CMS Renewables guide
A Sector In Transition - #lawvolution
The renewables industry is in a period of major transition. The industry has long looked to governments to help structure power sectors to give renewables preferential access to the system, to provide a strategic vision toward decarbonisation and to provide direct economic benefits to subsidise renewables. The industry is now in the middle of a shift to a new mentality.
In the future, the industry will be expected to develop fully merchant plants. The transition is at different stages in different countries and for different technologies. Over the short term, the industry is likely to require governments to continue to smooth the path, particularly in ensuring avenues exist to stabilise long-term revenue streams to mitigate the risks. This is particularly important for renewables given the proportionately higher upfront costs of developing projects.
The memory of the retroactive rule changes and wobbling of political support for renewables after the financial crisis a decade ago will mean that the industry will keep an eye on governmental ambitions in the sector. However, the economics and rationale for onshore wind and solar, and possibly offshore wind in the near term, have shifted significantly and so these segments of the industry will look to the future with greater optimism. And with the price falls for commercial scale batteries co-locating with renewables projects, the criticisms of renewables as unreliably intermittent are also fading fast.
Of course, solar PV and wind are not the only renewables technologies that exist. The scale of wider shifts in energy usage could see a sky-rocketing of demand for power, particularly green power. For example, the electrification of the transport sector through electric vehicles and charge points could be a further boost for new renewables developments. However, the extent of political will in the different jurisdictions to catalyse less mature renewables technologies remains an open question at this time.
The international context
On 12 December 2015, the language of the Paris Agreement was adopted by consensus, requiring its signatories to hold global average temperatures to well below 2°C above pre-industrial levels. The message of the Paris Agreement was clear: it is the shared responsibility of the global community to mitigate the impact of climate change, and those with the broadest shoulders should take on the largest burden. The development of renewable sources of energy remains crucial to achieving that goal, and the potential transformative impact of technology was recorded in Article 10 of the agreement.
Two years on, the subscribers to the Paris Agreement could scarcely have imagined the impact technological developments would have on the energy industry in such a short space of time. The argument for promoting renewable sources of energy has shifted away from environmental concerns to economic ones. Renewable sources of energy are increasingly able to compete with fossil fuels in a free-market environment: the first subsidy-free solar farm, complete with energy storage, was opened in the UK in September, while a raft of subsidy-free bids were received by the Dutch government for offshore wind this year.
The language of the Paris Agreement allows for a two-track approach, whereby developing countries are given more time to transition to a low-carbon economy than their developed counterparts. How “developed” a country is does not necessarily reflect the role renewables play in its energy industry. Indeed, Morocco has a sophisticated network of fiscal stimuli, pro-business policies and legal frameworks to promote renewable energy that overshadows many of the other countries in this guide. Offshore wind is the notable exception to this rule. All the largest offshore wind markets are located in Western Europe; in Belgium, for example, offshore wind farms will supply 10% of Belgium’s energy consumption in 2020.
Of course, the transformative impact of the last few years should not be overestimated. Many countries have long since benefitted from advantageous climates and topography, which are conducive to the development of renewable sources of energy. Switzerland, Croatia and Colombia all have mountainous regions which give them a clear competitive advantage in hydropower, the UAE’s location in the world’s “Sun-Belt” facilitates the development of solar panels, and Ukraine’s large agricultural sector and available workforce is conducive to the development of biomass and biogas plants.
Equally, the low price of fossil fuels and the emergence of fracking has seen a revival of those industries in some parts of the world, particularly the United States of America. The consumption of energy from fossil fuels still dwarfs that of energy from renewable sources. Nevertheless, renewables are on the rise. In 2016, a staggering 80% of the energy generated in Austria was derived from renewable sources. Other countries are following suit, and not simply to comply with international environmental law, but because the economic argument for renewables is becoming increasingly harder to ignore.
The demise of subsidies
Given the idiosyncrasies of individual countries, it is difficult to discern global trends in the renewables industry; any such trends will inevitably be subject to exceptions and counter-examples. Nevertheless, our guide broadly indicates that direct financial subsidies are reducing dramatically or are in effect falling away.
Many of the countries in this guide have traditionally operated a government-led subsidy system in which Feed-in-Tariffs (“FiTs”) or Energy Certificates are granted to renewable energy producers to incentivise the production of renewable energy. Hungary, for example, has recently introduced an offtake regime that offers mandatory FiTs and premium subsidies to newly-built power generation units using renewable energy sources. However, generally, these subsidies are now being amended or withdrawn altogether in favour of a more market-led approach. In June 2016, Italy provided for an annual aggregate cost cap for the number of FiTs that may be granted to non-solar renewable energy sources.
Subsidy regimes that are capped or secured through a selection process have been criticised as sometimes leading to market inefficiency and a policy of “picking winners”. For example, the European Commission has recently stated that the Czech government should adopt measures to control “overcompensation” in respect of some of its support schemes. In the UK, Oxford Professor Dieter Helm’s scathing assessment of the UK energy industry argued that the UK subsidy system has led to an inefficient culture of lobbying and crystal-ball gazing. Perhaps the clearest manifestation of the overcompensation caused by a subsidy regime is in Portugal. In February 2017, the government ordered that promoters of power plants who had received FiTs and public support funds should return “excessive” amounts to the National Electric System.
The merits of auction processes have also been noted. Those introduced in Slovakia, Spain and Mexico are seen as indicative of a transition to a more competitive energy industry. However, in many countries, this transition is still at an embryonic stage. Although Peru’s first renewable energy auction took place in 2009, it was only in 2016 that the guaranteed prices awarded to bidders fell dramatically, and government subsidies could be curtailed. Equally, some countries, such as Slovenia, have avoided the transition to a more competitive renewable energy market altogether, instead choosing to reinforce and renew existing subsidy schemes.
Rather than adopt an auction process, other countries have developed tax incentives to encourage the development of renewable technologies. Luxembourg’s income tax law provides for a special depreciation method to encourage investment in assets contributing to energy efficiency in buildings, and exemptions in income tax for the sale of electricity generated from solar PV sources.
Singapore has resisted a subsidy or FiT regime for renewable energy instead generously funding R & D and waiting until technologies are commercially viable under usual market conditions. While the Singapore model may be seen as attractive to many countries, the larger economies will need to show leadership in helping to commercialise immature technologies if momentum on these is to be maintained.
Of the numerous changes in recent years, arguably none has been as impressive as the plunge in solar power costs. The International Renewable Energy Agency (IRENA) has recently stated that it expects solar power costs to fall by another 60% in the next ten years. The fall in these costs has facilitated the rise of rooftop solar panels. In Brazil, for example, the ten-year plan projection forecasts 3.5GW of on-site solar PV by 2026 from an existing negligible base. The emergence of rooftop solar forms part of a wider trend that is having a disruptive effect on traditional models of transmission and distribution infrastructure.
Alongside the fall in solar and wind costs, other costs are also falling. For example, the costs of equity, of debt and of operation and maintenance have all fallen considerably over the past few years.
In addition, the costs of managing the intermittency risks of many renewables technologies are also falling, with electricity storage options coming into focus. Storage offers numerous benefits. In the context of renewables, key benefits include optimisation of the revenue stream, reduction in imbalance costs, reduced strains on the grid system and potentially the deferral of some infrastructure costs. Energy storage projects have been installed in the majority of jurisdictions reviewed – although not always at significant scale. The main focus has been in the UK, Czech Republic, Netherlands and Poland. While battery technologies are receiving the bulk of industry attention at present, a range of technologies have been, and are due to be, installed, pumped hydro storage in particular. Obstacles remain in the legal and regulatory frameworks in many jurisdictions before the potential of storage technologies can be fully realised.
Consumers driving the demand for more green power
Renewables technology is likely to be a key beneficiary from the enhanced role consumers will play in the sector in the future. At the larger end, the RE100 includes global brand names, like Microsoft, Google, Unilever, Diageo and Tata Motors, who are committed to becoming 100% fully renewable in their consumption. At the smaller end, smart meters and new interfaces with the sector are allowing more direct consumer engagement. For example, new technologies are entering the sector such as blockchain - a digital platform that allows an individual party to conduct and bill a transaction directly with another party without the need for an intermediary.
The combined effect of low fixed costs and new technologies is that many traditional gatekeepers may be bypassed and a new type of consumer - the “prosumer” who both consumes and produces energy - will emerge. Such prosumers are often driven by a desire to both reduce their costs and their impact on the environment from their energy usage. Existing legal frameworks have not yet caught up with industry developments such as peer-to-peer trading although a number of governments in our guide are belatedly beginning to update existing legislation to accommodate these developments.
Further, the future of transport would appear to be electric. There has been a recent flurry of government announcements, including commitments in the UK and France to ban the sale of new conventional petrol and diesel vehicles by 2040 and the announcement in India that all cars sold from 2030 are to be powered by electricity. A number of countries are already adopting energy strategies that facilitate the transition to electric vehicles. Bulgaria’s Energy Strategy outlines the role electric vehicles will play in the “green” cities of the future, and the Bulgarian government is shortly expected to bring forward legislation to encourage the deployment of localised charging stations which are so vital to achieving this goal.
The trend toward localisation of electricity production is inevitable, with more smaller projects (including household projects) embedded in distribution networks. However, it seems likely that the scale of the shift in electricity usage, together with the implicit expectation of consumers that the shift brings broader environmental benefits, will also drive forward new renewables projects.
The challenge for emerging technologies
In many countries, hydropower energy has traditionally been the foundation of the renewables economy owing to their fortunate topography. However, we have recently seen the growth of renewables technologies that are less dependent on geographical circumstance, namely solar and wind, and even countries with a traditional strength in hydropower, such as Brazil, are diversifying their renewables industry.
While some technologies have thrived, others have struggled. Carbon Capture and Storage has not taken off in the way many would have expected, as alternative renewables have become more attractive for investors (a USD 25m prize offered by Richard Branson for the first “commercially viable design” to remove greenhouse gases on a large scale has remained stubbornly unclaimed).
The defining feature of the renewables energy industry in the last two years is the dramatic fall in solar and wind technology costs. For example, in 2010, the unit cost of solar power in China was about 20,000 yuan per kW. It is now roughly 7,000 yuan per kW. This has allowed governments to decrease subsidies while still meeting their obligations under the Paris Agreement. It has also boosted the economic case for renewables to supplement the environmental arguments. Fully meeting our decarbonisation commitments is likely to require even greater diversity in renewables sources than those that are currently commercialising. The challenge is to continue to focus on the long-term goals and help the most promising emerging technologies to achieve technological and economic leaps similar to those demonstrated by solar PV and wind over the past decade.