Renewable subsidies: balancing economy and the environment in the Netherlands and beyond

  • May 21, 2020
  • Power Technology

In March, the Dutch Government announced plans to double its contribution to renewable power subsidies, from €2bn ($2.17bn) to €4bn ($4.34bn), as it tries to keep up with lofty European climate change goals, such as a plan to cut emissions by 55% by 2030. Announced by Dutch minister for economic affairs and climate policy Eric Wiebes, the move is the final phase of the Stimulation of Sustainable Energy Production (SDE+) scheme, which is set to come to an end after almost a decade of financial support for renewable projects.

The scheme is set to be replaced by a new, broader policy framework, although questions remain as to how effectively a single fund can balance the financial strain of supporting a subsidy programme even more ambitious than its predecessor. Meanwhile, renewable energy subsidies around the world, from Uzbekistan to South Korea, are demonstrating that this approach of government-backed projects can be effective, but only if financial need and environmental idealism are properly aligned.

The Dutch model comprises two parts, one that has just closed its last round of funding, and a successor scheme that will expand on the work of the first. Implemented in 2011, the SDE+ is the first such scheme, and has supported renewable energy projects for the better part of a decade, from biomass and wind energy to geothermal and solar power.

In the first seven years of the scheme, the project funded 5,823MW of new installed energy capacity, 3,185MW of which were used for electricity generation, according to a 2018 report from UK-based Catapult Energy Systems and the Energy Technologies Institute. The report also noted that less than 15% of funded projects could be considered “free riders”, those that would have been realised without the support of the SDE+, highlighting the importance of the project in overcoming the financial barriers that are typically a major obstacle in the installation of new renewable power.

The SDE+ was also an effective compliment to other, similar, schemes across Europe. The report draws parallels between the Dutch project and schemes such as the EU Emissions Trading System, both of which aim to improve the EU’s environmental performance, but through opposing means; while the EU scheme aimed to reduce greenhouse gas emissions by 21% by 2020, the SDE+ targeted a 16% increase in renewable energy generation by 2023. This emphasis on active generation – not simply reducing reliance on traditional forms of energy generation, but replacing it with new technologies – has helped the Dutch set a precedent for proactive change in the sector.

This precedent has influenced the latter days of the SDE+ scheme, with the doubling of finances available in its final funding round highlighting the government’s desire to see the project achieve a strong finish. This approach has also fed into the second phase of the Dutch scheme, an expansion of the original project that is to be dubbed SDE++.

Announced by Wiebes earlier this year, the SDE++ plan will cover much of the same ground as its predecessor, although its funds will be opened up to a greater range of projects, namely those that reduce carbon dioxide emissions in any capacity, rather than just renewable power generation. In practice, this means there is potential funding for projects that feature heat pump technology or carbon capture and storage.

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However, this broader scope comes with a caveat, that the value of projects will be assessed with regard to the value of fossil fuels not being used, rather than the value of renewable power which is being used. This subtle shift means that the value of a project will be tied to external factors, such as fluctuating oil prices, which could see a series of “correction amounts” applied to SDE++ projects at the end of each year, ultimately lowering the money they can expect to receive from the government.

Wiebes has guaranteed that projects funded by the initial SDE+ scheme will be exempt from these changes, and that correction will not exceed €7 per MWh of electricity produced. This has given cause for optimism that the SDE++ scheme will be able to effectively build on the work of its predecessor, while balancing the need to deliver renewable energy projects and remain profitable across the Dutch energy sector.

The Dutch example of marrying environmental ideal with economic incentive is one being replicated around the world, with many countries traditionally reliant on fossil fuels for their power generation moving towards renewables. Uzbekistan, for instance, has announced plans to more than double its total power capacity to 29.3GW by 2030, with 5GW of this new capacity coming from solar projects and 3GW coming from wind facilities, meaning renewables are on track to account for more than a quarter of the country’s total energy output within a decade.

These projects are underpinned by economic investment and foreign support. Saudi Arabia’s Acwa Power has signed a 25-year power purchase agreement with Uzbekistan, helping to offset some of the financial costs of the shift to renewables, and has committed up to $1.1bn to aid in the construction of wind power facilities with a capacity of up to 1GW.

There are similarly ambitious projects in South Korea, where government support for biomass has seen usage of the fuel source explode alongside government subsidies. According to a report from South Korean NGO Solutions For Our Climate (SFOC), electricity generation from biomass rose 160% every year from 2012 to 2018 in South Korea, with biomass plants receiving up to 40% of all government renewable energy credits between 2014 and 2018.

However, this aggressive pursuit of a single energy source has left the legislative framework lacking. The energy credits are designed to offset the costs of converting coal-fired plants to biomass facilities, but a SFOC report found that these subsidies were up to 15 times greater than the actual cost of converting the plants. Similarly, three-quarters of the country’s biomass is burned alongside coal plants, meaning the government’s biomass subsidies are doing little beyond supporting coal-reliant power companies, despite its best efforts.

Meanwhile, other countries are working without the Dutch subsidiary model, to wildly different ends. Iran is heavily invested not in renewable subsidies, but support for fossil fuels, with the International Energy Agency (IEA) reporting that the country spent $69.2bn on fossil fuel subsidies in 2018, the most in the world, and equal in value to 16% of global energy subsidies. The IEA report also found that Iran’s percentage of fossil fuel subsidies as a share of its total GDP reached $15.3bn, third in the world behind only Venezuela and Uzbekistan.

As a result, Iran is one of the most fossil fuel-reliant countries in the world, with Trading Economics reporting that 99.02% of the country’s energy needs are met by fossil fuels. While this has led to some economic benefits both domestically and abroad – Iran’s oil price of $0.3 per litre was the lowest in the world, according to IEA data from 2018 – this extreme prioritisation of fossil fuels over renewables is at odds with many countries around the world.

A group of countries to take a different path to the Netherlands are those in West Africa, although its policies are far more supportive of renewables, albeit through a different route. Those belonging to the Economic Community of West African States (ECOWAS), including Nigeria, the Ivory Coast, and Mali, are set to reap long-term benefits from investment in solar power, according to a 2020 research paper published by academics at the Lappeenranta-Lahti University of Technology in Finland. The report argues that a combination of de-incentivising investment in traditional power sources and free market energy reforms could see the entirety of ECOWAS’s energy needs met by solar power.

Critically, the paper suggests that ECOWAS’s energy needs can be met, and its power sector reformed, without the need for direct government subsidies. It may be possible to cut out the middleman used in the Dutch model to overcome the prohibitive cost of renewable installation, and move directly to a system where economic incentive and environmental protection are satisfied at once. While this is an optimistic approach, this is perhaps the ideal state to which the world’s major energy producers ought to aspire, where energy and financial needs can be met without direct government subsidies.

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