EU Renewable Energy Policy: Successes, Challenges and Market Reforms

Authors are: Yurchenko, Yuliya; Thomas, Steve

Low carbon sources – primarily renewables and perhaps nuclear power - are almost invariably acknowledged to give more expensive power than power from fossil fuel sources – coal and gas. In a competitive electricity market, as is being attempted in the European Union, low carbon sources will not be chosen by power plant developers unless they are either insulated from the market or provided with some form of subsidy to make them competitive.
Policy effort in the EU (e.g. the renewable energy Directive (2009/28/EC)) is aimed at supporting technologies and new capacity installations and production of renewable energy in three areas: (1) electricity or RES-E i.e. photovoltaics, wind, etc., (2) transport or RES-T i.e. biofuels, and (3) heating and cooling or RES-H&C i.e. biomass, solar-/geo-thermal, etc. Amongst the three, EU renewable electricity sector has seen most state support and effective growth in terms of production and installed capacity in 1997-2012. It will thus be the main focus of this report. European Union competition law makes ‘state aids’ that distort markets illegal so for low-carbon sources to be promoted, there needs to be market mechanisms that do not distort markets or exemptions from this legislation. In this report, we look at mechanisms that have been used in the European Union to promote low-carbon sources, review the guidelines for state aid in the energy sector, and the challenges they pose to the EU renewable energy 2020 targets.