Competition Effects of the Renewable Energy Policy Reform in Flanders:

Is the Flemish market for Green Electricity Certificates working properly?

Annemie BollenPeter Van Humbeeck

This presentation reflects the personal opinion of the authors and does not bind SERV

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•When preparing or evaluating energy regulation , is it important to assess the effects and impacts on market competition•This information is crucial to good policy decisions in the energy sector•Today in Flanders, competition and market effects are not assessed ex ante nor ex post by market regulator VREG or the energy agency VEA•VREG should get its priorities right, and develop a greater capacity for adequate market analysis and regulation; only VREG has the legal powers to collect the necessary information•Case study: GC

Main Messages (1): Competition Assessment

•Many problems with the GC-system; reform is needed•Most proposals (including VREG/VEA) look for solutions within the existing trading system (but do not examine the impact on the market and competition)•Some major and persistent problems with the GC however are closely linked to the choice for a trading system, in a region where the electricity and GC-markets are very concentrated (and all attempts for improving market forces have failed) • A closer look at how the GC market works leads us to a different incentive scheme that is more effective, efficient and just in a more concentrated market

Main messages (2): case study GC-system

I. The Flemish GC systemII. The choice for a trading systemIII. Is the certificate market working properly?IV. Can the market's functioning be improved?V. Is there an alternative?VI. Conclusion and policy recommendations

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Outline

A hybrid quota system (1)• producers receive a green certificate (GC) per MWh

generated• electricity suppliers are required to purchase these GCs (or

produce green electricity themselves) and must submit to VREG enough GCs per year to cover the amount of electricity they supply, or pay a penalty. The quota is increased yearly, and will reach 13% in 2020.

• The suppliers pass on the costs of the quota requirement to their customers.

I. The GC system

A hybrid quota system (2)• Green electricity producers can sell their GCs not only on the

certificate market, but in certain cases also to the distribution system operators (DNB)

• DNB are required to pay a minimum price that differs depending on the technology

• If this minimum price is greater than the price on the certificate market, producers will sell to the DNB

• DNB later put the purchased GCs on the market, and thus are able to partly recuperate the costs of the purchase obligation

• The net cost is passed on to consumers via the utility rates

I. The GC system

With results but also many problems• Increased amount of green electricity produced BUT• Not effective in the long term: investments are decreasing,

low investment certainty• Not efficient: support levels are too high, problems with the

certificate market. • Eroding public support for RE: costs are higher than

necessary, and not fairly distributed

I. The GC system

Revision is planned• Many proposalsBUT• Most important question is: do we continue to look for

solutions within the existing system or do we stop using a system that depends on the trade in a green certificates market?

• Answering this question requires an analysis of how the certificate market functions in practice

I. The GC system

• Economic theory: a quota system can only be effective, efficient and fair when there is a good market

• Green power markets usually do not meet these conditions• Despite this, Flemish government opted for a quota system in

2000, justified by the expectation of a EU GC trading system• Today: no EU trading system. Consequently, most countries

opted for a different system without a certificate market, such as feed-in or tender. The countries that did opt for a quota system have a moderately concentrated electricity market… except for Belgium/Flanders (see map).

• Frequent changes and corrections of the Flemish GC system, but market with trade in certificates remained

II. The choice for a trading system

II. The choice for a trading system

• concentration on the supply side of the certificate market• concentration on the demand side of the certificate market

QUOTA SYSTEM RESULTS IN FAVOURING1. the dominant integrated suppliers (to the disadvantage of smaller

suppliers without own green power production capacity)

2. green power producers that are affiliated with a (dominant) supplier (to the disadvantage of smaller or independent green power producers)

III. Is the GC market working?

3. the larger integrated player when quotas are increased to create a certificate shortage in times of surplus (to the disadvantage of smaller (new) suppliers without own renewable production capacity and smaller, less cash-rich renewable energy producers)

4. large installations and further increases in scale and concentration and investments by large, financially strong players and investment companies willing to take risks (to the disadvantage of small-scale players and initiatives, and of collective systems and participative projects)

5. dominant players that have a better view of the market or are able to influence the market indicators (even VREG does not have a clear picture of the market volumes and prices)

III. Is the GC market working?

• Many proposals to reform the GC retain the existing system, subject to a systematic “banding” of certificates (Q-option)

• This can address major problems in the current system but not the problems of an inadequate market functioning

• Past attempts to improve the market's functioning failed• New proposals are on the shelf, but will not work either

because they do not change the fundamentals of the market

IV. Can the market improve?

NQ option• Absolishment of the quota obligation and the associated

certificate market• Support via GS remains, as does the sale of the generated

green electricity via the electricity market. • The price of a GS is not determined by the market, but is a

guaranteed selling price• Monitoring progress toward the 13% objective by 2020 is

done via a strict monitoring of the production and costs, and possible fine-tuning of the support or the broader policy.

V. Is there an alternative?

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Quota system in theory

Feed-in premium in theory

Hybrid quota system in practice

Q: hybrid quota system with

banding

NQ: system without quota

Buying up certificates at fixed minimum pricesCompensation at minimum prices

possible in diverse ways

Quota obligation for suppliers and associated certificate market

Thoroughgoingbanding of certificates

Limited bandingof certificates

Feed-in tariff in theory

Buying up electricity

delivered via the network

Support for green character of electricity delivered via the network

SUPP

OR

T FO

R W

HAT

?

Support for green character of all electricity produced (including self-producers)

VIA

WH

ICH

SU

PPO

RT

MEC

HA

NIS

M?

NQ vs Q option• Q and NQ share many characteristics• NQ-option is no ‘system shock’• NQ-option can also honour the support commitments to the

existing green electricity installations. • The main difference between the NQ option and the Q option

lies in the role reserved for a certificate market • NQ-option is more effective, efficient and just in a more

concentrated market than Q-option

V. Is there an alternative?

1. When preparing or evaluating energy regulation , is it important to assess the effects and impacts on market competition

2. Major and persistent problems with the GC are closely linked to the choice for a trading system, in a region where the electricity and GC-markets are very concentrated (and all attempts for improving market forces have failed)

3. A closer look at how the GC market works leads to a different incentive scheme that is more effective, efficient and just in a more concentrated market

VI. Conclusions

•When preparing or evaluating energy regulation , is it important to assess the effects and impacts on market competition•This information is crucial to good policy decisions in the energy sector•Today in Flanders, competition and market effects are not assessed ex ante nor ex post by market regulator VREG or the energy agency VEA•VREG should get its priorities right, and develop a greater capacity for adequate market analysis and regulation; only VREG has the legal powers to collect the necessary information•Case study: GC

Main Messages (1): Competition Assessment

•Many problems with the GC-system; reform is needed•Most proposals (including VREG/VEA) look for solutions within the existing trading system (but do not examine the impact on the market and competition)•Some major and persistent problems with the GC however are closely linked to the choice for a trading system, in a region where the electricity and GC-markets are very concentrated (and all attempts for improving market forces have failed) • A closer look at how the GC market works leads us to a different incentive scheme that is more effective, efficient and just in a more concentrated market

Main messages (2): case study GC-system