Policies for the development of RES in the European Union - The Sustainability of Renewable Energy in Europe - page 81

objectives for sustainability and energy security, while ensuring the society con-
tained spending and a reduction in distortion with respect to competition or frag-
mentation of the single market. The guidelines will be in force until the end of 2020.
With these new rules, subsidies for RES are replaced by market-based mechanisms
for all generators of electricity by 2017, following a pilot phase starting in 2015 and
feed-in tariffs will be replaced by the feed-in premiums that allow RES to capture
the signals of the market, while the energy infrastructure and cross-border schemes
will be protected in some way, and 68 energy-intensive sectors will be selected for
grants.
According to the feed-in premium, the price of RES is composed of two factors:
the value of the electricity market is exposed to fluctuations in supply and demand,
and a premium fixed by the state. The feed-in premium scheme is therefore going to
replace the feed-in tariff scheme and is quite controversial weigh the two schemas
to understand what is actually the most effective. Looking specifically at the pros
and cons of the two instruments, such as the feed-in tariff, eliminates the risk of
price. Detailed analyses of the average levels of payment for a number of feed-in
tariff policies in the EU have shown that the policies of fixed-price feed-in tariff
have had, on average, a higher degree of cost efficiency with respect to the feed-in
premium schemes; this implies lower payments per kilowatt-hour for electricity
generated from RES.
The stability of long-term payments with a fixed price leads to lower risks for
both the RES project developers and investors and therefore it is more likely that
there is a reduction in costs financing. Understood in this way, the feed-in tariff
policies are a way to remove price risk, which can decrease costs per kilowatt-hour
of RES deployment. In addition, the feed-in tariffs approximate better the actual
costs of RES generation if the feed-in tariff rates are set appropriately. This payment
structure based on cost is more likely to encourage investment in RES projects,
because it actually captures the true costs of the project. The feed-in tariffs are typi-
cally accompanied by a guarantee of purchase which further reduces the risk of the
market. The assurance that a counterparty will purchase the electricity significantly
reduces the risks by providing the certainty of revenues. The feed-in tariffs can
actually act as a hedge against energy and electricity price volatility by introducing
fixed-price supply into the electricity supply mix.
This effect may help to reduce the wholesale price of electricity at the time when
the cost of offering the RES is less than the marginal cost of the offer conventional.
So, having a portfolio of electricity generation that includes a fixed price for the
RES, the court may protect ratepayers through reduced exposure to the volatility of
energy prices. This is very important in markets where a significant proportion of
electrical generation comes from natural gas. The main disadvantage of policy feed-
in tariff is that it does not adapt to the market price of electricity. These prices are
blocked, often in long-term contracts, and typically do not create an incentive for
project operators to adjust their production in relation to demand. It was also argued
that the feed-in tariff policies, which offer contracts to sell electricity in the long
term at fixed prices, may create distortions in the wholesale and retail electricity
markets.