Photo: Sommer
First-hand experience:
Danish politicians can see
wind power at work di-
rectly in Copenhagen: At
the Middelgrunden off-
shore wind farm and at
the port jetty, where
there are six Bonus tur-
bines of 600 kW rated
capacity each.
?
Political prices or
political quantities
A comparison of renewable energy support systems By Frede Hvelplund
ed from 2000 and onwards are sub- been supported by a European Court
jected to payment according to these adjudication of March 2001, which
wo main renewable energy not yet totally settled rules. Almost no says that the German “Political price-
(RE) governance models are contracts have been entered into /amount market” model is not to be
discussed here: under them, which has brought Dan- regarded as illegal state aid and is the-
(a) The “Political price-/amount mar- ish wind power development to a refore acceptable as a way of suppor-
ket” (PPAM) model, which has poli- very critical situation (NEW ENERGY ting the development of renewable
tically set prices for renewable 3/2001). Only offshore wind turbines energies (NEW ENERGY 2/2001).
energy based electricity, and where are being built, as they are subject to The main arguments for introduc-
the produced quantity of renew- specific “demonstration project” sub- ing a “Political quota-/certificate price
able energy based electricity is sidies and payment rules.The 2000 market” system have been linked to
determined on the market; and wind power boom (around 600 MW) the belief that a system with quota
(b) The “Political quota-/certificate was contracted before the end of regulation and a price regulated on
price market” (PQPM) model, 1999 and is based on the old PPAM the market would increase competi-
where the renewable energy based rules in effect until then. tion between suppliers of renewable
electricity quantity is politically In 2000 the German parliament energies and results in getting more
fixed as a quota and the renewable approved a new advanced “Political “value for money.” Upon examining
energy based electricity prices are price-/amount market” and in June the various arguments and the dyna-
determined on the market. 2001 the French parliament accepted mics of the debate, it is striking that
a similar model. Recently the EU au- there seems to be no thorough dis-
The PPAM model has been suc- thorities accepted the use of the cussion of the fact that, compared to
cessful in Germany, Spain, and Den- PPAM model in the proposed Direc- fossil fuel technologies, renewable
mark, countries that boasted around tive for electricity from renewable energy technologies are characterised
90% of the European wind power energy sources (NEW ENERGY 4/2001). by:
production in 2000. This keeps the question of the future a. A cost structure with a very high
In 1999 the Danish parliament ap- regulation framework open.The percentage of investment-fixed
The author
Frede Hvelplund proved a new law introducing a PQPM PQPM model, therefore, is no longer costs and very low running costs,
works as scientist model for renewable energies (NEW the only possible future regulation which implies high investor risks
at Aalborg University. ENERGY 2/99).Wind turbines contract- model.This development has lately on the market and increasing im-
18 NEW ENERGY 5/2001
portance of keeping alive competi- political intervention in the PPAM costs. Once the wind turbine is built,
tion in the equipment market. model is at the price level.The hardly anybody works on it. It just
b. Different natural resource bases “Political quota-/certificate price mar- produces electricity for 20 to 30 years
from location to location, making it ket” model, therefore, is not more and is usually maintained by service
necessary to establish a govern- liberal or market- oriented than the units linked to wind turbine factories.
ance system that furthers an EU- advanced “Political price-/amount mar- Therefore, the wind turbine will not
wide “site efficiency” generating ket” model. On the contrary, the Dan- work more efficiently because of com-
process rather than a “mono ish PQPM model, due to its 100% petition with other wind turbines on
price” (one price on a European state-governed amounts, and partly the electricity market.
market) based price competition. state-governed prices, was closely In a traditional electricity service
c. Being dispersed around the coun- related to the governance frameworks supply system, the situation is totally
try, and often in residential areas, of former East European planned eco- different. At least in theory one might
making it particularly important to nomies until around 1990. expect competition on the electricity
involve neighbours and people market to put pressure upon the
from the region in the design, power utilities, which will then dismiss
development and ownership of some power plant workers. A wind
renewable energy projects. The high fixed cost turbine can dismiss nobody, once it is
d. Being newcomer technologies, thus built. Any potential personnel cutting
having minor market shares and
RE characteristics can then only happen at the level of
meeting resistance strategies from the wind turbine factory, because a
established technologies. wind turbine is, in principle, an energy
In a PPAM system the wind turbine automation.
The PPAM model is a better go- factories are able to decrease their At present, fossil fuel back-up
vernance model for any country, as selling prices, increasing sales of wind systems are still being used. But in the
well as for the EU, especially because turbines. It is due to this system that future, a system with different types of
it is well adapted to the above four the per kWh cost of wind power has storage techniques, such as hydrogen
specific demands to an RE regulation decreased by 80% since 1980. In a storage, might be developed.These
framework.
Equipment Electricity
market market
Which governance model Fossil fuel systems
Renewable and electricity conservation systems
47%
81%
53%
19%
is a market model?
Table 2: Moving from fossil fuel to RE means a change in value added from the electricity
market to the equipment market.
Before entering a discussion of the
above four specific characteristics of PQPM system, the quantity of wind systems also appear to be “automatic
renewable energy development, it is power is politically decided several storage systems,” which hardly require
necessary to briefly discuss the “ideo- years ahead. Consequently, the wind any maintenance performed by em-
logical question” regarding the “mar- turbine producers, as a group, can ployees in an energy organisation.
ket” attributes of the two models. only increase their turnover by in- Thus, when introducing renewable
The “Political quota-/certificate creasing prices.This motivates the energy systems, the importance of the
price market” system, with its politi- wind power firms to establish “stra- electricity market decreases, whereas
cally set quantities (quotas), has per- tegic collaboration” or mergers to try the market for energy equipment
sistently been touted as more market- to win more market control.This becomes increasingly important. In
oriented than a “Political price-/ mechanism constitutes an important Table 2 the relative importance of the
amount market” system with political- problem as one of the general struc- market for equipment is compared
ly fixed prices and quantities deter- tural changes on the market:The de- within a fossil fuel system and a rene-
mined on a market.This delusion has crease of value added on the market wable energy-/electricity conservation
been so successful that it is now an for electricity and the likely increase system.
almost undisputed “fact,” that “Green of value added on the market for In the present situation of techno-
Certificate” trading on the basis of a energy equipment, seen as a propor- logical change, the “Political quota-
market plus quota regulation should tion of the sales price at the consum- /certificate price market” system ends
be ‘the genuine market’ system.Table er level. Concretely, the change to up introducing price competition on a
1 illustrates why this is a delusion. some types of renewable energy dwindling market and abolishing mar-
As illustrated in table 1, the PQPM systems, such as wind power, repre- ket competition on an expanding mar-
model shows the political interference sents an automation of electricity pro- ket.The advanced “Political price-
on the market at quantity and price duction, with 85-90 % as investment /amount market” system supports
levels in the Danish case.The only costs and the rest as maintenance market competition on the growing
market for equipment, making it espe-
cially suitable for the present period
“Political quota/certificate “Political price/amount of technological change.
price-market” model market” model (present Ger-
(Danish model from 2003) man, Spanish and French model)
Price
determination
Market and political Political Different natural
Amount
determination
Political Market resource bases from
location to location
Table 1: Political and market determination of price and quantity in two regulation models.
Comment: The price in the Danish “Political quota-/certificate price market” model is partly
politically set, since the law determines that the price should not be below 1.32 Kct/kWh or As mentioned in the beginning,
above 3.57 Kct/kWh.
renewable energy technologies are
NEW ENERGY 5/2001 19
characterised by having different na-
Figure 1:
tural resource capacities from location
to location. A wind turbine on an Wind power production costs in the three countries
inland site in Germany produces only Wind power costs pr. kWh with equal technological
around 50% of the quantity produced resource efficiency in three countries.
on a very good coastal site in Ireland
or Scotland.When dealing with nuc- Country 1 Country 2 Country 3
lear, natural gas or coal-fired power
plants, variations from location to 8.00
location will mainly depend on diffe- 7.00
rences in cooling facilities, with a 6.00
coastal site being slightly cheaper than
Dct/kWh
an inland site that needs cooling 5.00
towers. 4.00
To meet the declared EU goal of 3.00
increasing the percentage of renew-
able energy based electricity produc- 2.00
tion (not including large hydro) from 1.00
3.2% to 12.5% from 1997 to 2010, it is 0.00
necessary not only to exploit the best
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
coastal sites for wind power, but also
Unit:10 TWh electricity production
to use good inland wind sites all over
Europe.With a “Political quota-/certifi- Source: “Renewable energy governance systems” Frede Hvelplund.To be published June 2001.
cate price market” system for the EU,
there would be only one certificate
price for wind power in the EU. The costs of producing wind pow- especially in Central Europe, will be at
Regarding wind power, Figure 1 er vary from around three Dct/kWh around nine Dct/kWh.This price is
shows the different production prices on a very good coastal site, in Ireland required because some profit is
in a “model union” consisting of three for instance, to around seven Dct/ necessary to stimulate investment.
countries. kWh on good inland sites in central This price would result in very high
Europe. As wind power production on profits on the good wind sites, with
inland sites is required, and there is between 90-160% profits on the good
only one marketplace and one price (classes 0 and 1) sites. Hence, the pro-
for “Green Certificates” in Europe, blem of establishing a mono-price
the price level needed in order to market for renewable energy in the
produce wind power on inland sites, EU.
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Contact
Deborah Friedman,
Mathiaskirchplatz 23E,
50968 Köln, Germany,
Tel.: +49 221 343 748,
Fax: +49 221 93 45 511,
e-mail: daff@gigabell.de
20 NEW ENERGY 5/2001
Figure 2:
Costs, profits and prices in a Union wide “Green
Certificate” market (case example)
Costs,profit,risk premium and price on a "Unionwide" "Political quota-
/Green Certificate pricemarket" model.
Country 1 Country 2 Country 3
12.00
10.00
8.00
Dct/kWh
6.00
4.00
2.00
0.00
10 TWh/year
Cost pr. kWh Profit before risk premium Risk premium 10%
Source: Same as Figure 1.
(Assumptions: 10% risk premium due to fluctuating prices. 20% profit demand on a wind
class 3 site.)
efficiency” in a non-bureaucratic way.
RE resources and the Figure 3 illustrates the effects of this
type of regulation.The price perfor-
“Political quota-/certificate mance of the advanced PPAM model
price market” model is shown for the three countries.The
Figure displays exactly the same cost
In the PQPM model, a quota politi- structure as in Figures 1 and 2.The
cally regulates the amount of renew- only difference is that the advanced
able energy based electricity.The price PPAM model has a politically defined,
is determined on a market for electri- site-dependent price framework,
city. In Figure 2 the three countries which makes it possible to decrease
have introduced a common PQPM the profit on good wind sites without
system. Linked to their different wind destroying the economy of inland
resources, this governance system wind sites.
entails the following wind power cost
functions and profits for wind site and
wind turbine owners:The figure Renewable energy is
shows that on this market there is “dispersed” and often
one price for wind power all over the
Union, namely the one developed in close to residential areas
the EU certificate market. Politicians
One of the main historical secrets
have established a quota system that
behind the Danish wind power suc-
ensures that an annual production of
cess was that a system of public regu-
200 billion kWh RE electricity is
lation promoted co-operative neigh-
implemented.To reach this goal the
bourhood and local ownership, creat-
kWh price on the market has to be at
ing more than 60,000 wind turbine
least high enough to make it profitable
owners in Denmark. People like wind
to use wind class 3 sites, which con-
turbines when they own them and are
cretely translates into a price slightly
not annoyed by the noise and visual
above ten Dct/kWh. Additionally, the
inconveniences, especially when get-
fluctuating prices on the certificate
ting a fair compensation. However,
market imply that the investors de-
with a system of distant utility or
mand a 10% risk premium, increasing
shareholder owners, the local inhabi-
the price to 9.8 Dct/kWh.
tants get only the disadvantages and
no compensation.This is seen as un-
RE resources and the just and increases local political resist-
ance to wind power. It is as simple as
advanced “Political price- that.
/amount market” model The new Danish “Political quota-
/certificate price market” system re-
We call the model “advanced” be- sults in very fluctuating prices due to
cause of its ability to foster a compe- a range of different factors.The cost
tition process, which increases “site structure of wind turbines results in a
very vertical supply curve. Once wind
Figure 3:
turbines are built, they will not close
down production, as the majority of Price, profit and costs in the “Political price-/
costs are fixed. Annual wind resources
vary with up to 30%, making it impos-
amount” model (case example)
sible to govern by quotas, as the an- Cost and profit in a "political price-/market amount" model
nual change in wind resources will
Country 1 Country 2 Country 3
surmount the size of a quota increase. 10.00
Furthermore, the market will be cha- 9.00
racterised by large players able to
manipulate market prices. 8.00
Altogether, this causes the certifi- 7.00
cate prices to fluctuate heavily and 6.00
Dct/kWh
often in a manipulated way, making it
5.00
impossible to draft trustworthy wind
power project budgets. Consequently, 4.00
the old procedure of financing a wind 3.00
turbine project together with the
2.00
local bank is no longer possible. Only
large financial investors and power 0
1., 0
utilities are left in the market.This 0.00
means that the number of investors 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
and, consequently, the competition
Unit:10 TWh
between them decreases, driving up
project prices. Moreover, it stokes KWh production costs Profit/kWh in a "Political price---" model
local and regional political resistance
Source: Same as Figure 1.
against wind power.
(Assumptions: Profits are a percentage of costs: 40% on wind site 0; 35% on wind site 1;
30% on wind site 2 and 20% on wind site 3.These profit percentages are approximations of
the profits that we have calculated on the basis of the new German prices. Since prices are
Characteristics of politically guaranteed, there is no need for any risk premium.)
“newcomer” technology
increases, then the profit of the power with their own short term marginal
The competition between renew- companies, ELSAM in Denmark, EON costs.
able energy technologies and existing in Germany, etc., decreases. Due to Hence, these old fossil fuel and
fossil fuel and uranium based power the excess capacities of these power uranium-based companies have no
companies is very often a win/lose companies, when they own renewable real economic interest in investing in
situation. If wind power production technologies they are often competing renewable energy plants.That makes it
“Political price-/amount market” model “Political amount-/certificate
price market” model
(a) Is it a market model? The price is political, the amount is decided The amount is political, the price is partly deci-
upon a market. ded upon a market, partly politically set.
(b) Does it further compe- The equipment producers as a group can The equipment producers face a 6-8 year politi-
tition between equipment expand sales and profit by lowering production cally set annual production quota.They can
producers? costs. expand profit by lowering costs and especially
by increasing sales prices.
(c) Can it differentiate the Yes, as happens in the German model. No. In this “mono-price” model, the same price
price between good and is paid to the very good coastal sites as to the
bad “politically desired” good inland sites.
wind sites?
(d) Can it price-differen- Yes, as happens in the German model. No.The same price has to be paid during the
tiate between the first whole lifetime of an RE plant.
years and the last years of
the production of a given
RE plant?
(e) Can it lower the price Yes, as happens in the German model. 2002 No.The quota has to be set for a 6-8 years
in parallel with RE produc- wind turbines are getting 1.5% lower kWh pri- period and new improved wind turbines are
Main source: tivity improvements? ces than 2001 wind turbines. getting the same certificate price as less efficient
Renewable energy wind turbines built at an initial stage of develop-
governance systems ment.
A comparison of the (f) Does it support neigh- Yes.The foreseeable prices make it possible for No.The very fluctuating and possibly manipula-
“political price-/amount bour and local investors? local groups to borrow from local banks. ted prices make it too risky to invest and diffi-
market” model with the cult to borrow from local banks.
“political quota-/certifica- (g) Does it put a cost Yes. Almost the same cost pressure is put on In general, no.The mono-price system gives very
te price market” system pressure on equipment investors at good wind sites as on investors at high profits to owners of good coastal sites.This
(the German and Danish producers? inland wind sites. increases site prices and weakens the cost pres-
cases). sure on equipment producers.
By: (h) Does it support inve- Due to the above (f), yes. Due to the above (f), no.
Frede Hvelplund stor groups independent of
Aalborg University. uranium and fossil fuel
Tel: +45 96 358380 interests?
E-Mail: Table 3: A comparison of the “political price-/amount market” model with the “political amount-/certificate price market” model.
Hvelplund@i4.auc.dk
22 NEW ENERGY 5/2001
important for politicians to esta- difficult for neighbours and local
blish development tracks, where investors to invest in wind tur-
independent investors not having bines. Due to its mono price cha-
“sunk costs” can further the racter, it gives too high profits to
renewable energy technologies wind turbine owners at very
linked to the old fossil fuel and good wind sites and inadequate
uranium technologies. As argued profits to wind turbine owners at
above, the “political quota-/certifi- poor wind sites.The “political
cate price market” system tends quota-/certificate price market”
to hamper the possibilities of system is very far from being a
such independent neighbourhood market model, as the RE amount
and local investors. Hence this is politically decided and the cer-
governance system leaves the tificate market price is also politi-
economically unmotivated urani- cally influenced.Table 3 summar-
um and fossil fuel utilities alone in ises our conclusion.
regard to investments in the RE The conclusion, therefore, is
market.This is not the case with that it is time to find an RE go-
the “Political price-/amount mar- vernance model that addresses
ket” system, which, with its the specific needs and characteri-
foreseeable prices, makes it possi- stics of RE technologies.The pre-
ble for independent “neighbour sent analysis strongly indicates
and local” investors to establish that a “political price-/amount
wind turbine projects. market” model in this connection
is far better than the “political
quota-/certificate price market”
model.
Furthermore, a common EU
Concluding remarks model, based on the principle of
site efficiency, would be much
more flexible, cheaper and easier
The PQPM system introduces to pursue than the “political
inefficient competition between quota-/certificate price market,”
energy robots and weakens the or mono price model, which is
increasingly important competi- designed for uranium and fossil
tion between equipment produc- fuel technologies and represents
ers. It hampers the competition a governance model designed for
between investors by making it the technologies of yesterday. q
NEW ENERGY 5/2001