Energy Policy 33 (2005) 1239–1250

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doi:10.1016/j.enp

A European-wide harmonised tradable green certificate scheme forrenewable electricity: is it really so beneficial?

Pablo del R!ıo*

Facultad de Ciencias Jur!ıdicas y Sociales de Toledo, Universidad de Castilla-La Mancha, C/Cobertizo de S. Pedro M !artir s/n, Toledo 45071, Spain

Abstract

Winds of change are blowing in the public promotion of renewable electricity (RES-E) in Europe. On the one hand, a move to

allegedly more market-conform instruments for the promotion of RES-E has already taken place in some Member States. On the

other hand, a Directive on the promotion of RES-E has recently been approved setting indicative targets for RES-E consumption

and opening the possibility that a harmonised framework for support schemes will be implemented in Europe. This harmonised

framework (in combination with trade in RES-E between Member States) can be compared to a situation in which Member States

continue to apply their current support schemes. This paper analyses the pros and cons of harmonisation. The main conclusion is

that if priority is given to the local/regional/national benefits of RES-E, then harmonisation in combination with a tradable green

certificate scheme is not so advantageous for countries. Only if the policy priority is the achievement of the RES-E Directive targets

at the minimum costs should harmonisation be favoured by national energy authorities.

r 2003 Elsevier Ltd. All rights reserved.

Keywords: Renewable electricity; Policy support schemes; Cost efficiency

1. Introduction

Support policies are still and will continue to be forsome time very relevant for the market penetration ofelectricity from renewable energy sources (RES-E),given that renewable electricity is not competitiveenough albeit it already provides very important benefitsfrom the social point of view (environmental, socio-economic and otherwise). Long-run energy supplies areexpected to be based to a significant extent on renewableenergy.In Europe, winds of change are blowing in the area of

public promotion of renewable electricity. On the onehand, a Directive on the promotion of RES-E hasrecently been approved.1 On the other, RES-E is beingcurrently promoted in the Member States through awide array of different instruments (feed-in tariffs,tradable green certificates (TGCs), bidding/tenderingschemes, investment subsidies, fiscal/financial and greenpricing schemes).2 This diversity does not facilitate the

-776-8027/34-925-268800; fax: +34-925-268801.

ss: pablo.rio@uclm.es (P. del R!ıo).

1/77/EC of 27 September 2001.

and assessment of these instruments is provided by

(2003), Haas et al. (2003) and Van Dijk et al. (2003)

front matter r 2003 Elsevier Ltd. All rights reserved.

ol.2003.11.019

trading of RES-E across countries. With nationalsystems as they now are, problems related to distortionsin competition could result if trade in RES-E took place.This is why a community support framework (CSF)might be beneficial and could be proposed in the nearfuture, as envisaged in the RES-E Directive. This issuewill be the focus of the next section.Some Member States have recently moved to alleg-

edly more market-conform instruments for the promo-tion of RES-E (TGCs) in the last couple of years, whilein others an internal discussion on the future of theirpromotion schemes is taking place.The RES-E Directive aims at facilitating a medium-

term significant increase in RES-E within the EU from14% in 1997 to 22.1% of electricity consumption in2010. Apart from setting indicative targets for renewableelectricity, the Directive envisages the possibility that aharmonised framework for support schemes will beimplemented in Europe. This may come in 2005,following a report by the Commission on the experiencegained with the coexistence of different support schemes.This harmonised framework (in combination with

trade in RES-E between Member States) for achievingthe targets for 2010 set by the Directive can be comparedto a situation in which Member States continue to applytheir own support schemes.

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–12501240

The advantages of harmonisation versus the con-tinuation of present national policies have been stressedboth at the theoretical and empirical levels with the helpof simulation models (such as Elgreen, Rebus, Pretir,Admire-Rebus, Recert). A harmonised framework(combined with the possibility of trade in renewableelectricity) facilitates effectiveness and cost efficiency inreaching targets at the EU level. This is frequentlymentioned in the academic debate and is also one of themajor results from such analysis and models. Not onlythe EU as a whole would benefit, but individualMember States as well. Exporting countries wouldreceive additional revenues while importing countrieswould experience cost savings.However, when the assumptions of such analysis are

examined and other criteria apart from cost efficiency inreaching targets are considered, a slightly differentpicture emerges. On the one hand, results are highlysensitive to the assumptions being made. Furthermore,some of the assumptions on which both the theoreticalanalysis and the simulation models are based can bedeemed too strong and might not hold if a harmonisedsystem is actually implemented. This may significantlylimit the benefits of harmonisation. On the other hand,when other criteria for judging harmonisation areconsidered in the analysis (such as local environmentalbenefits, local employment levels and promotion of lessmature technologies), then a situation where nationalgovernments maintain control over RES-E supportpolicies could also be beneficial for countries. However,there has not been too much discussion on these issuesand, more specifically, on the possible drawbacks ofsuch a harmonised framework. This will be the maincontribution of this paper.This paper is organised as follows. Section 2 gives a

brief overview of the prospects for harmonisation set inthe RES-E Directive. The main assumptions for theanalysis are put forward in Section 3. In Section 4 thebenefits of harmonisation of support schemes arediscussed. Section 5 is divided into two parts. The firstsubsection deals with some possible limitations of theassumptions referred above. The second part furtherdiscusses some cons of harmonisation. The paper closeswith some concluding remarks.

3Probably its greatest merit is putting renewable energy in an

irreversible way on the national agendas and enforcing governments to

put their national policies in a European perspective.

2. The RES-E Directive: a possible transition to a

community support framework

Taking account of the wide diversity of the presentpromotion schemes between Member States, the Direc-tive states that it is too early to set a community-wideframework regarding support schemes (article 4.2). TheDirective announces a decision on a community frame-work for support schemes by the end of 2005 (followingthe report on the experience gained with different

support schemes in the Member States), after which atransition period of at least 7 years would be maintainedfor already installed capacity. In the meantime, someMember States are already developing and modifyingtheir national support schemes for RES in order toachieve the indicative targets for 2010.If the Commission decides to harmonise the support

frameworks in 2005, it might still take 2 years totranspose the Directive into national legislation. Thismeans that, by 2007, this CSF would already beimplemented for new capacity. For existing capacity,however, a transition period of 7 years holds andharmonisation of existing capacity would not beachieved until 2014 at the earliest. To sum up, therewould be two paths for harmonisation (one for existingcapacity and the other for new capacity).On the other hand, according to the Directive (article

5), no later than 27 October 2005 Member States willhave to issue guarantees of origin which ensure that theelectricity has been produced from RES. These guaran-tees will have to include information on the RES fromwhich the electricity was produced and even on the datesand places of production. They will enable RES-Eproducers to demonstrate that the electricity they sellhas been in fact produced from RES and have to beaccepted by other Member States. Guarantees of origindo not have to be tradable but if they are made to betradable, then they will work as a TGC (Van Dijk et al.,2003).The main benefit of making them tradable is to

facilitate trade and, thereby, to stimulate the deploy-ment of RES-E in the most efficient areas and countries.However, it should be emphasised that, in reality, theEU Directive does not make technology choices anddoes not prejudge either what type of RES-E policyscheme or instrument should be used in the future (noteven if a common RES-E promotion scheme should beimplemented). In other words, Member States areobliged to issue guarantees of origin but not tointroduce a TGC system.Given that the Member States have different views,

the Directive can be regarded as the best possiblecompromise that could be reached. It still does nottackle the fundamental differences in approach that thecountries prefer. Essentially, it leaves the discussionopen on whether to stimulate the supply (feed-in tariffs)or the demand (obligations on supply or financialincentives to increase demand) of renewable electricity.3

Although national policies will prevail in the comingyears, the Directive will prove to be essential in settingthe rules according to which the future game has to beplayed and therefore it substantially contributes to

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–1250 1241

accelerating the renewable energy market in the longerterm (Van Dijk et al., 2003, p. 40).

3. Scope, methodology and main assumptions

Both in the academic and the political debate it hasoften been suggested that the unified policy supportscheme, which would be the main feature of harmonisa-tion, be based on a TGC system. In the rest of the paperwe will assume that harmonisation will take place incombination with an EU-wide TGC scheme.Harmonisation of support schemes seems to be a

policy target at the European Commission level(especially for DG Competition and parts of DGTREN), which sees international trade and competitionas a way to bring down prices and therefore encouragethe more rapid spread of RES-E (Lauber, 2004). Theoverall political trend in EU, including the increasingliberalisation of the electricity market, favours the use ofcommercial markets as a driving force for RES-Edeployment, i.e. trends in the EU favour a market-based model.Harmonisation has also been praised at the academic

level, mostly by those economists who are aware of thebenefits it would bring, notably in terms of cost-efficientdeployment of RES-E in the EU. However, not muchhas been said on the possible negative side ofharmonisation. We use a graphical method to showthe pros and cons of harmonisation. This will becomplemented with the results of some simulationmodels. The analysis will be carried out at the countrylevel. For simplicity and clarity of exposition, only twocountries are considered. Results could be easilygeneralised to apply to EU-15. One country has arelatively low potential (and high costs) in RES-Egeneration (country A). The other has a higher potential(and lower costs) (country B).Some basic assumptions are necessary in order to

undertake the graphical analysis. These assumptionsare:

(a)

It is assumed that both the power and the TGCmarkets are competitive.

(b)

The price of electricity (PE) is the same in bothcountries and no difference between low and peakperiods is made.

(c)

4

Countries have a target for RES-E consumption.Both the targets (QA and QB) and the initialdeployment of RES-E are the same in bothcountries. The overall target for both countries isQ: Therefore, Q ¼ QA þ QB and QA ¼ QB:

The former is the case of investment subsidies and of some forms of

(d) feed-in tariffs. The latter is the case in TGC systems. Some feed-in

tariff schemes also pass the additional costs of deploying RES-E to the

consumers in their electricity bill (this is the case in Spain, for

example).

Countries differ in the shape of their respectivelong-term marginal cost curves for RES-E genera-tion. One country (A) has a relatively high marginalcost curve, meaning that it becomes comparatively

more expensive for this country to deploy RES-Ecompared to the low-cost country (country B).

(e)

Marginal cost curves of RES-E are above the priceof electricity. This means that electricity generatorswould not produce RES-E unless they would befinancially compensated. We call the supportprovided to RES-E ‘‘social costs of deployingRES-E’’ (which would cover the difference betweenthe marginal costs of RES-E and the electricityprice times the kWh generated). Depending on theinstrument used by each country, these costs areeither government costs (i.e., at the costs totaxpayers contributing to the public budget) orconsumer costs.4

(f)

A comparative statit analysis is carried out whereonly two (extreme and ‘‘ideal’’) policy scenarioshave been considered: continuation of presentpolicies (CPP) and harmonisation of supportschemes. CPP implies that national governmentswill continue with their current (2003) policies andmeasures.

(g)

In the harmonisation scenario, the setting up of aCSF is assumed. In order to facilitate RES-E tradebetween Member States in the CSF, the implemen-tation of a TGC system for all RES-E technologiesis considered (with an obligatory consumer quota ofgreen electricity). Trading in TGCs facilitates thedistribution of an overall objective in the most cost-efficient way among several technologies andorganises RES-E development in the scale of severalcountries (Menanteau et al., 2003).

(h)

The TGC price is determined by the interaction ofsupply and demand in the TGC market. The supplycurve is based on the marginal cost of RES-Egeneration. Demand is given by the targets (quota).In the harmonisation scenario an EU-wide, singleequilibrium TGC price for the EU results. How-ever, if there was imperfect competition in the TGCmarket, then the TGC price could well be eitherabove or below the level that would result from theintersection of the aggregate marginal cost curve ofRES-E generation in EU-15 and the quota for allEU (22%). This deviation from such a level wouldlead to either less deployment than expected (sincecertain investments at sites that are less attractivefrom the investor’s point of view would not beeconomically feasible) and, therefore, possible non-compliance with targets, or to the fulfilment oftargets at a high price for consumers. We assume

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–12501242

that the eventual European TGC market would behighly liquid, resulting in an ‘‘accurate price’’ (i.e., arelatively low and stable TGC price). Of course thisdepends on the smooth functioning of the TGCmarket, being close to the conditions of a perfectcompetition market. However, reasons for imper-fect competition in TGC markets may exist. Therecould be few suppliers or demanders, a lack ofmarket transparency, high transaction costs andmarket entry barriers. For example, Amundsen andMortensen (2001) argue that market power may bea relevant issue, since RES-E generators maycollude and exercise market power by restrictingtheir capacity expansion. Speculation in theTGC market, price determination not based inreal economic costs, limited volume of TGCtraded in the market and non-transparent determi-nation of TGC prices are also possibilities theore-tically (although indirectly) considered byMorthorst (2000). This issue of possible imperfectcompetition in TGC markets deserves furtherresearch in the future at both theoretical andempirical levels.

(i)

In the harmonisation scenario countries can trade.However, trade is not physical but only TGC tradeis considered. The separation of physical electricityfrom certificates, which is a main feature of theTGC system, facilitates the international trading ofRES-E. This means that, in theory, a country willdeploy RES-E up to the point where its marginalcosts curve equals the European TGC price. Ifthe target for that country is above the RES-Equantity for which the country cost curve andthe EU TGC price intersect, then it will bemore attractive for the country to buy TGCsthan to deploy RES-E domestically in order tomake up for the difference. Countries unable tofulfil their own target will import TGCs, while thosewith a surplus of certificates may export them tocountries with a shortage. This ensures that thenational targets are reached in the most cost-efficient way.

MCAcents /kWh

The results of the analysis might be sensitive to theseassumptions, an issue we will discuss later.

d

c

b

a

QA= QB

MCB

MCB

MCA

GWhO

Ptgcb

Ptgca

Fig. 1. Costs for reaching the targets under the CPP scenario.

4. Benefits of harmonisation

Harmonisation of support schemes shows relevantbenefits at both the theoretical and empirical levels.A discussion of these benefits follows. A com-parison between domestic and a European-wide TGCscheme is carried out in order to highlight theseadvantages.

4.1. Theoretical benefits from harmonisation combined

with a TGC system

4.1.1. Cost efficiency in reaching the RES-E Directive

targets

In theory, if harmonisation of support schemestogether with an EU TGC scheme was implemented(with trade and quota obligations on the demand side),then the RES-E Directive targets could be reached atmuch lower costs than if countries relied on their ownpolicies (see also Voogt and Uyterlinde, 2003). Thefollowing analysis explains why. Fig. 1 shows the RES-Emarginal cost curves for both countries. Assuming anintegrated EU market in 2010, it is shown that achievingQA leads to a higher marginal cost of the last unitgenerated for country A (MCA) while, for the sametarget, marginal costs for country B would be muchlower (MCB). The total costs of reaching the target forcountry A are given by the sum of areas a; b; c and d

while the costs for country B are given by the sum of theareas c and d: The total costs of achieving the targets inthe CPP scenario (Q ¼ QA þ QB) would be the sum ofall those areas=a þ b þ 2c þ 2d:If both countries had a domestic TGC scheme, the

domestic TGC prices would be given by the intersectionof the respective marginal cost curves and the quotas(minus the price of electricity). A higher TGC pricecould be observed in the case of country A becausemarginal costs are higher than in country B while bothshare the same level of ambition in the targets. Therewould be no trade between countries in this CPPscenario.When looking at Fig. 1, a policy instrument could be

implemented in order that the production of RES-E inthe higher-cost country was reduced (reducing its totalcosts accordingly) and production of RES-E in the low-cost country was increased, so that the aggregatecompliance costs were reduced. The answer is that, inline with the bubble concept from environmentaleconomics, such a win–win situation would be possibleand feasible if harmonisation of policy support schemes

ARTICLE IN PRESS

QA= QBQA+ QB = Q

Pe

MCB

MCA

Penalty

P*=MCA+ B

MCB

MCAMCA+ B

GWh

cents/kWh

O Q’A Q’B

12

Fig. 2. Harmonisation combined with an aggregate TGC scheme.

Total marginal cost curve and TGC price.

P. del R!ıo / Energy Policy 33 (2005) 1239–1250 1243

in combination with a European TGC market wasimplemented. Trade would then be driven by thepossible gains for both countries with different marginalcost curves (and targets).Theoretically, assuming an overall target of Q and,

provided that the assumptions concerning the TGCmarket and the price of electricity hold, a unitary TGCprice in Europe would result from the intersection of theaggregate marginal cost curve and the total quota Q:Fig. 2 depicts the aggregate marginal cost curve for bothcountries (constructed by adding the domestic marginalcost curves of each country). An EU-wide TGC pricewould result (P�).5 The price of the TGCs in country Ais higher than P�; meaning that country A has nopotential to produce RES-E at that price if a harmo-nised market with a single TGC scheme for bothcountries was implemented (and trade allowed). Onthe contrary, the price of TGCs in country B would bebelow P�; meaning there is a large RES-E potential incountry B. Note that the more ambitious the targets fora country, the more likely his (internal) TGC price in aCPP scenario would be high.In harmonisation, for an overall TGC price of P�; it

would be attractive for country A to deploy RES-E upto Q0

A: It will not be profitable to go beyond thatamount, because then it would be cheaper to buy TGCsin the market than to produce RES-E by itself.Therefore, in order to reach its own target (QA), countryA will buy TGCs at a price of P� in the followingamount: Q0

A � QA: By following this strategy, country Awould save area 1 compared to the CPP scenario.The picture is the opposite for country B, which

would increase its deployment compared to the CPPscenario. In harmonisation, it would produce up to Q0

B

because the additional costs of generating RES-E aremore than compensated by the revenues B would obtainfrom selling its surplus certificates to country A at aprice of P�: Country B would deploy RES-E up to Q0

B:It would not be profitable to produce less than that

5P� would be the price of TGCs at the EU level. Therefore, it would

be the difference between the aggregate marginal costs of deploying

RES minus the electricity price (which is assumed equal in country A

and B).

amount since at that TGC price, the country would earnadditional revenue by producing up to Q0

0B: Thisadditional revenue is given by area 2 in Fig. 2.This analysis shows that both countries individually

would be better off if harmonisation of support schemescombined with a TGC system was implemented. That is,both countries would benefit from a transition toharmonisation and trade in TGCs. Country B wouldobtain additional revenues while country A would savecosts.Not only would individual countries be better off, but

also the overall target (i.e., RES-E Directive target)would be achieved at lower costs. The reason harmo-nisation with trade would be cost efficient is that afamiliar rule of environmental economics (i.e., theequimarginality principle) is accomplished.This result could be generalised and applied to the

reaching of RES-E targets in Europe in 2010. Problemsin complying with the national quotas will be handledby importing TGCs from countries with a surplus ofcertificates. National targets would then be achieved inthe most cost-efficient way. Furthermore, TGC tradingstimulates competition between renewable energy pro-ducers, which will lead to declining costs of renewableelectricity generation (van Dijk et al., 2003). Dynamicefficiency gains would therefore add to static efficiencygains.

4.1.2. Price stability

Compared to fragmented national TGC markets, aninternational market would lead to more stable TGCprices. Some national markets would be too small forachieving price stability. Short-term fluctuations in thesupply of RES-E and thus in the supply of TGCs to themarket would be mitigated in a larger market.

4.1.3. Facilitation of RES-E trade and mitigation of

unfair competition

Domestic TGC schemes in Europe are very differentfrom each other concerning main design features such asmechanisms to initiate demand, national targets, tech-nologies included (definition of renewable technologies),inclusion (or not) of existing capacity, existence of amarket stabiliser, consideration of banking/borrowing,existence of maximum (penalty)/minimum prices andtheir levels and period of validity of the TGC (Nielsenand Jeppesen, 2003). These differences may affect theability to trade TGCs internationally and could maketrade difficult. Harmonisation would minimise traderestrictions. Once a certificate is issued it should be validin all countries participating in the TGC system (Nielsenand Jeppesen, 2003). A European TGC system couldand should define common rules and mitigate oreliminate distortions and inefficiencies in internationalcertificate trading resulting from different nationalsystems.

ARTICLE IN PRESS

Table 1

Main results from some simulation modelsa

Name of simulation model Compliance costs in

harmonisation (%)bTGC price

(hcents=kWh)c

European Renewable Electricity Certificate Trading project (RECerT) 20 11

Renewable Energy Burden Sharing project (REBUS) 85 6.2

Assessment and Dissemination of Major Investment Opportunities for Renewable

Electricity in Europe using the REBUS Tool (ADMIRE–REBUS)

70 4

Organising a Joint European Green electricity market (ELGREEN) 20 ?

aFor more details on these models, see RECerT research team (2001), Voogt et al. (2001), Uyterlinde et al. (2003) and Huber et al. (2001),

respectively.bEstimation of the costs of complying with the 2010 targets set in the RES-E Directive. The compliance costs in the harmonisation scenario are

presented here in relative terms, i.e., as a percentage of the compliance costs in a CPP scenario.cThe estimations of the TGC prices are net of the electricity price.

P. del R!ıo / Energy Policy 33 (2005) 1239–12501244

A level playing field within Europe would result fromthe implementation of harmonisation and TGC on aEuropean level, and market distortions would beminimised.

4.1.4. Mitigation of problems related to quota setting

Problems related to the quota setting in domesticTGC schemes (quotas either too low or too high) maybe expected to be considerably smaller if a larger,harmonised EU market is established. The reason forthis is that problems in fulfiling the national quotas maybe handled through import of TGCs, while surplus ofTGCs may be exported to countries in shortage. Alarger market will facilitate both the setting andfulfilment of the national quota.

4.1.5. National policies may create barriers and distort

competition

Given the difference in support levels, nationalpolicies may lead to distortions in competition in aEuropean liberalised electricity market. A harmonisedsupport framework combined with an EU-wide TGCscheme may reduce these competitive distortions andlead to a cost-efficient deployment of RES-E in the EU.

4.2. Benefits from harmonisation: results from some

simulations

The results from the theoretical analysis carried outpreviously are confirmed by some simulation models,which are able to predict relevant benefits stemmingfrom harmonisation of support schemes in Europe.Table 1 provides a schematic overview of these models.Although the models belong to the same tradition, theirresults are not strictly comparable, however, since theyare based on different assumptions and scenarios.6

6A recent model, based on the project ‘‘Progress of Renewable

Energy: Target Setting, Implementation and Realisation (PRETIR)’’

has dealt with the same issues. An important result of this project is

that without the implementation of active policy none of the Member

In the context of this paper, the main conclusionsfrom the models are:

* A continuation of present support policies will notlead to reaching of the 2010 targets neither for the EUas a whole nor for individual Member States. This isin sharp contrast to harmonisation, which wouldallow reaching of EU targets (although someMember States would still not comply with theirtarget in this scenario).

* The models show significant cost savings andeffectiveness in reaching the RES-E Directive targetsin a harmonisation scenario with trade, comparedwith a CPP scenario. However, the models show widedifferences in the percentage reduction in compliancecosts that harmonisation would involve compared toCPP. Cost savings would be significant according toREBUS and ADMIRE–REBUS and very high in thecases of the other two models, which conclude thatthe costs of reaching the targets in a harmonisationscenario would be one-seventh of the compliancecosts under the BAU scenario (CPP).

* There are also relevant differences in the expectedEU-wide TGC price, from 4 hcents=kWh (AD-MIRE–REBUS) to 11 hcents=kWh (RECerT).

5. Discussing the benefits from harmonisation of support

schemes. Would harmonisation really be so beneficial in

the EU context?

The theoretical analysis provided above as well as theresults of simulations suggest that important socialbenefits could be achieved if harmonisation of supportschemes was implemented in EU-15. However, thepossible limitations and flaws in the theoretical analysisare provided below.

(footnote continued)

States is going to reach its 2010 indicative target (see Harmelink et al.,

2003).

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–1250 1245

5.1. Results are likely to be highly sensible to the

assumptions made

5.1.1. Sensitivity to assumptions concerning the good

functioning of the TGC market, and its effect on the

EU-wide TGC price

It has been assumed that the TGC price in an EU-wide TGC market would be set at its ‘‘right’’ level (P�).However, both a low and a high TGC price could result,which can be problematic. If P� was relatively low,investments at less attractive sites would not be profit-able. Results would not be so favourable either if theprice of the TGCs was high, since there would be noincentives to trade as it would not be attractive forcountry A to buy expensive TGCs in the market.Therefore, country A would deploy more RES-Edomestically and would not save costs by buying TGCsto country B. If there are no advantages stemming fromtrade, trade is unlikely to occur.Second, not only the level, but also the fluctuation in

the TGC price can be deemed problematic for RES-Edeployment. In this paper, we have assumed that theTGC price would be stable. But this would not be thecase if the market was not liquid enough (see Morthorst,2000). Of course, this is a general problem with TGCschemes and not a specific one against a harmonisedframework. However, when harmonisation is imple-mented via an EU-wide TGC scheme, this problemapplies.Uncertainties for investors arise from ups and downs

in market prices and the willingness to invest in RES-Emight be reduced. However, this risk could be mitigated.Theoretically, the market can manage this situationsince, for example, a shortage of sites with highintensities in wind may increase the price of wind powerand thus bring sites with lower intensities into play.However, it could well be that the price signals may notbe strong enough to secure a sufficient penetration ofwind power in relation to the environmental commit-ments (Meyer, 2003). On the other hand, a spot marketand a forward and options market for TGCs couldmitigate volatility of price and, therefore, price risks.7

Of course, an international TGC market is more likelyto lead to both lower and more stable TGC prices thanfragmented national markets, which might be too small.Finally, in some countries, changing from a feed-in

tariff system to an EU-wide TGC system could lead touncertainty for investors and thereby slow the furtherdeployment of RES-E. This already occurred in Den-mark, due to the announcement of a quota-based TGCsystem (see Meyer and Koefoed, 2003).

7 It can be expected that these markets would develop for TGCs.

Forward prices would then provide a powerful price signal for the

development of new renewable energy projects.

5.1.2. Concerning the level of ambition of targets

In this analysis, we have assumed that the targets forboth countries were the same. In reality, the RES-EDirective sets different (indicative) targets per MemberStates. The level of targets has a significant influence onthe possible savings of harmonisation compared to asituation of no harmonisation and no trade. In reality,the overall cost efficiency of harmonisation is dependentupon the level of ambition of national targets. This is sobecause depending on the level of such targets percountry, the savings might be higher or lower. This hasto do with that part of the national marginal cost curveof generating RES-E which is additionally saved orincurred by countries.Therefore, both the incentives for harmonisation at

the individual country level and the overall benefits ofharmonisation for both countries are highly dependenton the level of the targets set for each country. If TGCsare used for trade of the obligations under a quota, thelevel of ambition of the target or obligation will bereflected in the price of the green certificates. Restrictivenational quotas spill over to other countries through theprice mechanism and induce investments in othercountries (van Dijk et al., 2003; Nielsen and Jeppesen,2003).In theory, countries with more potential and lower

RES-E generation costs should have accepted moreambitious targets than countries with low potentials andhigh costs. According to some authors, the objectivesassigned by the EU Directive take into account existingpotentials and the efforts already made. It is likely,however, that the EU targets were rather the result of apolitical negotiation process in which countries’ interestsplayed a major role. Since the marginal generation costcurves for each country are not known, the allocation ofthe RES-E Directive may not be the most efficient wayof sharing the burden, a point also stressed byMenanteau et al. (2003).8

Table 2 shows the different levels of increase in theshare of RES-E from 1997 to 2010 in the differentMember States, which is necessary to reach the 2010targets. The table shows that a big challenge for allcountries lies ahead.On the other hand, ceteris paribus, the ambition of

targets is also different for countries with differenttrends in electricity consumption. As the targets of theDirective are set as a percentage on consumption (‘‘grossinland consumption’’), it would be more difficult toreach targets for countries with a higher electricitydemand growth than for countries where demand grows

8Note that if targets had been set according to marginal generation

cost curves, a small flow of TGC trade between countries would occur

in a harmonised European TGC market because, then, there would be

small incentives to trade. On the contrary, the current targets, quite

different from an equimarginality allocation, would lead to quite

significant trade flows.

ARTICLE IN PRESS

Table 2

Increase in the share of RES-E from 1997 to 2010 in order to comply

with the RES-E Directive targets

Country Increase (%)

Austria 8.1

Belgium 4.9

Denmark 20.3

Finland 6.8

France 6.0

Germany 8.0

Greece 11.5

Ireland 9.6

Italy 9.0

Luxembourg 3.6

Netherlands 5.5

Portugal 0.5

Spain 9.5

Sweden 10.9

UK 8.3

EU total 8.1

Source: Reiche and Bechberger (2003).

P. del R!ıo / Energy Policy 33 (2005) 1239–12501246

at a slower pace. Particularly, when electricity demandgrowth is considered and compared to other EuropeanMember States, the so-called cohesion countries wouldhave to make additional efforts in order to comply withthe targets.9

5.1.3. Concerning the shape of the marginal generation

cost curves

Obviously, the benefits from trade in the harmonisa-tion scenario are greater when the marginal generationcost curves of the individual countries are very different.The larger the difference between marginal cost curves,the larger the potential cost savings for the high-costcountry and the larger the revenues from exports for thelow-cost country. Some models (Elgreen, Rebus,y)show that these RES-E curves greatly differ acrossEuropean countries. Therefore, the potential for costsavings in reaching targets in the harmonisation scenarioseems to be quite high in Europe.

5.1.4. Concerning the initial level of RES-E deployment

and actions carried out in the past

In the analysis above, both countries are assumed tostart from the same level of RES-E deployment(actually, zero deployment). In order to achieve theirtargets, they advance along their marginal cost curves,going from low levels of marginal costs to higher levels.The problem is that if countries have already carried out

9For example, although the required increase for Portugal seems

very small (only 0.5%) it is a great challenge in reality since electricity

consumption is expected to grow by more than 5% each year.

Electricity demand is still rising in Spain, Greece and Ireland, while the

market in countries like Austria or Sweden is characterised by

stagnation and over-capacities (Reiche and Bechberger, 2004).

very significant investments in RES-E in the past theywould have exhausted most of their cheap potential bythe time targets are set. Therefore, if these considera-tions had not been taken into account in the setting oftargets, they would face a very steep upward-slopingmarginal cost curve, whereas the other country, whichhas not undertaken measures in the past, would finditself in a much better position (i.e., with a relatively flatmarginal cost curve which increases steeply only aftersignificant additional deployment has been achieved). Itwould be more expensive for the former country toachieve its target than it would be for the latter to reachits target. The former would incur much higher coststhan if it had not done any deployment in the years priorto the setting of the targets. This issue of fair or unfairdistribution of the overall EU target on national levels isa direct consequence of the setting of national targets asa result of the negotiation process, but would beaggravated when a harmonised TGC scheme is in placecompared to a CPP scenario (I am grateful to ananonymous referee for this remark).This theoretical situation might be a very real one in

the context of the setting up of the RES-E Directivetargets. For example, Spain has an indicative target for2010 of 17.5% (excluding large hydro). This is above theEU overall indicative targets (12.5%). But when thesetargets were set, Spain had already achieved a relativelylarge deployment of RES-E (i.e., wind), exploitingprobably the most profitable sites. We could comparethis with the UK case, for example, with a much lowertarget for RES-E of 9.3%, limited deployment of RES-Eat the moment but relatively large available potential inwind energy. In 1997, the share of renewables indomestic electricity consumption was 3.6% in Spainand only 0.8% in the UK.In this context, if harmonisation of support schemes

was implemented, then high-cost Spain would have toimport TGCs from low-cost UK. Some would arguethat this would not be really fair since this would partlybe a consequence of the setting of the RES-E targetbeing based neither on efficiency nor rationality groundsbut rather on political negotiations.Table 3 shows the evolution in RES-E generation in

EU-15 in 1995–2010 (both absolute figures and percen-tages, excluding hydro). Some countries have alreadyexploited a large proportion of their national potentialsby 2001, while in others the growth of RES-E generationcan be deemed a slow one.

5.2. Harmonisation may be in conflict with national

socioeconomic and environmental objectives

Apart from cost efficiency in achieving the RES-EDirective indicative targets, national governmentshave other policy goals as well. The developmentof a powerful domestic RES-E industry brings very

ARTICLE IN PRESS

Table 3

Trends in RES-E generation in the 1995–2001 period

Country RES-E 1995 (%)a RES-E 2001 (%)a RES-E 1995 (TWh)b RES-E 2001 (TWh)b Average annual

percent change 1995–2001c

Austria 3.3 3.1 1821 1934 1

Belgium 0.8 0.8 0588 0628 1.1

Denmark 5.4 16.3 1981 6145 20.8

Finland 10.5 11.4 3412 12,143 23.5

France 0.6 0.8 2945 4368 7

Germany 1.0 2.7 5326 15,654 20

Greece 0.1 1.6 0041 0849 65

Ireland 0.1 1.7 0017 0418 69

Italy 1.6 2.9 3798 7885 13

Luxembourg 10.9 17.3 0054 0086 8

Netherlands 1.5 3.3 1215 2998 16.2

Portugal 3.2 4.2 1062 1940 10.6

Spain 0.9 4.4 1490 10,326 38

Sweden 1.7 2.4 2521 3880 7.5

UK 0.6 1.4 1995 5369 17.9

Source: Own elaboration from IEA/OECD (2003).aShare of electricity production from renewable sources excluding hydro (%), by country.bAbsolute electricity generation from renewables, excluding hydro (data in TWh).cAverage annual percent change 1995–2001 in absolute generation from renewables (two preceding columns).

P. del R!ıo / Energy Policy 33 (2005) 1239–1250 1247

important benefits for the country.10 Renewablesprovide development opportunities for unattractivedepressed regions and rural areas. This improves socialcohesion at the national as well as at the Europeanlevels.Conflicts at the Member State level between the

advantages and disadvantages of harmonisation mayoccur. For example, we noted that harmonisation ofsupport schemes at the EU level may lead to cost savingsin reaching the targets for the EU as a whole. Althoughharmonisation leads to an overall benefit for all thecountries, the cost for some of them might be so highdue to the negative effects on the national industry andjobs that, once this is considered, harmonisation wouldnot be so beneficial.If an international system of TGCs is set up in order

to have a cost-efficient distribution of technologydeployment, national benefits of RES-E can no longerbe stimulated directly. This would probably be costefficient, but, for example, by not deploying wind energyin Spain and having the wind mills located somewhereelse (i.e., UK), also the local benefits would be gone tothis latter country. This would have very negative effectson a country such as Spain, where employment creation

10 It reduces the dependence on foreign sources of energy and the

currency payments to foreign parties, improves the security of supply,

leads to diversification of energy sources, mitigates environmental

problems and, finally, it provides a source of local employment, both

direct and indirect and both related to the manufacturing of the plant

and to its maintenance. According to Lauber (2004), the benefits of

promoting a domestic wind power industry were behind the

implementation of support policies (feed-in tariffs) in Germany and

Denmark.

in the RES-E sector has been very significant. Takinginto account these negative effects, harmonisation ofsupport schemes combined with a TGC system mightnot be very attractive for this latter country.Eventually, the local benefits that would be gone

would be not only socioeconomic, but environmental aswell. RES-E provides both global and local environ-mental benefits. From a climate change point of view, anRES-E plant located in Denmark would lead to thesame reductions in CO2 emissions as a plant located inSpain. Under a harmonisation approach if it is morecost efficient to install a wind turbine in Spain than inDenmark, then, in order to reach cost efficiency, theplant would be installed in Spain. But if we take intoaccount other (local) environmental benefits stemmingfrom the installation of the RES-E plant, then harmo-nisation would not have such beneficial consequences.For example, assume the plant in Denmark would beinstalled in a highly polluted area. It would actuallysubstitute a local fossil-fuel combustion plant leading tosignificant local pollution problems. The renewableenergy plant in Spain would be located in an area wherethe carrying capacity of the environment has not beensurpassed. Both plants lead to the same CO2 reductions(although at different costs). However, it is ratherobvious that the plant in Denmark would have morevalue for its Danish neighbours than the plant in Spainwould have for theirs. Harmonisation of supportschemes combined with a European TGC system wouldstill lead to the plant being installed in Spain. Of course,for the Danish, it would be more cost efficient to reachan increase in RES-E by locating the plant in Spain(buying the TGCs thus created). However, the public

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–12501248

authorities in Denmark should probably compare thesecost savings with the environmental local benefitsforegone. Therefore, harmonisation may not lead tothe best outcome from a social point of view once thesepositive local externalities are considered.If all benefits for the country stemming from RES-E

could be valued in monetary terms, then an analysiscould be made comparing the national marginal benefitsof RES-E (environmental, socioeconomic and other-wise) with the marginal cost of RES-E for all countries.If this was done, it could well be that for some countries,in the harmonisation scenario, it was optimal to deploya RES-E above the quantity resulting from theequimarginality principle (cost efficiency) under aEuropean TGC price which equalises the marginal costof deploying RES-E in all countries and translates thisinto quantities per country depending on the countrymarginal cost curve and the European TGC price (i.e.,quantities Q0

A and Q0B in Fig. 2). This would happen if,

for a specific country, the (theoretically and unknown)intersection of the marginal benefit curve and themarginal cost curve leads to an optimal quantity ofnational RES-E deployment of, say, Q� and thisamount is above Q0

A and Q0B:

However, this would be a very complicated proce-dure, which would not be favourable in practice.Perhaps an easier solution to this problem would be tointernalise these other benefits through other means(e.g., emission taxes).11

To sum up, if two countries with different RES-Emarginal generation costs participate in a joint TGCscheme, then the higher-cost country will import TGCsfrom the lower-cost country. This would have bothpositive and negative effects for the importing countrycompared to a CPP scenario. Costs would be saved butsome of the national socioeconomic and environmentalpolicy objectives of the high-cost country wouldnot be met.

5.3. Dynamic efficiency problems

Trade in certificates allows the distribution of anoverall objective in the most cost-efficient way amongseveral technologies. The implementation of a Europe-wide harmonisation with a TGC scheme including allRES-E technologies would allow the achievement of theRES-E Directive targets with the most competitive andmature technologies (i.e., wind and biomass), whileother technologies would not have a chance and wouldnot penetrate the market (i.e., PV). Harmonisation withan EU TGC system ensures that the most competitiveRES-E technologies are deployed first.If a dynamic perspective is adopted, the most

competitive and mature RES-E technologies are cheaper

11 I thank an anonymous referee for this remark.

than other RES-E technologies because they haveexperienced a reduction of costs in the past as a resultof their diffusion. This diffusion allowed them toadvance along their learning curves leading to areduction in unitary costs and to further technicalimprovements which, in turn, made them more andmore attractive as wider adoption took place. On thecontrary, non-mature technologies cannot compete withthose technologies that have benefited in the past fromsuch economies of scale and learning effects. A viciouscircle would prevent them from penetrating the market:their high costs (but high potential for further improve-ments) make them relatively unattractive and are abarrier to adoption. But if they are not being adopted,they will not benefit from economies of scale and theirunitary costs will not be reduced. In this situation,harmonisation with a TGC market would only compli-cate things for these technologies and it would notcontribute to the breaking of such a perverse and viciouscircle.The background problem is that harmonisation

combined with a TGC system probably puts too muchemphasis on the side of free trade at the expense of long-range planning for a sustainable energy development,12

in which the currently immature technologies have a roleto play. Precisely, one of the problems of greencertificate markets concerns the fairness of competitionbetween renewable technologies at different stages ofdevelopment. TGC systems could be deemed moreappropriate to the phase of near-market competitivenessbut they are of little help for the earlier phases oftechnology development, due to the goal of keepingprices as low as possible. They are probably not so wellsuited for promoting non-mature technologies.Therefore, other national support schemes apart from

the TGC scheme would still be necessary in order topromote these less mature technologies. The type ofsupport given to technologies has to be adapted to thestage of maturity of the technologies. Of course,supporting technologies that are currently less costefficient implies that the overall short-term cost effi-ciency of the system is lower than would be the case if anoverall TGC scheme was applied to all the technologies.However, this approach may lead to efficiency gains inthe longer term (dynamic efficiency), because supportingthese technologies now allows their unitary costs to fallin the future. The challenge lies in adopting acomplementary strategy, which both stimulates cost-efficient RES-E deployment and at the same timepromotes non-mature RES-E technologies.A priori, one possible solution would be to set

European but technology-specific TGC schemes (i.e., aTGC for solar PV only, another for wind only,y).However, this would be neither effective nor cost

12This point has been stressed by Meyer (2003).

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–1250 1249

efficient in stimulating the deployment of that specificRES-E since such a TGC market (even at a Europeanlevel) would be too narrow compared to an EU-wide, alltechnology-encompassing TGC scheme and would notwork as well in practice since relatively fewer actorswould take part in such a scheme compared to an all-encompassing scheme. Liquidity would be minimal andthe price of TGCs would be probably too high.Another possible solution would be to reserve the

TGC market for the most mature renewable technolo-gies and to promote less competitive and maturetechnologies through a different instrument (feed-in ortendering).

5.4. Real-word harmonisation difficult to achieve

Harmonisation is difficult to achieve in reality, ascurrent support schemes are very different betweenMember States. Even the existing domestic TGCschemes show different design features in each country.They have been developed with insufficient internationalcoordination and they are highly fragmented. Therefore,it is likely that harmonisation will be a politicallyunfeasible exercise (see also Haas et al., 2004; Nielsenand Jeppesen, 2003; Midttun and Koefoed, 2003).Nation states with strong vested interests in nationallydesigned greening policies have been reluctant to give uppolicy control.It is highly likely that harmonisation of support

schemes in combination with a common TGC marketwill continue to be resisted by some countries in thefuture, probably by those that would become importersin the unified market. In some of them significantamounts of money would have to be spent in order tocomply with the targets (by importing TGCs) withoutenjoying the local benefits of reaching those targets.Therefore, the proposal for a CSF will probably bedelayed by several years. Neither is the setting ofmandatory targets by the Commission expected in thenear future.On the other hand, not only the implementation of a

harmonised framework but also one solely based onTGC schemes is highly unlikely. Some authors evendoubt that the Commission will ever propose aharmonised system based (solely) on TGC schemes(see Lauber, 2004).

6. Concluding remarks

In this paper, we have analysed the advantages anddisadvantages stemming from harmonisation of RES-Esupport schemes in Europe. The motivation for such ananalysis lies in the RES-E Directive, which envisages theimplementation of a CSF in the short/medium term. Theproposal for such a framework may see the light in 2005.

This is already causing additional uncertainty for actorsinvolved in the RES-E markets (investors and policymakers).Theoretical analysis and simulation models show that

harmonisation combined with an EU-wide TGC marketmay lead to very significant benefits for the promotionof RES-E in the EU both in terms of effectiveness andcost efficiency. Harmonisation would lead to significantcost savings for reaching the 2010 RES-E Directivetargets. Benefits would accrue to the EU as a whole aswell as to individual countries. Compared to a situationin which countries would achieve targets on their own(i.e., by applying their own national schemes) withouttrade, both importing and exporting countries wouldbenefit. Importing countries would save costs whereasexporting countries would receive additional revenues.However, in spite of these benefits, other considera-

tions may make harmonisation a less attractive policyoption both for the EU as a whole and for the individualMember States. On the one hand, the theoreticalanalysis on the social gains from harmonisation is basedon a set of assumptions which might not hold in the realworld. But more substantially, Member States maylegitimately have other goals apart from that of costefficiency. They may like to maintain a (socially profit-able) RES-E domestic industry. Local socioeconomicand environmental benefits may make it attractive forcountries to maintain control on the promotion of RES-E. As stressed by Voogt and Uyterlinde (2004), theimportance of individual policy goals widely variesamong Member States given the large differencesbetween geographical, social and economical circum-stances. The main implication is that, even though theattainment of the RES-E Directive targets in a cost-efficient manner is a relevant goal in itself, other policygoals are also important at the national level and,perhaps, should not be sacrificed in the name of costefficiency.Finally, one relevant problem related to harmonisa-

tion in combination with a TGC market is the fact thatimmature technologies may not even have a chance topenetrate the market. This is relevant since thesetechnologies have a hidden potential and may lead tosocial benefits but are not competitive at present inrelation to other more mature RES-E technologies. Ofcourse this is a general argument against a TGC schemerather than a specific one against a harmonised TGCscheme.Therefore, the continuation of present policies

compared to EU-wide harmonisation combined witha TGC system would come at a cost for the con-sumer and/or the taxpayer which should be takeninto account. But it would also bring benefits. Bothgroups of benefits should be put in the balanceand national governments should position themselvesaccordingly.

ARTICLE IN PRESSP. del R!ıo / Energy Policy 33 (2005) 1239–12501250

Acknowledgements

This paper was written during a research stay at RISONational Laboratory, Systems Analysis Department. Iam grateful to this institution for providing logisticsupport. I thank the University of Castilla-La Manchafor providing financial support. I am also grateful to ananonymous referee for helpful comments. Of course, theusual disclaimer applies.

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