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The determinants of support levels for wind energy in the European Union. An econometric study

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Abstract

The aim of this paper is to identify the factors that drive support levels for wind on-shore electricity in the Member States of the European Union (EU) with the help of econometric techniques. The econometric analysis is based on cross-section linear regressions with ordinary least squares. Four alternative specifications of the model have been estimated. The estimates comply with the basic hypotheses of the lineal model, i.e., absence of multicollinearity, accurate functional form, homokedasticity and normality in the distribution of errors. Thus, the estimations are unbiased, efficient and consistent. The results show that countries with higher wind energy generation costs have higher support levels. The higher support levels in countries with higher carbon intensities suggest that wind energy deployment is regarded as effective to mitigate carbon emissions. The type of support scheme also influences support levels, with feed-in tariffs leading to lower levels of support than other instruments. In addition, a general good investment climate in the country makes higher support levels less necessary, stressing the importance of lowering risks in order to reduce support levels and, thus, financial transfers from consumers to producers. Thus, providing stable regulatory frameworks should be a priority of policy-makers. The rest of variables (renewable energy resource potentials, administrative barriers, energy import dependency, interest rates, share of wind energy in total electricity generation as a proxy of lobbying pressures and electricity demand) are not statistically significant in most specifications and some of them do not have the expected sign.

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Notes

  1. Many papers focus on the functioning of RES-E policies in certain countries and, while they show the influence of some stakeholders on policy choices, they do not focus specifically on factors influencing their adoption. See, among others, Bechberger and Reiche (2004) for Germany, Agterbosch et al. (2004), Van Sambeek and Van Thuijil (2003) and Junginger et al. (2004) for the Netherlands, Varho (2006) for Finland, Foxon et al. (2006) for United Kingdom (U.K), Menz (2005) and Bird et al. (2005) for the US and Meyer and Koefoed (2003) for Denmark.

  2. An RPS ensures that a minimum amount of RES-E is included in the portfolio of electricity resources, and does so by requiring electricity suppliers to add a specified amount or percentage of eligible renewable resources to their supply mix. In some U.S. states electricity suppliers can use renewable energy certificates (RECs) to comply with their RPS requirements (Wiser et al. 2005). In the EU, the aforementioned minimum amount of RES-E and RECs are called “quota” and tradable green certificates (TGCs), respectively.

  3. See Appendix for further details on this instrument.

  4. As the development proceeds, self-reinforcing properties cause the costs of reversing or altering previous decisions to increase, narrowing the decision-making scope (Woerdmann 2004).

  5. For a brief survey of the empirical literature on path dependence, see Greener (2005) and del Río and Labandeira (2009).

  6. For example, the European Commission has warned governments that administrative barriers are a major deterrent for RES-E investments and the renewable energy Directive (Directive 28/2009/EC) includes significant requirements for governments in this regard.

  7. As argued by Agnolucci (2008), a relevant proxy could also be the (relative) size of national wind energy associations. However, these data are not publicly available in a consistent manner across countries. In addition, negotiation power might not be related to such size. Actual deployment, which is likely to be correlated to the size of national associations, seems to be a better proxy.

  8. These authors comparatively assess the effectiveness and cost-effectiveness of support schemes in the EU. Effectiveness is defined as the ability to deliver an increase of the share of renewable electricity consumed and cost-effectiveness is defined as the comparison of the total amount of support received and the generation cost.

  9. See Mitchell et al. (2006) for the U.K. In Sweden, TGC prices fluctuated between 150 and 250 SEK in 2008 (see Swedish Energy Agency 2009).

  10. It is beyond the scope and length of this paper to provide a detailed assessment of all these instruments, however. See Del Río and Gual (2004) and Ragwitz et al. (2007) for further details.

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Acknowledgments

Cristina Peñasco gratefully acknowledges support from the Ministry of Science and Innovation and CSIC through the JAE (Junta para la Ampliación de Estudios) predoc program.

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Authors and Affiliations

  1. Consejo Superior de Investigaciones Científicas (CSIC), C/Albasanz 26-28, Madrid, 28032, Spain

    Pablo del Río

  2. Facultad de Derecho y Ciencias Sociales, Universidad de Castilla-La Mancha, C/Ronda de Toledo s/n, Ciudad Real, 13071, Spain

    Miguel Angel Tarancón

  3. JAE Program, CSIC, Madrid, Spain

    Cristina Peñasco

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  1. Pablo del Río
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Correspondence to Pablo del Río.

Appendix. RES-E policy: main components

Appendix. RES-E policy: main components

Crucial components of RES-E support policies include targets, instruments and design elements.

  1. 1.

    Deployment targets.

    According to the EU renewable energy Directive 28/2009/EC, renewable energy will have to contribute 20 % to gross energy consumption in the EU in 2020. This target includes the electricity, heat and transport sectors combined. Since the penetration of renewables in electricity is easier than in the other two sectors, its share should be higher than 20 % (35 %, according to calculations made by Resch et al. 2009), in order to achieve that target cost-effectively. Member State targets are a result of burden sharing to achieve the EU targets. Countries may adopt more stringent targets (than those set at EU level) and, thus, provide more financial support in order to achieve further CO2 emisions reductions, industrial development or reductions of energy import dependency.

  1. 2.

    Instruments.

    The new RES Directive does not establish a harmonised, EU-wide instrument to promote RES and leaves the decision on which support scheme (and support level) to apply in the hands of EU Member States. A wide array of direct support schemes for RES-E deployment is currently being applied by the Member States. Deployment support has traditionally been based on three main (primary) mechanisms, however: FITs, quota systems with TGCS and bidding/tendering systems. These have been supplemented by other complementary instruments (investment subsidies, fiscal and financial incentives and green pricing).

    FITs are subsidies per kWh generated, combined with a purchase obligation by the utilities. They are widespread in Europe, with 19 Member States currently using this instrument.

    Quotas with TGCs are certificates issued for every megawatt-hour (MWh) of RES-E, allowing generators to obtain additional revenue to the sale of electricity (i.e., two streams of revenue). Demand for TGCs originates from an obligation on electricity distributors to surrender a number of TGCs as a share of their annual consumption (quota). Otherwise, they have to pay a penalty. The TGC price depends on the interaction of supply and demand. They are currently applied in six European countries.

    Tendering/bidding systems. The government invites RES-E generators to compete for either a financial budget or RES-E generation capacity. Within each technology band, the cheapest bids per kWh are awarded contracts and receive the subsidy (i.e., bid price per kWh). A fund financed by a levy on electricity consumers covers the difference between the bid price and the market price of electricity. In the EU, tendering schemes have been applied in the U.K., Ireland, France and Denmark (for wind off-shore).

    In theory, FITs can be a relatively effective instrument, but if support is set at a high level, they can also be expensive. By setting the quota and allowing trading of TGCs, quotas with TGCs are expected to be a cost-effective instrument to achieve a pre-defined level of RES-E generation. By introducing competition between generators, bidding schemes would encourage RES-E at low costs. In practice, however, FITs have proven to be effective at relatively low costs compared to other instruments, at least for wind energy promotion (see Ragwitz et al. 2007; European Commission 2008b).Footnote 8 This is due to the lower risks for investors under FITs. They know in advance the amount of remuneration that they will receive. In contrast, uncertain and volatile TGC prices involve a risk premium which increases the costs of financing projects.Footnote 9 Furthermore, since the price of TGCs is set by the marginal costs of the last technology needed to comply with the quota, and this is usually a high-cost technology, the TGC price is relatively high for mature, low cost technologies such as on-shore wind, leading to overcompensation for these technologies. Finally, bidding schemes have proven ineffective, since the low level of support does not make investments attractive enough.Footnote 10

  1. 3.

    Design elements.

    The literature on RES-E support has stressed that the success of RES-E support schemes depends as much on their design elements as on the specific instrument chosen (IEA 2008), i.e., FITs, bidding, or quota with TGCs can work well or not depending on how they are designed. Ragwitz et al. (2007) show that several design elements can/should be included in FITs and TGCs in order to make these instruments more effective and cost-effective. Support levels are related to, both, instruments and design elements.

    The above mentioned components critically affect policy stability, which is crucial for effective and cost-effective RES-E deployment. RES-E policy is one of the main determinants of the profitability of renewable energy investments. Investments depend on keeping risks for investors at low levels. Risks may be associated to the absence of targets, changes in the instrument or key design elements.

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del Río, P., Tarancón, M.A. & Peñasco, C. The determinants of support levels for wind energy in the European Union. An econometric study. Mitig Adapt Strateg Glob Change 19, 391–410 (2014). https://doi.org/10.1007/s11027-012-9439-6

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