Scheer Solar Economy Renewable Energy for a Sustainable Global Future (Earthscan, 2005)

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lobbying efforts of the latter have proven so successful that the success of grid feed-in legislation in the above-named countries has attracted little attention elsewhere. In its White Paper on renewable energy in 1997, the EU Commission did put forward a directive on grid feed-in, with a minimum price set according to the average cost of electricity supply up to the ‘city gate’ of the local distribution grid, plus an environmental premium of 20 per cent.6 The European Parliament also passed a motion supporting the directive.7 The Commission Directorates-General responsible for drawing up directives for the energy market and for competition policy, however, have so far remained stubbornly opposed to implementing these proposals – just as they have ignored the clauses in the Common Market directive on electricity that explicitly allow for preferential treatment at the national level of electricity generated in an environment-friendly manner.

Attempts by companies to have grid feed-in laws replaced by a quota system form another component of this defensive strategy. Electricity companies would be obliged to purchase a proportion of the electricity they sell from renewable sources, this proportion being set by the government, which would raise it from time to time. The quota would be filled by a process of competitive tender, the idea being to bring market forces, and the resultant pressure to raise productivity, to bear on renewable energy. Such proposals, however, overlook regional differences in the availability of renewable energy, whose profitability depends not just on the productivity of the plant, but also on the local wind conditions and insolation. The consequence of systems of quotas and competitive tender would be a scramble for the best geographical locations and for the renewable energy technologies that currently offer the most favourable production costs – at the moment, primarily wind. The supply of good locations would quickly be exhausted, especially with the local opposition that results from disproportionate regional concentration of such plant. Other electricity suppliers would be forced to use more expensive suppliers with less favourable locations as a consequence of losing the competition for the best locations. The market distortion argument would make an immediate reappearance,

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especially from the mouths of those who currently propose quotas as an alternative to legislation on grid feed-in.

At the very least, every subsequent increase in the quota would be the subject of intense controversy, as the problem of different prices in different locations would become more acute with each rise in the proportion of electricity coming from renewable sources. Pressure for enlarged quotas could only come from independent operators not encumbered by existing conventional capacity. Yet the lack of such encumbrances is a precondition for the rapid expansion of the market for renewable energy. If a quota system were required to ensure that investment in renewable energy did not concentrate on particular technologies such as wind power, which currently has a cost advantage over other renewable sources, then the quota would have to be divided into subquotas, which would turn the system into a bureaucratic nightmare. And as the quotas would also be filled using remote production capacity, renewable energy would become increasingly dependent on the national grid. Quotas can also be side-stepped by awarding the contract to a supplier without requiring delivery. This has occurred time and again in competitive tender processes under the British non-fossil-fuel obligation, which is a model for quota systems elsewhere. Quota systems therefore cannot be an alternative to grid feed-in rules with minimum prices. Electricity companies extol quota systems because they offer a way to resurrect their regional monopolies: the first quota would be filled in-house, and further increases resisted.8

There is no obvious sensible alternative to minimum price legislation. The Renewable Energy Act passed by the German parliament in February 2000, which replaces the existing grid feed-in legislation, is also based on minimum prices. The difference with the new act is that the payment mechanism takes full account of the unbundling of the local grid. Bridging finance for electricity from renewable sources comes from the national grid, following the statutory price minima. The national grid in turn apportions the cost to all electricity suppliers according to the proportion of total electricity supplies coming from renewable sources. All suppliers, and by extension all consumers, thus contribute to the financing of

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investment in renewable energy in proportion to the share of renewable energy in national electricity supplies. The result is a sort of sliding quota with no limit on the quantity of renewable energy that can fed into the grid at statutory minimum prices. This adheres to the market principle as far as it can be applied to renewable energy. But it is still environmental considerations that dictate the primacy of renewable energy, thus bringing about a fundamental shift in policy in an era of electricity market liberalization.

Independent markets for green electricity and the intermediary problem

An independent electricity market consists of direct contracts between green electricity suppliers – either an appropriate broker or a direct producer – and customers. The contract covers the supply of electricity generated solely from renewable sources, with electricity from fossil fuel cogeneration plants representing a halfway-house.9

Suppliers of green electricity have begun to appear as electricity markets have been opened up to competition, especially in countries which have seen wide-ranging public debate on environmental alternatives, and where these have broad public support. Such suppliers seek to attract customers who are prepared, whether for reasons of principle, caution or public image, to pay higher prices for green energy. Surveys have shown that large swathes of the population are willing to pay higher prices,10 and there is also a precedent in the form of the market for organic produce. The market for green electricity may even grow faster than the organic produce market, as the consumer is not faced with a new set of purchasing decisions every shopping trip, but simply has to sign on the dotted line when they change their supplier. The enthusiasm of some new suppliers of green electricity is so euphoric as to make all other options seem beside the point. This optimism rests on two expectations:

1continuing development will bring the price of green electricity down year on year, thus lowering the price differ-

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ential with conventional electricity and making it easier to grow the market for the alternative – especially if renewable energy is granted tax-exempt status; and

2grid operating companies will operate a non-discriminatory pricing structure, thus ensuring a level playing field for all electricity suppliers.

But these expectations are far from secure, as the bombshells dropped by the electricity companies have shown. It is highly doubtful that the price differential between green and brown electricity will move in favour of green electricity in the near future. A price-cutting war has broken out in the European electricity market. The large corporations are holding four cards that give them considerable scope for action. Firstly, they have a large pool of power stations for which the depreciation charge has already been paid, and which can therefore be operated very cheaply with minimal additional investment. Secondly, electricity can be bought cheaply on the international market, especially from Eastern Europe. Thirdly, the established companies were able to build up a large financial cushion during the regional monopoly years. Fourthly, they have considerable scope for cutting staff. This is why electricity prices have recently been sinking by double-digit rates – it is indirect evidence of earlier excessive profits at the consumer’s expense. These trends will lead to a widening of the price differential for the foreseeable future, thus reducing the ability of green electricity to penetrate the market.11

There are also question marks in respect of transmission charges and discrimination – whether a non-discriminatory regime can be achieved as hoped, and whether such a regime can remain free of barriers thrown up by established electricity companies. There can be no question that the functional separation of production, transmission and distribution is not being observed in practice. Even where power companies have been divided into generation and grid-operating companies, attempts to use the grid to secure the position of large power stations continue, and transmission charges are the weapon of choice. ETSO, the Association of European Transmission System Operators, the peak association for European opera-

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tors of highand medium-voltage grids, was founded in July 1999 in order to exert pressure on the Commission and the governments of the Member States to accept the existing transmission agreements within the industry, and not to issue additional directives or create an independent watchdog or competition authority with the power to intervene against discriminatory behaviour. Even if the rules on transmission are not obviously discriminatory, the major grid operators have ample scope for placing technical difficulties in the way of unwelcome competitors.

Transmission charges are the principal bone of contention. Some green electricity companies reject transmission charges outright, on the basis that these have already been paid by the customer before the switch to green electricity, through the charge for the provision of supply capacity contained in the electricity price and through the connection charge. According to this line of argument, an additional transmission charge would represent a triple payment by the green electricity consumer.12 It would therefore make more sense to contract only for the additional cost of investing in renewable energy. The investment would be used to install new plant, and the electricity produced would be fed into the grid as usual and paid for in line with the statutory minima. As electricity is an intangible product, this is no different in physical terms from a contractual relationship between the green electricity supplier and the customer. Electricity always goes into a general pool; it is impossible to determine the origin of what comes out the other end. For such business models to work, however, there must be a system of statutory minimum payments in place.

In the face of competition from suppliers of green electricity, electricity companies have started to create their own green electricity subsidiaries. Minimal additional investment is required, because established companies have a legacy stock of hydropower capacity, which they can take out of their existing supply mix in order to sell it as green electricity. This enables them to undercut any other green supplier. Despite their enormous competitive advantages, however, they undercut other suppliers only by a very small amount, thus making additional profits without altering the overall balance of renew-

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able energy in the system. This tactic enables electricity companies to exploit the positive attitude of green electricity customers towards renewable energy to rake in additional profits, improve their public image and block or neutralize the threat of independent green suppliers.

The only counter to such tactics is a certification system for suppliers of green electricity. Certification must be conditional on the credibility of the supplier and on proof that the electricity comes from new plant. The German green electricity certification association Grüner Strom-Label, which is supported by, among others, the environmental organizations BUND, Naturschutzbund, Deutscher Naturschutzring, Eurosolar and IPPNW, the energy consumers’ association and Verbraucherinitiative (a national consumer action group), therefore refuses certification to green electricity companies with considerable holdings in electricity companies that continue to include nuclear and fossil energy in their strategy and whose behaviour hampers the development of renewable energy, despite statements to the contrary.13

The outlook for the market for green electricity thus depends on whether the behaviour of the suppliers is transparent and whether the transmission conditions directly or indirectly favour established electricity companies, be that by multiple charges for the same service or by high charges for high-voltage transmission. The grid has proved to be the power companies’ most lucrative asset, and it has turned them into an economic force to be reckoned with, despite the existence of state regulators. The potential of the green electricity market lies not in a few large suppliers, but in many regional ones. Local markets also do more justice to the unique nature of renewable energy as a local energy source. In this case, there would be no need for transmission charges, because these really would have been covered by the connection charges paid by both the supplier and the customer. In the case of supply contracts between suppliers and customers within the local distribution grid, (German) municipal utilities rightly do not impose further transmission charges. The correct approach for renewable energy and for a distributed energy supply would be different access charges for external suppliers and suppliers

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operating within the local grid, according to the principle of ‘from the local area to the local area’, or ‘from the region to the region’.

Green suppliers and municipal self-sufficiency

The lack of transparency in the way electricity prices are determined within the grid is what enables companies to confuse the debate on grid feed-in laws and the real costs of supplying electricity from renewable sources. The mechanism by which prices are set and supply contracts agreed is an impenetrable black box, which is why the grid-based electricity industry can quite happily make unverifiable claims. The pitfalls of the green electricity market also have to do with the problems of the grid, despite the fact that a decentralized generation industry does not need a national grid. It has already been established that the best way to exploit the potential of renewable energy is not by replicating the centralized grid. Instead, renewable energy needs its own supply structure based on high-performance electricity storage.

The argument against integrating renewable energy into the existing grid does not stem from dogmatic rejection or demonization of the industry, but from the simple fact that this is not the most economically efficient way to harness technologies that can be deployed anywhere and whose multifunctionality offers multiple economic benefits. The decisive element in any strategy for renewable energy will be an understanding of its very different supply-chain requirements. It is important to be aware of the structural conflict between the necessarily hierarchical organization of nuclear and fossil fuel energy supply and the different requirements for renewable energy, and not to muddy the waters. Whereas the established energy companies are becoming diversified but nevertheless highly centralized energy suppliers, the goal for renewable energy should be a trans-sectoral distributed energy supply system. The foundations of any energy system are its sources and consumers of energy. Extended supply chains were necessary and a centrally managed system possible with nuclear and fossil fuel energy because source and consumer could not be

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brought together within the same locality or region (except, that is, in those regions where primary energy is extracted). With renewable energy it becomes possible to co-locate source and consumer, thus rendering transmission over a high-voltage grid unnecessary. It would be like taking an unnecessary detour via a private toll-road. A distributed system, on the other hand, would revolutionize energy supply and open the floodgates for renewable energy. It is also the only way out for municipal and regional electricity suppliers, including the municipal electricity utilities. This is the path they must tread, lest they find themselves fighting a last-ditch battle against industrial consolidation – a fight that, without an integrated energy base, they can only lose. The range of agents who would participate in a localized energy system include:

•classical energy consumers, who buy all the energy they need (including motor fuel) from the local or regional supplier;

•individual energy users who generate part of their own electricity and buy the rest on the market;

•the completely self-sufficient, who store their own energy for later use;

•the self-sufficient who become suppliers themselves by selling their excess power to the local or regional supplier; and

•the diversified green energy supplier who buys others’ surplus energy for redistribution or storage, and who operates the local electricity and gas network.

If demand for a centrally managed energy system falls and eventually disappears as the renewable energy sector expands, then the individual consumer need no longer pay for it. Specialized conventional energy suppliers will give way to a decentralized energy system. It is the responsibility of the operator of the local distribution grid to optimize the productivity of privately operated plant by redirecting surplus energy to other uses. Both the local grid operator and the operators of private installations, including the energy self-sufficient, increase their productivity by exploiting the multifunctionality of renewable energy to the full, and by adding new modules as

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the technology matures. Their role is thus not just purely economic.

Distribution has always been the preserve of municipal enterprises, which must now become integrated energy businesses. Municipalities must ensure that the local grid remains under their control, and that they regain control if it has already been sold. The local grid, however, is more than just a delivery service for electricity: its function is to store all surplus power from local generation plants, both those under the control of the local supplier and privately operated individual systems. This integrated municipal corporation would also provide all the other network carriage services – ie, sewerage, gas, distributed heat and water networks. It would also use these networks to offer internet connectivity. All these services can increasingly be operated in parallel, thus saving infrastructure and maintenance costs. The services described properly belong in the public sector because there are no competing networks for electricity, water, gas or distributed heat, which means that market distortion is not an issue. The only questions are:

•Who controls the networks? Private monopolies, or democratic institutions that can deliver cost transparency and prevent discriminatory behaviour? We would do well to remember that at the dawn of the modern urban age, it was private businesses who demanded that municipal infrastructure should be run by the local council, with equal charges for all users: for reasons of market economics, no monopoly enterprise should be allowed to compete simultaneously in other sectors.

•Will local distribution networks remain integrated, so that they can be used more productively for multiple supply functions?

Privatizing supply networks will not bring about competition. Competition comes from different firms producing different products in different ways, and from the separation of production from the use of networks. In order to ensure more productive energy use, a municipal energy corporation would provide energy storage systems both for municipal power plants

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and as a service to independent operators. It would also produce and sell biofuels – vegetable oil, biogas, hydrogen, methanol, ethanol or gasified biomass from regional sources – and provide a network of garages.

A municipal energy corporation would thus provide storage services for all forms of energy, assuming that individual operators do not store their own energy. It would enter into partnership with local agriculture and forestry companies, buying raw biomass and converting it into electricity, heat or heating or motor fuel. It might buy agriculturally produced biogas and sell it as motor fuel or for generating electricity and heat. It would sell the residues from its own biomass power plants and gasification plants or the fermented biomass from its own biogas plants to agricultural enterprises as fertilizer, and, with further processing, as chemicals for pest control. The principal obstacle to municipal cogeneration plants – the difficulty of finding customers for the distributed heat – would no longer apply, as any excess heat could be converted into electricity, and any surplus electricity could be converted into other energy media.

A municipal energy supplier would always have enough stored energy to be able to meet demand spikes from local production. There would no longer be a charge for conveying energy from local suppliers to local consumers, because it would be covered by the connection charges. Individual suppliers of green electricity would therefore be able to find the markets they need within the local area. The local network of resource-processing enterprises would form the new basis for the functional separation of roles within the industry; with each additional module, their independence from the conventional fuel, gas or electricity supply chain grows; the system becomes more effective and more economic. Businesses and property owners have the option of installing their own generating plant, moving further towards self-sufficiency as the necessary technologies become available. Cross-substitution of multifunctional energy storage systems to iron out demand fluctuations would put an end to conflicts over capacity. In addition, the municipal corporation could also offer contracting and consultancy services.