the sector the greatest push. In this year, the Act on Supplying Electricity from Renewables (Stromeinspeisegesetz, Str EG) came into force. This act "obliged public energy utilities to purchase and pay for electricity from solar and wind energy, hydropower, biomass, sewage and landfill gas on a yearly fixed basis," write Mischa Bechberger and Reiche of the Free University of Berlin in Renewable energy policy in Germany: pioneering and exemplary regulations, in the March 2004 issue of Energy for Sustainable Development. After Str EG was enforced, installed wind capacity in Germany grew almost a hundred times within a decade: from 48 megawatt (MW) in 1990 to 4,443 MW in 1999. The cost of producing electricity from wind technology today almost equals the actual cost paid for electricity. While on an average a fixed tariff of 7.5 cents/kWh (US $9 c/kWh) is paid to power from wind, the average industrial electricity price is about 6 cents/kWh (US $7.2 c/kWh).
Renewable sources found their greatest supporter when the Green Party formed a coalition government along with the Socialist Democratic Party in 1998. One of its major achievements was an agreement, signed in June 2001, to phase out nuclear energy, which produces 30 per cent of Germany's electricity, by 2021. Greens say renewable sources can fill the gap, but industry associations representing conventional energy say their fuels and imported gas can meet the shortfall.
Renewable sources in 2002 formed 2.9 per cent of the total primary energy consumption in Germany. In the renewables share, 49.2 per cent came from biomass, 22.5 per cent from hydro, 16.1 per cent from wind and just about 1.9 per cent from solar (PV plus thermal). For the electricity sector alone, renewables accounted for 7.6 per cent of the total electricity consumption in 2002, which was about 582 terawatt hour (1 Twh = 1,000 gigawatt hour = 1 billion kilowatt hour). Wind power contributed 2.7 per cent (about 15.8 Twh) of the total electricity consumption in the country while solar energy only 0.03 per cent (0.1 Twh). Coal contributed 51 per cent in the electricity sector and nuclear power 31 per cent.
EEG, A CLASS ACT: The Renewable Energy Sources Act of 2000 (EEG) aimed to at least double the share of renewables in electricity generation by 2010 from the baseline year of 1997. This means that at least 12.5 per cent of electricity would come from renewable sources by 2012. Unlike the earlier feed-in system, EEG guaranteed a fixed, declining or regressive feed-in-tariff for all the electricity produced. The tariffs are guaranteed for 20 years and they reduce with each year. The tariff for biomass reduces by 1 per cent each year, for wind 1.5 per cent and for PV 5 per cent. This would mean that a PV plant set up in 2004 would get a 5 per cent lesser tariff than the one set up in 2003. According to EEG, a grid operator cannot say no to renewable energy producers and has to give renewables priority over other sources.
The latest amendment to EEG encourages developing biomass-based renewable technologies (see: Farm to fleets: running on biogas in Germany). It gives a higher feed-in-tariff to biomass plants of lower installed capacity. The tariff keeps reducing as the plant size goes up. For example a plant less than or equal to 75 kilowatt installed capacity gets a feed-in-tariff of 12.5 cents/ kWh (US $15 c/kWh); while one of 5-20 megawatt gets 8.4 cents/kWh (US $10.1 c/kWh).
As a result of decades of reforms, in 1999 renewable electricity fed into the grid was to the tune of 8 Twh, it increased to 18 TWh in 2001 (4 per cent of total), and 31 TWh in 2003 (7 per cent of total). Total installed capacity for wind increased from 4,443 MW in 1999 to more than 14,000 MW by 2004
Impressive? Not to all Germans. Many say wind energy is erratic. "At a given time, feed-in from the entire wind capacity installed can be up to 2,139 MW less than the prognosis. This creates a huge problem because the gird operator will have to keep a reserve of 2,130 MW for balancing power. This is highly costly," says Till Bohmer, head of the renewable energies section, German Electricity Association, VDEW, an electricity industry body. "For the installed capacity of 14,500 MW of wind farms," adds Bohmer, "We need 13,000 MW installed capacity of conventional power as reserve to make up for the times when wind energy is not adequate." But others disagree. "Industry exaggerates the amount of balancing power required," says Heiko Stubner, staff member at the office of German parliamentarian Hermann Scheer.
The government pays no subsidy for the feed-in-tariff system; the extra cost is paid by the consumers. Certain energy intensive industries are exempted from paying the higher tariff under EEG. "As the electricity bill does not contain a break-up of the details -- electricity rate, distribution charges and money paid under EEG -- it is not very clear how much extra an average household pays for renewables. On an average it could be about 1 (US $1.2 /kWh) per month for a household," says Uwe Busgen of the Federal Environment ministry. "The electricity bill of an average household has increased by about 13 (US $15.6 /kWh) per annum because of higher tariffs paid under the EEG," informs Lutz Mez, deputy director at the Environment Policy Research Unit, Free University of Berlin. The electricity industry argues EEG is pushing prices too high. "Today the cost of supporting renewables comes to 0.46 cent/kWh (US $0.55 c /kWh), a total of 2 billion Euros (US $2.4 billion) per year. This is too much for the industry to pay. Households are already paying 40 per cent of their electricity bills as taxes. Can they afford the future increase?" asks Bohmer. The resentment is also due to fears that renewables will lead to job losses in the conventional energy sector. This despite data from the Federal Environment ministry that renewable energy has created 1,35,000 jobs in the country and recorded a turnover of 9.6 billion (US $11.5 billion)in 2002.
The UK, too, has tried out renewable energy slow but steady. No all-in-14 years reforms and no Green Party to help out. According to the British Wind Energy Association, the UK possesses 40 per cent of the European Union's total wind resource. This alone, theoretically speaking, should be enough to meet the country's current electricity need eight times over.
But by 2003 UK had only 600-plus MW of installed wind energy. In 2002, 1.2 per cent of the primary energy and one per cent of the electricity in UK came from renenwables. "The promotion framework for renewables in UK did not meet with much success," says David Elliott, professor at the Energy and Environment Research Unit, The Open University, Milton Keynes, UK. "The country has taken a very soft approach," says Elliott. But things are looking up. "Reliance on abundant domestic energy resources has kept renewable energy in the background," writes Timothy P Brennand of the School of Environmental Sciences, University of East Anglia, UK, in the paper Renewable Energy in the United Kingdom: policies and prospects (March 2004 issue of Energy for Sustainable Development). "Now the prospect of exhausting indigenous fossil fuel is combining with heightening environmental awareness. Now is the time UK can benefit from the application of technologies such as wind-farming," writes Brennand.
THE FIRST STEP: UK began supporting renewables in 1990 with the Non Fossil Fuel Obligation (NFFO). The government ordered 12 regional electricity companies (RECs) to supply a certain amount of electricity from non-fossil fuel sources for a specified period. Developers were invited to bid for projects, and bidding drove project prices very low. The successful bidders had to then supply the electricity from renewables. The cost incurred by the electricity companies on supplying electricity from renewables was compensated by the Fossil Fuel Levy, paid by all licensed electricity suppliers. The suppliers' cost was in turn borne by their customers.
Interestingly, the main aim behind introducing NFFO was to support nuclear power plants of total 8.5 gigawatt capacity. "Nuclear power costs 10 per cent more than the other energy sources. This extra cost was passed on to consumers under the NFFO mechanism. Originally it was supposed to be called the nuclear surcharge but they named it NFFO and included renewables in it. But the fact remains that 98 per cent of the money went to nuclear energy and rest to renewables," says Elliott. NFFO failed to get 1,500 MW of energy from renewables by 2000.
"The NFFO tendering system was good at giving contracts, but not at bringing actual finances into the renewables sector," says Marcus Rand, chief executive, British Wind Energy Association. The upside was that overall prices for renewables kept falling in different NFFO rounds: starting at about 5.5 pence/kWh (US $9.3 c/kWh) in the first round down to 2.7 pence/kWh (US $4.6 c/kWh) by the fifth round. Wind energy prices fell, from 6 pence/kWh (US $10.2 c/kWh) in 1991 to 2.5 about 2.5 pence/kWh (US $4.2 c/kWh) in 1998. NFFO also opened up the sector for investments. Now, NFFO has now been abandoned in favour of the renewable obligation.
RENEWABLE ENERGY, BY OBLIGATION: In April 2002, UK introduced the renewable obligation (RO) scheme, which obliges a power supplier to derive an increasing percentage of electricity from renewables. Nationally, it was 3 three per cent in 2003 and 4.3 per cent in 2004, to be increased up to 10.4 per cent by 2010 and 15.4 in 2015. To prove their compliance, suppliers will have to provide RO certificates to UK's energy regulator OFGEM (The Office of Gas and Electricity Markets). RO certificates are like currency; one certificate equivalent to one MW of electricity supplied through renewable sources. Electricity suppliers can meet their obligation by either setting up their own generating capacity, or buying it from already existing plants, a step which will get them certificates equivalent to the amount of energy bought. They could also buy certificates from renewable energy generators. "Currently these certificates, called renewable obligation certificates, are traded at 35-45/MW (US $59.5-76.5/MW)," says Michael Cupit, assistant director, Energy, Chemicals and Utilities, Ernst and Young, London. "The actual cost of electricity from conventional sources like coal is about 18/MW (US $30.6/MW)," says Cupit.
Suppliers can also trade certificates between them. If suppliers fail to meet the target or fail to supply certificates, they have to pay a fine of 30 (US $51/MW) to OFGEM for each MW shortfall. Money from this fine is collected into a separate buyout fund. "At the end of the obligation period of one year, the money is distributed amongst the suppliers depending on how many certificates they redeem," says Gaynor Hartnell, director of policy, Renewable Power Association. For example, if a supplier has provided 100 per cent of its quota of certificates and these certificates are 25 per cent the total collected, then that supplier will get 25 per cent of the money from the buyout fund. "This creates a feedback mechanism to encourage more renewable generation, which gets stronger the further we fall behind the target. The theoretical value of a certificate to a supplier comprises 30/MW (US $51/MW) buyout plus the returns expected from buyout recycling," says Gaynor.
RO has benefited the wind energy sector the most as it is seen as the most cost-effective technology. "This year we will be doubling our installed wind capacity," says Rand. Already 1,148 MW of onshore and 1,109 MW of offshore wind projects have been approved. The British Wind Energy Association expects 750 MW/year increase in installed wind capacity till 2010. UK's electricity industry is growing at a rate of one per cent, or about one Gigawatt per annum.
But what about other renewable technologies like solar energy? "Little money is being spent on solar energy because costs are high," says Catherine Murray, of the department of trade and industry. "We are obsessed with cheap energy. The government says that let us wait for the price of renewables technologies to come down. Most companies have stopped research and development on renewables," says Elliott.
In 2002, renewables contributed one per cent to the total primary energy consumption in UK. Out of this one per cent, maximum contribution was from biomass (83.2 per cent from landfill gas, sewage gas, domestic wood, industrial wood, biofuels and others) and 3.4 per cent from wind.
"The RO system has its own problems, like slow project financing. Uptake and development have been slow and in 2002-2003 compliance was only 48 per cent. The same is likely to be repeated in 2003-2004," says Cupit. According to the data from OFGEM on compliance in 2002-2003, "out of 38 supply companies in England and Wales, 12 met their obligation wholly through the production of certificates, and nine suppliers paid 100 per cent buy-out (30 per MW; US $51/MW). In Scotland, 28 suppliers had an obligation, of which 16 met their obligation wholly through producing ROCs, with four suppliers paying 100 per cent buy-out." For 2003-2004 the buy out price will be 30.51 (US $51.8/MW) per MW.
Cupit says that RO may be a slower promotion system compared to feed-in-tariff but it is cheaper. "From the investment point of view feed-in-tariff may be better but RO is cheaper compared as the cost of a certificate will go down as the share of renewables and their installed capacity increase. Extra money to be paid to the generator will go down and so the cost for customer will also be lower," explains Cupit.
Renewables obligation promotion system has made UK a promising market for renewable energy. Financial consultant group Ernst and Young has placed UK at number one in their latest 'Country Attractive Index' index for investments in wind energy sector. "In UK renewable energy is the only game in town. In the next five years 10-15 billion (US $17-25.5 billion) of new investment in the power sector will be in renewables and only 1.5-2 billion (US $2.5-3.4 billion) in fossil fuels," says Cupit. Much of the investment going into renewables is expected to be in offshore wind farms. "We could have a situation in 2010 where 70-80 per cent of the target of having 10.4 per cent of energy from renewables is met. This means that 7.5-8 per cent of the total electricity will actually come from renewables while the rest 2-2.5 per cent will met through buyouts or trading certificates," says Hartnell.
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