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According to Watson & Band Import and Export Data Watch, according to the latest research by Rystad, a well-known Norwegian energy research and business intelligence company, the EU's emergency measures to deal with the energy crisis in Europe may fall short of its expected goals, at least in the foreseeable future. This is the case with renewable energy. The EU's proposal to temporarily limit the income of ultra-marginal power producers aims to capture windfall profits from renewable energy producers. In the current period of high electricity prices, renewable energy producers are benefiting from lower production costs.
About 60% of the EU’s installed renewable energy capacity comes from fixed-rate contracts signed long before the energy crisis – often below current spot prices, according to Watson & Band Data Watch. . According to the European Commission, an estimated $116.6 billion could be earned by implementing revenue caps for low-carbon and coal-fired power generation, but the windfalls described by the EU represent only 40 percent of renewable energy producers.
Rystad expects investors and developers to be scared off, which could lead to reduced investment, project delays and renegotiation of long-term contracts for projects still in development. Given that the European Commission has set ambitious new targets for renewable energy, it also seems like it should address the real issues facing the industry: licensing, auction prices and supply chain support - as the US did in the recent Inflation Cuts Act as done.
Rystad renewable energy analyst Victor Sines said: “While the EU’s unprecedented intervention is necessary, it is only temporary and will not help the problem of supply gaps in the medium and long term. The renewable energy industry is a source of cheap and safe European production. The best industry for electricity, but this policy reduces the investment capacity of private sector electricity providers. The renewable energy industry not only helps Europe keep electricity, but also pays for Europe. If renewable energy is to occupy the European electricity mix in place, they will need corresponding support in the not too distant future.
Electricity prices in Europe have reached all-time highs in recent months, with average prices approaching $500/MWh in August and record daily and weekly prices approaching $700/MWh. The EU and its member states therefore aim to put a cap on profits from renewable electricity – proposed at €180/MWh ($179.4/MWh), regardless of the market time frame in which power companies sell electricity. The cap will apply to wind, solar, biomass, nuclear, coal and some hydroelectric power plants. Revenue above the price cap will be redistributed to member states to help households and businesses facing financial stress as energy bills soar.
Although the income cap will apply to all renewable energy plants, only about 40% of renewable energy plants benefit from the current crisis, according to Watson & Band Data Watch. Since 2000, governments in most European countries have instituted subsidy policies to encourage the development of renewable energy. Known as Feed-in Tariffs (FiT), Premium Subsidies (FiP) and Contracts for Difference (CfD), these schemes received early availability due to their lucrative tariff commitments relative to the average tariff. Widely recognized by renewable energy developers. These subsidies account for more than half of the region's installed capacity, and the support is spread across different schemes. The prices of these bilateral agreements are, on average, lower than current electricity prices. Since 2015, EU governments have deemed these subsidies too lucrative for renewable energy producers and have gradually replaced them with auctions. Most auctions in Europe award capacity through schemes such as FiT, FiP and CfD, but allow governments to offer competitive electricity prices based on a bidding process. Other auction schemes offer a fixed subsidy, and producers must sell the electricity they produce on the spot market.
Rystad estimates that 17% of installed capacity is currently subsidized through auction schemes, especially in Germany, Spain and France. Additionally, after 2010, power purchase agreements (PPAs), which are entered into with businesses, utilities, or governments, became popular. The PPA allows for a fixed tariff to be negotiated according to prevailing market conditions, representing 11% of the EU's current installed renewable energy capacity. Finally, the remaining capacity (14%) derives its revenue directly from the spot market. These plants may have been started in the early 2000s with subsidy contracts that have expired, or those that have opted for the spot market combined with a hedging strategy, or those that have recently made bets that electricity prices are high enough to be profitable.
Among these different mechanisms, two sources of income are key to understanding the current situation: fixed income and market income. Fixed income comes from fixed tariff contracts such as FiT, CfD or PPA contracts. Collectively, these contracts represent 60% of the EU's total installed renewable energy capacity, or about 170 GW, and are mainly distributed among Germany, France and Spain. Producers operating such capacity cannot profit from high electricity prices because they are obliged to redistribute revenue above the negotiated price to counterparties in the agreement.
According to Watson & Band Data Watch, current market conditions have led to a major shift - 20 years after the government had to pay a fixed price above the market to renewable energy developers, the government is now making a profit. In France, the government provided FiT subsidies for onshore wind power between 2000 and 2015, with an average electricity price of $82.3/MWh for a duration of 15 years. The average profit for the French government is close to $500/MWh, based on average electricity prices last month. Recently, the French Energy Regulatory Commission (CRE) announced that renewable energy revenue in 2022 and 2023 is expected to reach $8.5 billion. This is the first time these revenues have seen positive growth, which directly reflects current trends.
According to Watson & Band Import and Export Data Observatory, due to the complexity of implementing policies to manage the market, the European Commission's decision to recommend a fixed upper limit regardless of the type of income and the specific situation of the market has made people have an impact on its impact. a lot of confusion. At a time when renewables are being urged to solve the twin energy and climate crises, the policy sends a negative signal to the industry.
