Experts warn: Stopping the financial support for almost mature renewable energies will make the energy transition more expensive

April 26, 2017

The future financial support of almost mature renewable energy technologies such as onshore wind or photovoltaic is subject to increasing criticism. However, these criticisms are rarely based on scientific findings. This is why experts from Fraunhofer ISI and other research institutions are now voicing their opinions on the current debate based on empirical studies: In a recently published report, they conclude that competitively designed funding of almost mature energy technologies should be retained after 2020 – to lower the costs of the energy transition as well.

lmost mature renewable energy technologies like onshore wind or photovoltaic systems should no longer be subsidized – this is a demand often being voiced by critics today. Among other things, they argue that abolishing these subsidies would significantly reduce the overall costs of the energy transition. According to the critics, almost mature renewable energy technologies should finance themselves through the revenue earned on power markets and the indirect effect of the emissions trading scheme, which penalizes fossil technologies compared to renewable technologies.

Due to often repeated similar arguments, the experts from Fraunhofer ISI, CSIC, TU Wien, Ecofys, CEPS and ECN have now examined the empirical basis of this funding criticism. The report “Do almost mature renewable energy technologies still need dedicated support towards 2030?“ was produced as part of the “Towards2030 dialogue” research project funded by the European Union. It addresses the question whether the dedicated support of almost mature renewable energies should be continued until 2030 or abandoned, and the arguments for and against this.

Even new onshore wind and photovoltaic systems still have a significant cost reduction and learning potential

Following an analysis of their own and other studies, the authors argue clearly in favor of retaining the current support of almost mature renewable energy technologies. Dr. Anne Held, head of the project at Fraunhofer ISI and co-author of the report, lists several reasons in favor of continued support: “Even new onshore wind and photovoltaic systems still have a significant cost reduction and learning potential which is why we regard these technologies as not yet completely mature. The support can lead to further innovations and technological improvements which will reduce the overall costs of the energy transition in the long term and help to advance this. In contrast, the incentives offered by emissions trading are not yet large enough to stimulate these cost reductions in the longer term.“ Concrete cost-efficient effects due to funding measures can be achieved mainly by reducing the capital costs of almost mature renewable energy technologies. Sensibly designed funding measures can reduce investment risks that in turn lower the returns demanded by investors and thus the financing costs.

Renewables’ support is not the main reason for the drop in prices on the power and emission allowance markets

Since there are no fuel costs when using wind and solar energy, but the price on the power market is formed based on variable costs, i.e. fuel costs and operating and maintenance costs, renewable energies tend to have a dampening effect on the electricity price. In a similar way, the increased deployment of renewable energies leads to a lower demand for emission allowances in the electricity sector and therefore to a lower allowance price. With regard to the significance of these effects, the experts emphasize that, contrary to what many critics believe, the current support for renewable energies is not the main cause of falling prices on the power markets and for CO2 allowances. Instead, other factors are responsible for lower power market prices, such as the reduced demand for power as a consequence of the economic and financial crisis, or the falling prices for fossil fuels and emission allowances. In this context, the authors propose an improved fine-tuning of the support instruments to help avoid over-supply on the power markets. Increasing the flexibility of support would make it possible to react to future market changes.

With regard to the future support of almost mature renewable energy technologies, defining the level of support competitively through tenders has the advantage that, given sufficient competition, support costs react automatically to falling technology costs. In addition, the amount of support can be continuously adjusted to deployment requirements without undermining the investment climate: However, changes in the auctioned amounts should be made gradually and with sufficient warning to safeguard stable investment conditions. Provided there is sufficiently strong competition and the relevant technology cost development, auction results with a premium of zero can indicate when specific renewable energies no longer require financial support.

The Fraunhofer Institute for Systems and Innovation Research ISI analyzes the origins and impacts of innovations. We research the short- and long-term developments of innovation processes and the impacts of new technologies and services on society. On this basis, we are able to provide our clients from industry, politics and science with recommendations for action and perspectives for key decisions. Our expertise is founded on our scientific competence as well as an interdisciplinary and systemic research approach.