U.S. heed lessons from Europe should renewable integration or follow the face, says NARUC expert

WASHINGTON, D.C. -- In integrating renewable energy to the electric grid, the United States has a unique opportunity to assess lessons learned in Europe and not replicate the disequilibrium that has occurred overseas to consumers, power producers and capital markets, according to Jeffrey Altman, senior advisor, Finadvice GmbH.

“A new transparent, ubiquitous, reliable regulatory framework needs to be established in order to correctly build and support the nation’s developing renewable power portfolio, which ensures a long-term responsibility for the whole power system, as well as the appropriate pricing to the American consumer,” he said during a Feb. 10 panel as part of the National Association of Regulatory Utility Commissioners (NARUC) Winter Committee Meetings in Washington, D.C. “The net impact to the U.S. economy and its future strategic competitiveness can be significant. The U.S., therefore, needs to appropriately restructure its regulatory framework and prioritize this effort now, or face similar challenges as Europe in the future.”

Altman noted that there are several benefits of having high penetration levels of renewable energy on the grid, including the diversification of the power portfolio and lower wholesale prices.

Speaking of the European experience, he noted that due to massively subsidized feed-in tariffs, new additional capacity is driving down wholesale prices of power as renewables with lower marginal production costs than thermal plants get dispatched first.

Other benefits include reductions of greenhouse gas emissions, he said, noting that the European Union (EU) has set a target of a 20 percent reduction of greenhouse gases from 1990 levels, with a 20 percent renewable target and a 20 percent increase in energy efficiency for 2020. So far, he said, the EU is on target with most of its members.

Also a benefit is energy independence, which is critical for every country, Altman said. Employment gains, the development of more efficient renewable technologies and greater efficiency in scale and scope are also benefits stemming from higher levels of renewable energy, he said.

Unintended Consequences in Europe

Despite the benefits, there have been unintended consequences in Europe as it pertains to advancing renewable energy, including a misunderstanding of required subsidies and appropriate regulation, he said, adding that European regulators grossly underestimated the cost of subsidies and the necessary build-out requirements.

Some estimate that Germany’s feed-in tariff subsidy program, for instance, could exceed $1.3bn by the time it expires.

Many European regulatory regimes were inappropriately structured and there have been efforts to correct those by, for instance, initiating retroactive taxes or new regimes that resulted in significant value destruction to various renewable companies.

“This continued regulatory uncertainty across Europe is increasing the cost of capital for European renewable companies, which Fitch, the rating agency, recently highlighted as the most likely sector in the European energy markets to receive a downgrade in 2014,” Altman said.

The enormous amount of subsidies and the speed of build-up have created disruption to the power markets, he said, adding, “As the EU is a liberalized market, government actions regarding subsidies are currently being allowed by international law in favor of the perceived requirements of the consumer and the environment.”

For instance, wholesale prices in Germany have fallen from €90/MW to €95/MW in 2008 to €37/MW in 2013.

Altman also noted that the EU will be required to pay subsidies for the build-out and enhancements of power networks to manage the dynamic flows. Germany, he said, is planning to spend some €40bn, or around US$60bn, to reinforce the grid from where it was in 2012 to where it will be in 2023.

“You’re effectively taking all of the power … from the north and bringing it down to the south,” he said. “[That is] a huge effort and no one was ever considering those costs early on.”

In addition to that, the German government is also now — as others are starting to do — looking at ensuring capacity payments for thermal power stations that are being closed down to ensure the reliability of the grid and prevent blackouts and brownouts, he said.

Another challenge is that many European utilities underestimated the growth of renewables as well as the impact to wholesale prices in the entire system, leading to the continued build-out of thermal plants over the last decade, many of which were made obsolete, particularly with respect to natural gas-fired plants, by the end of the decade.

“As a result, the utilities had to shore up their balance sheets by undertaking large divestitures of some of their holdings, as well as reducing their operating costs,” Altman said.

Europe’s top 20 utilities that were worth around €1tr in 2008 are now less than half that amount due to the global financial crisis and other factors, including those involving renewable energy development, he said.

Another important matter that has occurred is that prices to energy users have increased significantly, as has the backlash against energy companies, he said.

In Germany, household prices have more than doubled from 18 cents/kWh in 2000 to more than 37 cents/kWh. In the United Kingdom, there has been a call to freeze prices for up to 20 months, Altman added.

Well-meaning European governments and regulators embarked upon an effort to reduce carbon emissions and “unintentional consequences resulted from those policies that were not ultimately fully vetted by industry [including] renewable companies and utilities and other stakeholders,” he said. “The results of these policies have required enormous subsidies, which have created disequilibrium and value destruction to both renewable companies and utilities via regulatory interventions.”

It is now envisioned that further subsidies will be required for emission targets, the support of thermal plants and storage, via capacity payments and a build-out of grids.

Accordingly, Altman added, those policies, combined with large subsidies “are destroying what was essentially a free market and, as such, the influence of government in the power sector will ultimately have no real market correction mechanisms as European governments capriciously determine the fuel mix, technology choice and capacity price levels with detrimental effect to the efficiency, investment and, most importantly, prices to consumers.”

Lessons Learned as the U.S. Moves Forward

In the U.S., Altman said, “now is the time to fully assess the implications of transitioning to a partial renewable portfolio and structure the appropriate regulation.”

The current U.S. net metering and regulation, which has allowed for renewables to come on the grid, does not take into consideration the future requirements of grid enhancements as well as what will be required to maintain a reliable power system, he said.

“There needs to be a well-coordinated assessment between federal and state regulators, regulated and non-regulated power producers, renewable companies, consumers and other important stakeholders to develop ubiquitous regulation,” he said. “Otherwise, the U.S. will ultimately face an analogous situation relative to Europe with balkanized energy markets.”

On whether regulators should wait for there to be overcapacity and strains on the systems to set new regulations, he said, “I suggest what we have learned from Europe, this would indeed be imprudent.”

Regulators should consider creating a new framework whereby a structure be agreed upon as to how much capacity will be allowed in each state/region over a 20-year period, looking into five-year increments with review every two years, he said. In parallel, there should also be an agreement as to how much thermal capacity will be retired during that time, whereby, collectively, an assessment will be made with respect to the mix of power production, the network upgrade costs, the overall reliability of the network and the ultimate price to consumers, he said.

Special attention should be paid to require flexibility in storage. Upon this analysis, he added, all new generation coming online should be bid at an auction to meet the lowest economic costs, highest reliability standards, as well as environmental standards, Altman said.

This article was originally published on GenerationHub and was republished with permission.

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