lable at ScienceDirect

Energy xxx (2010) 1e8

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Energy

journal homepage: www.elsevier .com/locate/energy

Efficiency and effectiveness of promotion systems for electricity generationfrom renewable energy sources e Lessons from EU countries

Reinhard Haas a,*, Gustav Resch a, Christian Panzer a, Sebastian Busch a, Mario Ragwitz b, Anne Held b

a Energy Economics Group, Vienna University of Technology, A-1040 Vienna, Austriab ISI, Fraunhofer Institut für System und Innovationsforschung, Karlsruhe, Germany

a r t i c l e i n f o

Article history:Received 6 November 2009Received in revised form17 June 2010Accepted 22 June 2010Available online xxx

Keywords:Renewable energyPromotion schemesCost effectiveness

Abbreviations: RES-E, electricity from renewabletariffs; TGC, tradable green certificates.* Corresponding author.

E-mail address: reinhard.haas@tuwien.ac.at (R. Ha

0360-5442/$ e see front matter � 2010 Published bydoi:10.1016/j.energy.2010.06.028

Please cite this article in press as: Haas R, e(2010), doi:10.1016/j.energy.2010.06.028

a b s t r a c t

Currently, a wide range of strategies is implemented in different countries to increase the share ofelectricity from renewable energy sources (RES-E). A still controversial discussion is whether quantity-driven (like Tradable Green Certificates (TGCs) based on quotas) or price-driven (like feed-in-tariffs (FIT))instruments lead to preferable solutions for society. The core objective of this paper is to compare theperspectives of quota-based certificate trading systems for an efficient and effective increase of RES-Ewith FIT. The major results of this analysis are: (i) The success stories of growth in RES-E in EU memberstates in recent years has been triggered by FIT implemented in a technology-specific manner at modestcosts for European citizens; (ii) At present, TGC systems in most countries applied show a low effec-tiveness with respect to RES-E deployment of less mature technologies such as solar PV (with improvingtendencies in e.g. the UK or Italy with respect to certain technologies); (iii) Compared to short termtrading in TGC markets the intrinsic stability of FIT systems appears to be a key element for success; (iv)Hence, currently a well-designed (dynamic) FIT system provides a certain deployment of RES-E in theshortest time and at lowest costs for society.

� 2010 Published by Elsevier Ltd.

1. Introduction

Increasing the share of renewable energy sources for electricitygeneration (RES-E) has a high priority in the energy strategies ofmany countries world-wide. In Europe the European Union has setambitious targets for RES-E since the late 1990s, see e.g. EC [1], EC[2], Resch et al. [3] and Johnston et al. [4]. However, to facilitatea breakthrough for RES-E, several economic, institutional, political,legislative, social and environmental barriers have to be overcome,see e.g. Lior [5], and Haas et al. [6]. From our point-of-vieweconomic aspects state a superior barrier and of core relevance tomeet the targets set is the implementation of proper financialsupport systems. In this context a still controversial discussion iswhether quantity-driven e like Tradable Guarantee-of-OriginCertificates (TGCs) based on quotas e or price-driven (like feed-in-tariffs (FIT)) instruments lead to preferable solutions for society.Major pros and cons of support systems have been evaluated e.g. byRefs. [7e13].

energy sources; FIT, feed-in-

as).

Elsevier Ltd.

t al., Efficiency and effective

The most important issue in the current discussion is therequest for a more or less European-wide TGC system to promoteRES-E, see e.g. EWI [14], or Midtun [15]. This discussion appears tobe odd at least because of two major issues:

� It interprets a quota-based trading system as the best solutionsimply because it is trading-based. But, the core objective hasto be kept in mind which is to achieve an accelerated deploy-ment of RES-E in an effective and efficient mannere and whichis not to introduce a level playing field for trade;

� In the current discussion themeasure of harmonisation is oftenequated to (technology neutral) quota systems. This ignores thefact that there are other, potentiallymore favourable options, toform a harmonised support system

� It completely ignores the lessons learned so far which doactually not identify any success story. On contrary, most of theEuropean success stories of promoting RES-E over the pastdecades in an effective and economically efficient way weredriven by feed-in-tariffs, which are implemented in a tech-nology-specific manner.

An important issue in this context is that both systems areactually market-based and introduced by policymakers and, hence,create an artificial market. Eventually, in both systems the final

ness of promotion systems for electricity generation from..., Energy

Table 1Fundamental types of regulatory instruments ([3]).

Price-driven Quantity-driven

Regulatory Investmentfocused

� Investment subsidies � Tendering system forinvestment grant� Tax credits

R. Haas et al. / Energy xxx (2010) 1e82

electricity customers (or the tax payers) will have to cover thesupport costs.

The core objective of this paper is to compare the theoretical andpractical perspectives of quota-based TGC for an efficient andeffective increase of RES-E with other instruments like FIT.

� Low interest/Soft loansGenerationbased

� (Fixed) Feed-in-tariffs � Tendering system forlong-term contracts

� Fixed Premium system � Tradable GreenCertificate system

Voluntary Investmentfocused

� Shareholder Programs� Contribution Programs

Generationbased

� Green tariffs

EURO/

kWh Uncertainty

predicted

2. Regulatory promotion strategies

In this section a survey on regulatory promotion strategies andtheir features is given. Table 1 provides a classification of regulatorystrategies for encouraging the use of RES-E1

Within the category of regulatory price-driven strategies noquantity goals or targets are established. Instead, the focus is onproviding generators of electricity with financial support in termsof a subsidy per kW of capacity installed or a payment per kWh ofenergy produced. There are a number of variations under thisscheme such as:

� Investment focused strategies where financial support isprovided through investment subsidies, soft loans or taxcredits, usually per unit of generating capacity installed;

� Generation based strategies where financial support is offeredas a fixed payment or as a premium per unit of energygenerated.

Under a fixed payment scheme such as feed-in-tariffs (FITs),generators receive a fixed amount per kWh generated regardless ofthe costs of generation or price while under a premium scheme e

as implemented e.g. in Spain e a fixed amount is added to theelectricity price. In practice, this makes a big difference for therenewable plant owner. In the latter case, the total price receivedper kWh (electricity price plus the premium) is less predictablethan under the FIT because it depends on a volatile electricity price.

Regulatory quantity-driven strategies are based on a governmentdecision on the desired level of generation or market penetration ofelectricity from different RES. The price is in principle set throughcompetition between generators. Under these schemes, the policymakers set a desired quota or goal, usually with a target date, toencourage the market penetration of RES. Examples include:

� Tendering or bidding schemes which call for tenders to acquirespecific amounts of capacity or generation from specified typesof RES. Competition between bidders leads to the winners ofcontracts which will receive a guaranteed tariff for a specifiedperiod of time.

� Tradable certificate schemes such as TGC in Europe. Theseschemes typically obligate one or more parties involved in theelectricity supply chain such as the generators, wholesalers,distribution companies, or retailers to acquire a certainpercentage of electricity from RES in their energy mix. Mostschemes allow parties to trade certificates to demonstratecompliance. Certificates can be obtained in three ways:� From their own renewable electricity generation;� By purchasing renewable electricity and associated certifi-cates from other generators; and

� By purchasing certificates without purchasing the actualpower from a generator or broker.

The price of the certificates is determined by the market. Forfurther details on how instruments work see Haas et al. [16].

1 Of course, a specific promotion programme put into practice may consist ofa mix of different strategies.

Please cite this article in press as: Haas R, et al., Efficiency and effective(2010), doi:10.1016/j.energy.2010.06.028

2.1. How promotion schemes work

The following analysis is based on the concept of static (andfurther-on dynamic) cost resource curves of RES (see e.g. Haas [16],Ragwitz et al. [17],). It is important to differ between (theoreticallyexisting) continuous cost curves, and (in real life used) stepped(discrete) cost curves, see Fig. 1. The major reason for the shape ofthis cost curve is the difference in the costs of different technolo-gies. A continuous cost curve considers the fact that every locationis slightly different from each other and, hence, looking at alllocations e.g. for wind energy in a certain geographic areaa continuous curve emerges. Fig.1 takes into account that in real lifethis accuracy is impossible. Different sites are put into certaincategories and then a stepped curve emerges. Moreover, as Fig. 1depicts these cost curves are associated with uncertainties. Theseuncertainties are the higher the more right we move in thediagram.

Based on this static (and further-on dynamic) cost resourcecurves a TGC-based quota system works as follows: A quantity(¼quota¼ a certain percentage of electricity to be guaranteed fromrenewable energy sources) is set by a government. The generators(producers), wholesalers, retailer or consumers (depending who isobligated in the electricity supply chain) are obligated to supply/consume a certain percentage of electricity from renewable energysources. At the date of settlement, they have to submit the requirednumber of certificates to demonstrate compliance. A FIT works viceversa: the price is set and the quantity finally generated is decidedby the market.

2.2. Objectives of promotion schemes

To finally identify which strategy is most proper the followingbasic reflections are of core relevance:

kWh

Fig. 1. Stepped (discrete) static cost curve.

ness of promotion systems for electricity generation from..., Energy

[GWh/year]

[cen

t/kW

h]

BiomassSmall Hydro

Wind Loc. A

Wind Loc. B

Quota

Producer Surplus

PZert

Costs

Fig. 3. Producers’ surplus if the shape of the cost curve is flat (Source: [7]).

Quantity kWh)

Price, costs

[Euro/MWh]

Price of

GoO

certificate

MC (Static cost curve)

Quota Q

pele

MC ... marginal generation costs

pele ... market price for

(conventional) electricity

pMC... Marginal price

for green electricity (due toquota obligation)Generation Costs (GC)

Producer surplus (PS)

pMC

Fig. 2. Basic definitions of the cost elements (illustrated for a tradable GoO certificatesystem) (Source: [4]).

R. Haas et al. / Energy xxx (2010) 1e8 3

1. The core objective of a promotion scheme for RES-E must be toincrease its market deployment;

2. It is of core relevance to bear in mind that actually all thesesystems rely on a command & control approach of a plannedeconomy. In one case the price is set, in another case thequantity is set;

3. Yet on the other hand all of these systems are market-based:the goods are produced in a competitive market. (Private orpublic) Companies decide whether to invest or not. Only if theproper incentives are provided the proper investments will bemade on a “free” competitive market. And it is important tonote that this market in all cases is created by some kind ofartificial demand. Hence, in both cases an artificial market iscreated

4. What should be the economic target of a support system forRES? As it is based on an artificial market and not on thevoluntary decisions of the consumers/voters the objectiveshould be to minimize the overall additional costs for thesegroup to finally reach a maximum of support/acceptancepossible.

[c

en

t/k

Wh

]

Biomass pure

Small Hydro

Munic. waste

Wind

Producer Surplus

PZert

Biomass cofiring

Costs

2.3. Acceptance of support systems by customers and investors

Quota-based TGC systems as well as Feed-in tariff systemscreate an artificial market and cause policy costs (¼additional coststo be paid typically by all electricity customers). One of the majorcriteria for a successful promotion system is the acceptance by theelectricity customers (or in exceptional cases the society if reim-bursement is done through state budget) who finally have to paythe required expenditures. This acceptance is of course stronglydepending on the magnitude of overall support. So it is importantto analyze what are the additional extra costs for the electricityconsumers.

The objective is to minimize additional costs for consumers,where

Additional costs for consumers ¼ Producer Surplusþ Generation costs� Revenues electricity marketð�Avoided External costsÞThese additional costs (¼policy costs) have to be paid finally by

the electricity customers. Of course, the lower these additionalcosts are the higher will be the public acceptance and the larger will

2 Definition of producer surplus (PS): PS ¼ Q � PMC � C(Q) with Q quantity, PMC e

price at marginal production costs and C(Q) e total production costs.

Please cite this article in press as: Haas R, et al., Efficiency and effective(2010), doi:10.1016/j.energy.2010.06.028

be the amount of additional electricity generated from RES. As canbe seen from Fig. 2 this minimisation will especially focus onProducers’ surplus2 (PS) and finally leads to a technology-specificsupport system which allows less profits for the cheapesttechnologies.

In Fig. 2 the cost definitions and the various cost elements usedin the following are depicted. The total direct costs of this systemconsist of the generation costs, the producers’ surplus (PS) minusthe revenues from the sale in the conventional electricitymarket. Inaddition, it can also be argued that RES-E reduce external costs orimpact economic welfare and these terms may also be taken intoaccount.

Moreover, investors in new RES-E generation plants should becompensated in a fair way but not by means of exaggerated profits.The FIT and premium systems in country without trading systemshave proven that the RES-E investors accept this approach andprovide the proper corresponding investments.

The idea of the TGC system relies on the reflection that trade ina market finally leads to the best allocation of resources. Specialattention in this figure deserves the PS. The comparison of Figs. 3and 4 shows the impact of the shape of the cost curve onproducers’ surplus. If the cost resource curve is flat e Fig. 3 e PS issmall or almost negligible and the additional extra costs whichfinally have to be paid by the electricity consumers/tax payers willnot be influenced significantly by the design of the policy. Hence,there is no urgent need for a technology-specific support system.

Yet, if the cost resource curve is steep e Fig. 4 e PS is consid-erable and may even be higher than generation costs! Hence theadditional extra costs which finally have to be paid by the

[GWh/year]QuotaFig. 4. Producers’ surplus if the shape of the cost curve is steep (Source: [7]).

ness of promotion systems for electricity generation from..., Energy

Fig. 5. Differences in transfer costs due to higher PS of TGC systems in comparison to FIT when the cost resource curve is steep.

R. Haas et al. / Energy xxx (2010) 1e84

electricity consumers/tax payers rise tremendously in comparisonwith a technology-specific FIT. This case is by far the overwhelmingone in EU-27 countries and leads straightforward, to the request fora technology-specific support system e.g. FITs as depicted in Fig. 5.

A uniform European TGC price for all RES-E would be set by themarginal price of the most expensive technology sold (analogous tocurrent quota systems). If the marginal price is set by a medium orhigh cost technology, this would lead to windfall profits for low-cost technologies (this is one reason why the UK government hasintroduced technology banding for the UK ROCs market). Thesewindfall profits could offset the potential efficiency gains of Euro-pean trade.

In this context, Fig. 6 illustrates in a schematic way the possiblePS arising in EU-27 from a technology neutral support scheme. Itplots the cost resource curve of the additional realisable potentialfor renewable electricity in the EU-27, where the whole basket ofavailable RE technologies is clustered into several bands, indicatedby their marginal generation cost and the corresponding realisablefuture potential. Thereby, several low-cost options such as biowasteincineration, biomass co-firing or most preferable sites for windonshore form the left part of the merit order curve, followed bymoderate RES-E options e e.g. wind onshore at moderate sites,wind offshore, small-scale hydropower or large-scale biomass

0

20

40

60

80

100

120

140

160

0 200 400 600 800 1000

Additional (up to 2020) realisable potential for RES-E [TWh]

Gen

erat

ion

Cos

t [€

/MW

h el

e]

Cost-resource curve (RES-E in the EU27)

Power price

Required

RES-E

deployment

Marginal cost for RES-E

Producer Surplus

Fig. 6. Possible producer surpluses arising from technology neutral GO trade in EU-27(Potential up to 2020) (Source: [5]).

Please cite this article in press as: Haas R, et al., Efficiency and effective(2010), doi:10.1016/j.energy.2010.06.028

plants. On the margin with regard to the required additional RES-Edeployment up to 2020 large-scale agricultural biogas andmedium-range biomass plants appear in this simplified depiction.Consequently, in case of technology neutral support as appearingunder a mandatory TGC trading scheme, high producer profits canbe expected, indicated by the shaded area above the cost curve inFig. 6.

In addition, it has to be born in mind that in a trading system therisk to recover investments leads to the effect of an additional riskpremium, see Fig. 7. This Figure finally explains why the supportcosts in most trading schemes tend to be higher than in FITcountries.

3. Country-specific lessons learned from TGC markets

This section summarises the major lessons learned from tradingsystems implemented in specific countries. Quota-based systemsare now in place in the UK, Sweden, Italy, Belgium, and Poland, seeTable 2 below. Analyses on the effectiveness of TGC systems havebeen conducted e.g. by van der Linden [18], Jacobsson et al. [19],Ragwitz et al. [20], Toke [21].

Fig. 7. Possible producer surpluses when the cost resource curve is steep.

ness of promotion systems for electricity generation from..., Energy

Table 2Survey on TGC systems in EU countries.

UK Belgium (Flemish region) Belgium (Wallon-region) Italy Poland Sweden

Period Start 2002 Start 2002 Start 2002 Start 2001 Start 2005 Start 2003Obligation 3% in 2003,

10.4% in 20101.2% (2003), 2% (2004)increasing up to 6% in 2010

3% in 2003 increasing upto 12% in 2010 From September2010 onward, the quota will bemultiplied by 1.01

2% in 2002 and increasedannually by 0.35%between 2004 and 2008

7.5% in 2010 7.4% in 2003, 16.9% in 2010

Obligation on Supplier Supplier Supplier Producers and importers Supplier End-userTechnology bands

within overallquota

No No No No No No

Involvedtechnologies

Small hydro****,wind, biomass,solar -, geothermalenergy,no waste

All renewables, nosolid municipal waste

All renewables andhigh quality CHP

All new renewables (incl.large hydro, MSW, CHP)

Small and largehydro, wind, biomass

Small hydro (<1.5 MW),large hydro (only some cases),wind, biomass,geothermal, wave

Existing plantseligible

No Yes Yes No (for certificate trade), Yes(for quota fulfilment)

No Yes (small hydro)

Internationaltrade allowed

No No No Yes, but only in exchangewith physical electricity andwith reciprocity countries

No Trading scheme withNorway planned

Floor price Not planned. At federal level: from 1st of July2003 onward the grid operator isobliged to buy TGC issued anywherein Belgium for the minimum pricesper 1 MWh) of: offshore wind 90V,onshore wind 50V, hydro: 50V, solar:150V, biomass: 20V Within theWallon-region, RES-E producers mayexchange their TGC for a subsidy of 65 V.

Not planned No Only in theintroductory phase.

Penalty Buy-out price£30,51/MWh(for 2003/2004)(w45V/MWh)

75V/MWh (in 2003; 10V/MWh in 2004;and 125V/MWh in 2005

From 1st of April 2003 onward:100V/MWh (100V per missingTGC in size of 1 MWh)

No. The grid operatorsells certificates at afixed price 12,528V/MWh(2006)

The buy-out priceis 100 EUR/MWh

150% of the market pricewith a maximum of about19V/MWh in 2004, 26V/MWhin 2005

R.Haas

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0

2

4

6

8

10

12

14

2002 2003 2004 2005 2006 2007 2008 2009 2010

Va

lu

e o

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ate

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/k

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0

2

4

6

8

10

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14

16

18

2003 2004 2005 2006 2007 2008 2009

TW

h/yr

TGCs issued

TGCs redeemed

a b

Fig. 8. a. Value of certificate in different European TGC markets, b. TGC’s in Sweden issued and redeemed.

R. Haas et al. / Energy xxx (2010) 1e86

In Sweden, certificate prices are still lowest e see Fig. 8a e

although prices have been rising in recent years. In Sweden someold capacity were also allowed to participate in the Swedish quotasystem. This resulted in the situation that more certificates wereproduced than redeemed until 2006. In 2007 it was the first timethat more certificates were redeemed than issued (see Fig. 8b)!Moreover, additional investment subsidies for wind power plantswere available, improving further the economic incentives for windpower investments.

In the UK, the major problem e aside from high certificateprices e is that the quota has never been fulfilled so far. In theaccounting period 2007/2008 4.9% of electricity was generatedfrom “new” RES while the quota was 7.65% (see Fig. 9a) resultingin a quota fulfilment of 64% (see Fig. 9b). One main reason for thisfailure is that ambitious RES targets were introduced in a non-mature market environment, where besides policy-driveninvestor’s uncertainty (e.g. on future certificate prices) severaladministrative barriers appear of relevance. There is a similarsituation in Italy. Certificate prices here are high (see Fig. 7) andquota fulfilment is moderate (about 90% of the quota of 3% wasfulfilled in 2007).

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2002 2003 2004 2005 2006 2007 2008 2009 2010

Qu

ota

a

nd

%

a

ch

ie

ve

d

IT quota IT achieved UK quota UK achieved SE quota SE achieved

a b

Fig. 9. a. Quotas and actual shares achieved in different European TGC

Please cite this article in press as: Haas R, et al., Efficiency and effective(2010), doi:10.1016/j.energy.2010.06.028

In Belgium there are two parallel TGC systems in Flanders andWallonia. The TGC prices in Flanders are among the highest inEurope and as reported in Verbruggen [22] and Verbruggen [23]the associated policy effectiveness has been very low until 2008.Yet, it appears to be on a rising trend starting in 2009.

Furthermore, it is of interest to analyse whether the financialsupport decreases over time. Fig. 8a shows the premium supportlevel in selected countries. As can be seen the requirement ofa noticeable dynamic decrease in the promotion costs is not met forTGCs despite increasing market prices for conventional electricity.For all other EU countries e especially Poland e it has to be statedthat the experiences available so far do not yet allow any appraisalof the success of the implemented policies.

4. Criteria for effective and efficient promotion schemes

A comparison of the different support schemes has been con-ducted in several projects and investigations see e.g. RWI [24],Sensfuss et al. [25], Gomez e al [26].

Next the relation between quantities deployed and the level ofsupport is analysed for some trading and some FIT systems in

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2002 2003 2004 2005 2006 2007 2008

qu

ota

fu

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%)

IT UK SE

markets, b. Quota fulfilments in different European TGC markets.

ness of promotion systems for electricity generation from..., Energy

0

2

4

6

8

10

12

0 20 40 60 80 100 120new generation (kWh/capita/yr)

su

pp

ort (

ce

nt/k

Wh

)

FITTGC

+

UK

AT

DE

IT

BE

ES

SE

--

Fig. 10. Effectiveness vs costs of promotion programmes for electricity from RES inselected countries 2003-2008 (excl. Photovoltaics, source: own investigations). Onlycountries are considered with promotion policies since 2003.

R. Haas et al. / Energy xxx (2010) 1e8 7

recent years. It is often argued that the reason for higher capacitiesinstalled is a higher support level. Paradoxically, countries withhighest support levels e Belgium and Italy for example e areamong those with the lowest specific deployment (Fig. 10). On theother hand, high FITs especially in Germany and Spain are oftennamed as the main driver for successful investments especially inthe area of wind energy. However, the support level in thesecountries is not particularly high compared with other countriesanalysed here.

Summing up a major result of these analyses is that the investi-gated FIT systems are effective at a relatively low producer profit. Awell-designed (dynamic) FIT system provides a certain deploymentof RES-E in the shortest time and at reasonable costs for society.

The most important design criteria for FITs are: (i) a carefullycalculated starting value; (ii) a dynamic decrease of the FIT thattakes into account technological learning; (iii) the implementationof a stepped and technology-specific tariff structure.

If any TGC system is implemented (e.g. to allow for some burdensharing between countries) the following conditions are of superiorrelevance:

� Ensure a large liquid market, which may be difficult in the caseof fragmented TGC systems according to technology and bycountry;

� Ensure an equilibrium between short term spot markets andlong-term contracts for TGC

Fig. 11. Development of “new” RES for electricity generation in EU-27 (Source).

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� Another important issue is to ensure a long-term planninghorizon. It has to be guaranteed by highly credible authoritiesthat a TGC system will exist for a specified and sufficient timehorizon. Otherwise the uncertainty for potential investors istoo high and it is likely that only few investments take place;

� A quota-based TGC system has to focus mainly on additionalinstallations of RES-E capacity. If a large share of the requiredcapacity to meet a quota already exists, TGCs lead to windfallprofits for the owners of existing plants. More precisely, noexisting or at least no fully depreciated plant should beincluded in a quota system, otherwise substantial windfallprofits occur;

� Hence, from the public’s point-of-view, TGCs qualifying fora quota should only be issued over a pre-defined period of time.A rolling redemption may provide a proper solution;

� It is highly relevant that the penalty for not purchasinga certificate is higher than the expected market price for TGCs.Otherwise there is no incentive to fulfil the quota.

5. Conclusions

The success of European promotion strategies for RES-E isdepicted in Fig. 11. An almost exponential growth took place sincethe beginning of the 1990s. Themajor conclusions of the theoreticalreflections and the empirical findings presented in this paper are:

The major success stories of this growth in RES-E in EUmemberstates in recent years has been triggered by FIT which are imple-mented in a technology-specific manner and involve rather modestcosts for European citizens. The main reason for this observation isthe long-term price security of the system combined with tech-nology diversification of support. Compared to short term tradingin renewable certificate markets the intrinsic stability of feed-insystems appears to be a key element for success.

Currently, awell-designed (dynamic) FITsystemprovides a certaindeployment of RES-E in the shortest time and at rather low costs forsociety. The experiences made with FIT systems have shown severaladvantages compared to trading schemesat least for three reasons: (a)a FIT system is easy to implement and can be revised to account fornew capacities in a very short time; (b) administration costs areusually lower than for implementing a national trading scheme. Thisfact is especially important for small countries where a competitivenational tradingscheme is difficult to implement; (c)Theadvantageofa technology-specific FIT, which helps to diminish the producersurplus, is the higher the steeper the cost curve is.

In recent years, quota-based TGC systems have shown a lowereffectiveness (but with improving tendencies where support isapplied technology-specific via banding) although comparativelyhigh profit margins are possible. Firstly, a major problem are thehigh producer profits for the cheapest options in the market givena steep cost curve as depicted in Fig. 4. This leads to correspond-ingly high additional costs for customers. Secondly, market mech-anisms seem to fail in TGC systems.3

Finally, the following reflections are of core relevance whenthinking about changes of promotion schemes or harmonisationbased on trading systems:

� It has to be born in mind that all support systems (quota-basedTGC systems aswell as other instruments like FIT) are based onanartificial market created by policy maker. It is not based on thevoluntary decisions of the consumers/voters! Hence to ensure

3 Remark: Why should competition work in a TGC market if it does not functionin the conventional European electricity market?.

ness of promotion systems for electricity generation from..., Energy

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broad acceptance off such a promotion system the objectiveshouldbe tominimize the overall additional policy costs for thesegroup.Moreover, investors innewRES-Egenerationplants shouldbe compensated in a fair way but not by means of exaggeratedprofits. The FIT and premium systems in country without tradingsystems have proven that the RES-E investors accept thisapproach and tend to provide the proper corresponding financialincentives;

� Many currently implemented FIT schemes have proven thatthey are efficient and effective. Why should they be abandonedand be replaced by a TGC system which has so far only shownthat it is in most cases inefficient and ineffective?

� Another major current question is whether a fully harmonisedEU-wide promotion scheme should be pursued. The majorconclusion here is: It cannot be recommended at all to try tointroduce currently a fully European-wide harmonised tradingscheme. Munoz et al. [27], Klessmann et al. [28] and Klessmann[29] have soundly argued that there aremore convincing designoptions under the new Directive. Or as Toke [30] puts it:“Problemsbegin tocreep inwhenpeople startmakingproposalsfor the same incentives to be given anywhere in Europe. Aharmonised EU-widemarket-based system,would not improvecost-effectiveness, and may serve to reduce, rather thanincrease, local investment in renewable energy”. However, wealso have to bear in mind what happens in the mid-term (afterthe first wave of investments comes to the end of their depre-ciation periods). In the light of the dynamic development in theRES-E market (e.g. wind turbine manufacturers, biomass plantdevelopers, photovoltaic system component producers) and inthe conventional electricity market (increasing prices due torising demand and capacities becoming scarce, highly volatilenatural gas prices and highly volatile prices for CO2-emissioncertificates), it is of course necessary to improve and furtherdevelop the promotion schemes for RES-E.

References

[1] European Parliament and Council. Directive of the European parliament and ofthe council on the promotion of electricity produced from renewable energysources in the internal electricity market. Directive 2001/77/EC e 27September 2001, Brussels; 2001.

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