Insights

25/02/2016

Feed-in tariff is closing

A working group recently submitted its report on a possible new subsidy scheme for wind power and other forms of renewable energy. The report is issued as part of preparations for the latest national energy and climate strategy. It will next move to political decision-making. It is estimated that any new subsidy scheme will take effect, in the earliest, in 2018.

On 13 May 2016, the Working Group for Developing Subsidy Schemes for Renewable Energy appointed by the Ministry of Employment and the Economy submitted its report to Olli Rehn, the Minister of Economic Affairs.

The starting point of the review was to evaluate how the objectives concerning the increase of the share of emission-free renewable energy and self-sufficiency could be achieved in a technologically neutral and cost-efficient manner, while ensuring the preconditions for the long-term development of new technology solutions and renewable energy projects.

For this purpose, the working group evaluated whether a model based on investment aid, operating aid or certificates best fulfils the goals set for the new support scheme for renewable energy. The group also considered competitive bidding process as a part of the new support system.

The working group reviewed the support schemes for the production of industrial scale renewable electricity and the combined heat and power generation. In addition, the objective was to achieve a clear and consistent support scheme, and efficient management and control of subsidies granted.

Operating aid scheme based on a bidding process?

The report of the working group did not include a clear recommendation for the support system but mainly analysed the different alternatives for the political decision-making process.

It seems, however, that, according to the working group, the most suitable support model for renewable energy going forward would be the operating aid scheme based on a bidding process.

According to the working group, the operating aid scheme, which is based on a technology-neutral competitive bidding process, would be a cost-effective way to guarantee an increase to the production capacity for electricity that uses renewable energy in Finland. It would also facilitate compliance with EU rules on state subsidies and requirement for technology-neutrality.

The scheme can be made flexible and such that it reacts quickly to changes concerning the need to increase the share of renewable energy. It can be implemented in a number of different ways, and the applied procedure can be developed on the basis of experiences.

The operating aid scheme would be financed from the state budget. According to the working group, the scheme can be considered as the best alternative from the project developer's risk perspective if the project is not a demonstration project for new technology.

The working group did not give guidance on the applicable subsidy level but stated that the subsidy level can be a flexible premium adjusted on the basis of the electricity market price and the emission allowance price or a fixed premium, or a combination thereof. The working group considers that a fixed premium would be the best by means of functionality of the electricity markets. It would also improve the predictability of the amounts that need to be reserved from the state budget for the subsidy scheme.      

Possible new bidding process is summarised

The working group's report also included a summary on how the bidding process could be set up. According to the working group, the bidding process should be based on long-term general plan that would include, among others, estimates of need for increase of electricity that uses renewable energy, functionality of the electricity markets and electricity systems and number of bidding processes. These estimates would be adjusted annually and the timing and volumes of annual bidding processes would be decided on the basis of such adjusted targets.

There would be at maximum two bidding processes annually. Bids could be approved annually up to the amount of the production volume (MWh) determined in advance, taking into account also the amount reserved from the state budget for the entire subsidy period. The actual subsidy level would be determined based on the bidding process, and it could be based at first stage on a clearing price model (i.e. highest accepted bid) and later on "pay-as-bid" model. The accepted bids would receive premium for a maximum period of 10 or 12 years.

The bidding process would be technology-neutral and all electricity producers that fulfil the economical and operational criteria are allowed to participate in the bidding processes. However, it would be possible to categorise bids based on different production profiles, for example, based on adjustability of the production. In connection with bidding, each bidder must provide a security, the amount of which is determined on the basis of production volume (EUR/MWh), and pay a non-refundable participation fee. 

The winning projects must be realised in accordance with the accepted bid and taken into commercial use within certain fixed time period from the date when the results of the bidding process become legally valid and binding. According to the working group, this time period could be, for example, two years but it could be prolonged for additional time period, however, at the same time, reducing the subsidy period for which the premium is paid accordingly. If the project would not be realised within such fixed time period, the electricity producer would lose the security given.   

The Finnish Energy Authority would manage the subsidy scheme and organise the bidding processes, under the control of the Ministry of Employment and the Economy.  

Certificate scheme

The working group analysed also the certificate scheme as a part of its work. According to the working group, the certificate scheme would facilitates an increase in the share of renewable energy cost-effectively and its main benefit from the Finnish State's perspective would be that it is funded by electricity consumers and that the scheme is market-based where only the target level for renewable energy is subject to political decision-making. Some sectors that consumes a lot of electricity and operate in international trade would be partly released from the funding obligation of the scheme.  

In the certificate scheme, the project developer would receive both the market price for electricity and the price of the certificate, but, at the same time, bears the related risk for the price development. According to the working group, the higher level of risk increases the need for subsidies and may also decrease the possibilities to realise the projects. 

The certificate scheme would be technology neutral, but, at the same time, the risk of over subsidising could apply to it.  According to the working group, the joint certificate scheme of Sweden and Norway could be used as a basis for preparation of the national scheme but the national scheme cannot be implemented on a quick schedule. It could be in place at the earliest early 2020.

The working group expects that the national scheme alone would not be sufficiently liquid and therefore a functional scheme requires implementation of an over-national system mainly with Sweden. An over-national scheme would be more burdensome and less flexible to manage and implementation of changes thereto due to, for example, changed national circumstances would no longer be possible solely based on national decisions.

In addition, the working group states that the certificate scheme would be very similar to emission trade system as a control mechanism and may result in investments being directed to the countries where their realisation is the most cost-effective and otherwise most favourable to the electricity producer. Thus, according to the working group, there would be no guarantee that investments take place in Finland and that the joint certificate scheme would be efficient way to reach national targets for renewable energy and self-sufficiency.

Investment Aid Model

As to the investment aid model, the working group considered that the discretionary investment subsidy is suited particularly for demonstration projects and the commercialisation of new energy technology, as well as specified other project types outside the EU ETS. The operating aid scheme for forest chips-based electricity is cost-effective and promotes replacement of peat with forest chips in the combined heat and power generation.

Projects approved or queuing to the feed-in tariff system

According to the working group, the new support scheme would be made compatible with the prevailing feed-in tariff system based on the Act on Production Subsidy for Electricity Produced from Renewable Energy Sources and the experiences collected from the feed-in tariff system would be utilised in the implementation of the support scheme.

The current feed-in tariff system would be closed and no acceptances for wind power plants, biogas plants or wood-fuelled power plants into the feed-in tariff system would be given.

The applications for approval into the feed-in tariff system would, however, be evaluated under the existing law in respect of such wind power plants that have already received a quota decision. Subsidies for electricity produced in plants accepted to the feed-in tariff system would continue to be paid according to the relevant feed-in tariff system approval.

What happens next?

The more detailed preparatory work on the new support scheme now continues on the basis of the working group's report. The work carried out by the working group is a part of the preparation of the national energy and climate strategy that will be submitted to the Finnish parliament for decision-making at the end of 2016.

The strategy will then also include the final form and scope of the new support scheme. Market participants, therefore, need to stay alert and wait for concrete decisions on the new scheme.

The Working Group for Developing Subsidy Schemes for Renewable Energy report (in Finnish) is available here