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During so-called „trilogue negotiations“, the European Parliament agreed with the EU member states and the European Commission on even more ambitious expansion goals and endorsed a revision of the renewable energy directive: according to the agreement, about 32% of average gross final consumption of energy of the EU member states should be covered from renewable sources by 2030, which is a significant increase compared to the current 17%. Thus, the directive defines the development of the European renewable energy markets until 2030 and will result in large-scale investment incentive programmes at national level not only in the electricity sector but also especially in district heating and district cooling as well as in the transport sector.
The agreement to amend the EU‘s renewable energy directive (so far 2009/28/EC) is a part of the large package „Clean Energy for all Europeans“ and regulates the issues and the pace of expansion. By 2030, 32 % of average gross final consumption of energy of the EU member states should be covered from renewable sources, with the option to revise the target upwards after a review in 2023. Besides political climate-related effects, this measure aims to help generate up to EUR 60 billion in savings annually as regards expenses for fossil fuels1. In addition to electrification, also the reduction in heat generated from fossil fuels will be a goal of major importance. The already defined national targets for individual member states will continue to apply as the minimum standard. There are great country-specific differences between the member states (in correlation with their resources), with some of the countries demanding a target of 13% (such as the Netherlands or the Czech Republic) or more ambitious targets such as 49% (Sweden) and 38% (Finland). The fact that the target of 18% set to Germany is far below the targets Germany has set itself clearly shows the weakness of the new directive that the ambitious EU-level 2030 targets also come down to mandating an obligatory path of expansion of renewables in the individual countries.
Illustration 1: current and planned shares of renewable energy in gross final consumption of energy2
In summary, the most important substantive requirements imposed by the directive on the member states as regards the expansion of investment in renewable energy generation capacities are as follows:
The goal will be to increase the share of electricity from renewable sources on the European average from the current rate of approx. 29.6 %3 to 50% by 2030. Due to steep falls in prices we have observed in photovoltaics (of up to 80% since 2009) and wind power, renewables already currently account for over 85% of investments in the European electricity production sector. The goal of the new directive is to further ensure high investment stability and transparency to investors and, at the same time, enable access to a more market-based incentive system. The feed-in priority for electricity from renewables should be abolished where reasonable; however, this should not present any new hurdles due to the low marginal cost of power at least in the case of wind turbines and PV power plants.
In addition, household self-consumption will be exempted from fees and charges (probably from 2026) in the case of small-scale installations of up to 30kWp. This is an important signal of the integration of photovoltaics as a technology for decentralised energy supply because, e.g. in Germany, installations exceeding the minimum capacity of 10 kWp are currently required to pay the EEG surcharge at the rate of 40%. In this respect, this minimum capacity threshold thus has to be increased. But the directive goes on to mandate even more: it requires member states which nonetheless intend to charge prosumers with fees to first evidence that exempting this group of consumers from charges would have a negative impact on the general system. It also provides for the elimination of double taxation as regards stored electricity, which finally enables establishing business models involving the multiple use of storage systems for peak shaving, system service, pooling for balancing energy.
According to the latest information, the current draft of the directive should also enable peer-to-peer electricity trading between citizens without any bureaucratic and financial hurdles. In this way, decentralised suppliers, such as citizen cooperatives, should be strengthened and incentivised. This encourages the expansion of blockchain-based systems, as e.g. the pilot project by utility company Stadtwerke Wuppertal (Tal.Mark) has already shown. Because this would have a highly „disruptive“ impact on the existing electricity trading system, it remains to be seen which country will be brave enough to adjust its regulatory framework to include these business models.
The EU member states will be required to increase the share of renewable energy in the supply of heating and cooling energy by 1.3 percentage points a year. In doing so, they will be also required to create appropriate incentive systems. Assuming the low rate of penetration of renewable heating in this sector so far, e.g. in the heating systems in Germany where this rate is currently approx. 7%4 (excluding the share of renewable energy in waste recycling), this means that the installed capacity will more than double by 2030. According to Rödl & Partner‘s estimates for the entire European Union, the additional volume of investment in heating and cooling renewable energy generation facilities will be approx. EUR 36 billion a year (Illustration 2).
IlIlustration 2: Extrapolation of the additional annual investment volume in the European countries in the area of generating heating and cooling energy from renewable sources based on the path of expansion at the rate of 1.3% (Rödl & Partner)5
The new guidelines for the member states regarding further development of the district heating sector are dealt with in Article 24. The article originally read that independent producers of heating or waste heat from renewable resources should be allowed the rights of access to local district heating systems. Network operators should off-take heating energy produced by third parties and even enable third parties to directly supply the customers. This regulation, however, was significantly relaxed in the latest version of the draft. In addition to this partial „unbundling“ in district heating, the current draft also envisages the option of directly obligating district heating suppliers to increase the share of renewables by 1% a year. Furthermore, a range of exceptions has been defined, such as capacity limitations, requirements regarding the technical parameters of heating or cost related aspects, which in practice significantly hinders access for third parties.
Moreover, consumer rights have been strengthened and options of terminating contracts of supply created. District heating or cooling suppliers will be obliged to provide end consumers with information about the share of renewables and the performance of their system and to ensure that consumers have the opportunity to generate electricity for self-consumption from renewable sources in a more efficient way.
In transport, the new directive prescribes fixed shares for renewable fuels, especially synthetic and biofuels, and the use of renewable electricity. According to the directive, the share should increase to 14% in 2030, whereas the share of first generation biofuels in this may be no more than 7%. This should lower the use of agricultural land and impede the consequences of land-use change. Advanced second generation biofuels, such as e.g. synthetic natural gas (SNG) or Fischer-Tropsch fuels, may have a share of at least 3.5 percentage points in that. In this respect, a strong expansion in incentives to pilot and demo installations and first commercial installations should be expected in the years ahead. Also due to the above-mentioned amendments to the directive, the flexible coupling of those installations with the power sector and the use of waste heat released in exothermic reactions for heating systems can lead to special cost advantages and positively influence investment decisions.
The reorganisation of the system of guarantees of origin which certify the green quality of eco electricity products is another issue addressed by the directive. Here, it was debatable whether and how the system of guarantees of origin should be expanded to cover state-funded electricity volumes in the whole EU. So far, this has been applied only in some countries. In Germany, however, such guarantees (or certificates) are only issued for renewable power plants that do not receive financial support in form of the EEG compensation for the generated electricity. The negotiated compromise on the directive‘s Article 19, which regulates this issue, currently provides that guarantees of origin should be basically introduced for the entire renewable energy sector – i.e. also for volumes regulated by the EEG. These guarantees, however, should not be auctioned to third parties as the EC originally envisaged. In addition, according to the compromise text, the member states should be free to decide whether they allow issuing guarantees of origin also for energy volumes which already receive financial support such as that under the EEG. Overall, the guarantees of origin offer another, probably significant source of income for investors investing in renewable power plants.
The bold EU-level guidelines address many of the current challenges facing the decarbonisation of the power sector. The achievement of the set targets partially requires a massive reform of the member states‘ systems, far beyond the current commitment. For investors and companies from the renewable energy sector, this means further that they should continue to attentively observe the regulatory framework and the situation around incentive programmes offered in the individual countries. Investment opportunities seem to abound: whether in deep geothermal energy, synthetic fuels, business models using the combination of photovoltaics and storage systems in the segment of small-scale installations or renewable energy in the heating/cooling segment – in all of those areas state-of-the-art technologies are already present and they only wait for investors or an enabling regulatory framework.
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1 European Commission, 2016, Achieving global leadership in renewable energies 2 Eurostat 2018, Share of renewable energy in gross final energy consumption, 2004 -2016 [nrg_ind_335a]3 Eurostat 2018, Share of renewable energy in total gross energy consumption of the EU28 4 BDEW, 2017, Strategic paper „Zukunft Wärmenetzsysteme“ [„The future of heating systems“]5 based on final energy data by Eurostat, 2018, Simplified energy balances - annual data [nrg_100a]
Benjamin Richter
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