feed-in tariffs and quotas for renewable energy in europe · 2020-08-05 · feed-in tariffs and...

FEED-IN TARIFFS AND

QUOTAS FOR RENEWABLE

ENERGY IN EUROPE*

GUSTAV RESCH**,

MARIO RAGWITZ***,

ANNE HELD***,

THOMAS FABER** AND

REINHARD HAAS**

Renewable electricity has increased significantlyin recent years on a global scale and especially

within Europe. A major reason for this developmentat the European level is the national support strate-gies triggered by Directive 2001/77/EC on renewableenergies in the electricity sector (European Par-liament and Council 2001), which set the renewableenergy sources (RES-E) target of 21 percent at theEU-25 level for the year 2010 and specified corre-sponding targets for all 25 member states. All EUmember states have introduced policies to supportthe market introduction of RES-E and most of themhave started to improve the corresponding adminis-trative framework conditions (e.g. planning proce-dures, grid connection) as well. The market diffusionof new renewable energy technologies has increasedsignificantly over the last decade. The existing sup-port instruments encompass feed-in tariffs (FITs),quota-based tradable green certificates (TGCs),investment grants, tender procedures and tax mea-

sures. Up to now, these policies have been imple-

mented exclusively on a national level and aim to

fulfil the national targets as set in the RES-E direc-

tive. However, based on the currently implemented

policies, these targets will most likely not be met in

the majority of countries, which indicates that RES-

E support systems are still not designed in a suit-

able way.

Evaluation of policy instruments for promotingrenewable electricity from a historical perspective

Classification of policy instruments and develop-

ment of RES-E policies in the EU

Within this study, the assessment of direct regulatory

promotion strategies is carried out by focusing on a

comparison between price-driven (e.g. FITs) and

quantity-driven (e.g. quotas based on TGCs) strate-

gies, which can be defined as follows:

Feed-in tariffs (FITs) are generation-based, price-

driven incentives. The price that a utility or supplier

or grid operator is legally obligated to pay for a unit

of electricity from RES-E producers is determined

by the system. Thus, a federal (or regional) govern-

ment regulates the tariff rate. It usually takes the

form of either a fixed amount of money paid for

RES-E production, or an additional premium on top

of the electricity market price paid to RES-E pro-

ducers. Besides the level of the tariff, its guaranteed

duration represents an important parameter when

evaluating the actual financial incentive. FITs allow

technology-specific promotion and acknowledge

future cost-reductions by applying dynamically

decreasing tariffs.

Quota obligations based on Tradable Green Certi-

ficates (TGCs) are generation-based, quantity-driven

instruments. The government defines targets for

RES-E deployment and obliges a particular party of

the electricity supply-chain (e. g. generator, whole-

saler or consumer) with their fulfilment. Once de-

fined, a parallel market for renewable energy certifi-

cates is established and their price is set following

CESifo DICE Report 4/2007 26

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* This assessment of the effectiveness and economic efficiency ofsupport schemes for renewable electricity was conducted for theEuropean Commission, DG TREN within the European researchproject OPTRES (www.optres.fhg.de). For a detailed discussion ofthe above illustrated topic we refer to Ragwitz et al. 2007.The authors and the whole project consortium gratefully acknowl-edge the financial and intellectual support of this work provided bythe Intelligent Energy for Europe – Programme. In particular, spe-cial thanks go to the project officers Beatriz Yordi, DG TREN, andUlrike Nuscheler, IEEA.** Vienna University of Technology, Institute of Power Systemsand Energy Economics, Energy Economics Group, Vienna,Austria.*** Fraunhofer Institute Systems and Innovation Research, Karls-ruhe, Germany.E-mail of lead author: [email protected].

CESifo DICE Report 4/200727

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demand and supply conditions (forced by the obliga-tion). Hence, for RES-E producers, financial supportmay arise from selling certificates in addition to therevenues from selling electricity on the power mar-ket. In principle, technology-specific promotion isalso possible in TGC systems. But it should be notedthat separate markets for different technologies willlead to much smaller and less liquid markets.

Figure 1 shows the evolution of the main supportinstrument for each country. Only 8 of the 15 coun-tries regarded did not experience a major policy shiftduring the period 1997–2006. The current discussionwithin EU member states focuses on the comparisonof two opposed systems, the FIT system and thequota regulation in combination with a TGC-mar-ket. The latter have replaced existing policy instru-ments in some European countries, such as Belgium,Italy, Sweden, the UK and Poland. Other policyinstruments, such as tender schemes, are no longerused in any European country as the dominatingpolicy scheme. However, there are instruments likeproduction tax incentives and investment incentiveswhich are frequently used as supplementary instru-ments. Only Finland and Malta apply them as theirmain support scheme.

Effectiveness of policy instruments

The effectiveness of a policy for renewable electrici-ty is based on its ability to increase the generation of

electrical power. The definition of effectiveness usedin this analysis is given in the following equation:

This definition of effectiveness has the advantage ofbeing unbiased with regard to the available potentialfor individual technologies in a specific country.Member states need to deploy RES-E capacitiesproportional to the given potential in order todemonstrate the comparable effectiveness of theirinstruments. This appears to be a meaningfulapproach since the member state targets, as deter-mined in Directive 2001/77/EC, are also mainlybased on the realisable generation potential of eachcountry.

Figure 2 shows the average annual effectiveness indi-cator for wind onshore electricity generation for1998–2005 for EU-15 countries. Several findings canbe derived from these figures. Firstly, the three mem-ber states showing the highest effectiveness duringthe considered period – Demark, Germany, and

Spain – applied fixed feed-in tar-iffs during the entire period1998–2005 (with a relevant sys-tem change in Denmark in 2001).The resulting high investmentsecurity as well as low adminis-trative barriers stimulated astrong and continuous growth inwind energy during the lastdecade. It is often claimed thatthe high level of the feed-in tar-iffs is the main driver for in-vestments in wind energy, espe-cially in Spain and Germany.However, as will be shown in thesection below, the tariff level isnot particularly high in these twocountries compared with theother countries analysed here.This indicates that a long-termand stable policy environment isactually the key criterion for the

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

ATAll RES-E

technologies

BEAll RES-E

technologies

DKAll RES-E

technologies

FIAll RES-E

technologies

Wind

Bioenergy

PV

DEAll RES-E

technologies

GRAll RES-E

technologies

IEAll RES-E

technologies

Wind

Bioenergy

PV

LUAll RES-E

technologies

NLAll RES-E

technologies

PTAll RES-E

technologies

ESAll RES-E

technologies

SEAll RES-E

technologies

UKAll RES-E

technologies

FR

IT

Feed-in tariff

Change of the

system

Adaptation of

the system

Quota / TGC

Tender

Tax incentives /

Investment

grants

Figure 1

EVOLUTION OF THE MAIN POLICY SUPPORT SCHEMES IN EU-15MEMBER STATES

En

i=

Gn

i�G

n�1

i

ADD � POTn

i

En

i Effectiveness indicator for RES technology i for the year n

Gn

i Existing normalised electricity generation by RES technology i in year n

ADD � POTn

i Additional generation potential of RES technology i in year n until 2020

success of developing RES-E markets. As can beobserved in a country like France, high administra-tive barriers can significantly hamper the develop-ment of wind energy even under a stable policy envi-ronment combined with reasonably high feed-in tar-iffs.

Economic efficiency from society’s point-of-view

In order to analyse the economic efficiency of sup-port from a historical perspective we compare thelevel of support in the case of wind energy onshoreand the corresponding costs of electricity genera-tion. Based on this definition the analysis shows (seeFigure 3) that for many countries the support leveland the generation costs are very close. Countrieswith costly potentials frequently show a higher sup-port level. A clear deviation from this rule can befound in the three quota systems in Belgium, Italyand the UK, where support is presently significantly

higher than the costs of genera-tion. The reasons for the highersupport level expressed by thecurrent green certificate pricesinclude still immature TGCmarkets, the non technology-specific design of the currentlyapplied TGC-systems as well asthe higher risk premium re-quested by investors. In the caseof Spain and Germany, the sup-port level indicated in Figure 3appears to be above the averagelevel of generation costs. How-ever, the low cost potentialshave already been exploited inthese countries due to recent

success in market growth. Therefore a level of sup-port that is moderately higher than average costsseems to be reasonable.

Expected revenues and profits for investors

In order to correlate the effectiveness of an instrumentwith the efficiency of support as defined in the previ-ous section, the levelised profit of potential wind ener-gy investments was calculated for Austria, Belgium, theCzech Republic, France, Germany, Ireland, Italy,Lithuania, Spain, Sweden and the UK for the year2004. Thus, calculations are based on the effective sup-port conditions in each country during 2004.

By plotting the effectiveness versus the levelisedprofit as shown in Figure 4, the correlation betweenthe levelised profit for investments and the level ofeffectiveness attained by the support instrument inthe respective year is analysed.

In Figure 4, the expected lev-elised profits as well as the effec-tiveness show a broad spectrumfor the countries under consider-ation. It should be pointed outthat the different instrumentshave different levels of maturityand that policy schemes in somecountries – in particular quotaobligation systems – are still in atransitional phase. It is strikingthat Italy, the UK and Belgium,which transformed their marketsby introducing quota systems asthe main support instrument


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0

2

4

6

8

10

AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK EU15

Note: This figure depicts the effectiveness indicator for wind onshore electricity in the period 1998 to 2005

in the EU-15 showing the relevant policy schemes during this period.

EFFECTIVENESS INDICATOR FOR WIND ONSHORE

average effectiveness indicator 1998–2005%

Feed-in-tariffs Quota/TGC Tender Tax incentives/Investment grants

Figure 2

0

20

40

60

80

100

120

140

160

AT BE DK FI FR DE GR IE IT LU NL PT ES SE UK

Note: This figure depicts support level ranges (average to maximum support) for direct support of wind

onshore in EU-15 Member States (average tariffs are indicative) compared to the long-term marginal

generation costs (minimum to average costs).

COMPARISON OF SUPPORT LEVELS AND GENERATION COSTS FOR

WIND ONSHOREEUR/MWh

Minimum to average generation costs

Average to maximum support level

Figure 3


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between 1999 and 2002, are characterised by expect-ed high levelised profits but low effectiveness. Thehigh levelised profit results in particular from theextrapolation of the presently observed certificateprices. The results show that certificate systems leadto higher producer revenues than FITs, which com-pensate for high investment risks. Furthermore, therecent development of certificate prices does notshow any decreasing tendency. On the other hand,countries with FITs seem to be typically more effec-tive at generally moderate levelised profits per unitof electricity generated. The fact that expected prof-itability from the investor’s perspective is signifi-cantly lower for FITs is directly linked with a higherefficiency of this strategy because additional costsfor consumers are lower.

Prospective analysis based onthe model Green-X

In this section we aim to signpostthe way forward by presenting aprospective analysis of possiblefuture RES-E support options atthe European level. The effec-tiveness and efficiency of sup-port schemes is based on theresults obtained from simulationruns using the Green-X model(www.greenx.at). This tool en-ables us to make a comparativeand quantitative analysis of thefuture deployment of RES up to2020 in all energy sectors (i.e.electricity, heat and transport)

based on applied energy policy strategies in adynamic context. Geographically the assessmentrefers to the European Union as of 2006, comprising25 member states (EU-25).

Figure 5 indicates the investigated scenario pathsand the resulting RES-E deployment – comprising abusiness-as-usual (BAU) case based on a continua-tion of current national support schemes (BAU), anational improvement and a harmonisation of RES-E support at the European level based on eithertechnology-specific support, i.e. a feed-in tariff sys-tem with technology-specific differentiated tariffs, oruniform support, i.e. a quota obligation based onTGCs commonly applied for all RES-E options.

Results with regard to non-har-

monised conditions – BAU &

improved national policies-

scenario

In 2004 the total amount of RES-E generation within the EU-25was around 460 TWh, corre-sponding to a share of about15 percent of gross electricitydemand. Without any changes tothe current support schemes ofthe various member states, RES-E would achieve a demand shareof 18.2 percent in 2010 at EU-25level. If RES-E support is accom-panied by energy efficiency mea-sures as assumed for a sensitivityvariant to the BAU case, a higher

0

5

10

15

20

0 1 2 3 4 5 6 7

Note: This graph shows a possible levelised profit per unit of electricity generated by an investment in wind

onshore in 2004.

EFFECTIVENESS INDICATOR VERSUS LEVELISED PROFIT FOR

WIND ONSHOREeffectiveness indicator in %

Feed-in-tariffs Quota/TGC Tender Tax incentives/Investment grants

expected annuity, EUR Cent/KWh

UKIT

DE

AT

IE

FI

LT

SE FRCZ

ES-

Fixed Price

ES-

Market Option

BE

Wallonia

BE

Flanders

Figure 4

0%

15%

20%

25%

30%

35%

1990 1995 2000 2005 2010 2015 2020

RE

S-E

deplo

ym

ent

Historical development

BAU-forecast

Indicative RES-E Target (2010)

Strengthened national policies

951 TWh

(BAU)

1156 TWh

(improved national& harmonised policies)

Introduction of harmonised policies (2015)

Technology-specific

harmonised FIT scheme

Non technology-specific

harmonised TGC system

Business-as-usual

(Bau)

Continuation of current

national policies

up to 2020

Improved national

policies

Efficient & effective

national policies

No Harmonisation

OVERVIEW OF INVESTIGATED CASES

Technology-specific

support

Feed-in tariffs

-harmonised

Non technology-

specific support

Quota obligation based

on TGCs – harmonised

Harmonisation in 2015

0%

15%

20%

25%

30%

35%

1990 1995 2000 2005 2010 2015 2020

RE

S-E

deplo

ym

ent


BAU-forecast



951 TWh

(BAU)

1156 TWh



Technology-specific




0%

15%

20%

25%

30%

35%

1990 1995 2000 2005 2010 2015 2020

RE

S-E

deplo

ym

ent


BAU-forecast



951 TWh

(BAU)

1156 TWh



Technology-specific




Business-as-usual

(Bau)


national policies

up to 2020

Improved national

policies


national policies

No Harmonisation


Technology-specific

support

Feed-in tariffs

-harmonised

Non technology-

specific support




Business-as-usual

(Bau)


national policies

up to 2020

Improved national

policies


national policies

No Harmonisation


Technology-specific

support

Feed-in tariffs

-harmonised

Non technology-

specific support




Figure 5

demand share of 18.8 percent is feasible in 2010. By2020, these differences will become more apparent: ashare of 23.6 percent is projected for the defaultBAU case, whilst deployment in relative terms is27 percent for BAU with accompanying DSM.

In contrast, it would be feasible to meet the Euro-pean target as set by the RES-E Directive by im-proving the support conditions for RES-E rigorous-ly and immediately in all EU countries, including aremoval of non-financial deficiencies and the imple-mentation of energy efficiency measures. In the“improved national policies” case, a RES-E share of20.9 percent is reached in 2010, rising to 34.1 percentin 2020.

The dynamic development of RES-E generation inboth cases is depicted in absolute terms at the EU-25level in Figure 6. This graph illustrates the tech-nology-specific deployment fornew RES-E plants and showsthe total RES-E stock (indicatedby the blue area) comprising allplants installed up to the end of2004. If currently implementedRES-E policies are maintained,as assumed in the BAU case,the total amount of RES-E gen-eration will increase from 460TWh in 2004 to about 951 TWhin 2020. This 2020 figure com-prises almost equal contribu-tions of new RES-E installations(from 2005 to 2020) in the orderof 520 TWh (55 percent of totalRES-E) and the stock of exist-

ing RES-E plants installed priorto 2005, which account for431 TWh (equal to a share of45 percent in total RES-E gen-eration) by 2020 in the BAUcase. “Improved national poli-cies” will induce a much higherdeployment of new RES-E inthe investigated period: by 2020this will amount to 725 TWhfrom new RES-E plants in-stalled between 2005 and 2020,corresponding to 63 percent ofthe total RES-E generation of1156 TWh.

Figure 7 illustrates the requiredconsumer expenditure for both cases investigated atthe EU-25 level due to the underlying national RES-E policies and the corresponding induced RES-Edeployment. In this context, the consumer / societalexpenditure due to the support for RES-E repre-sents a net value based on the direct costs of apply-ing a certain support scheme. This figure also illus-trates both the technology-specific shares of newRES-E plants and the expenditures associated withthe stock of existing RES-E plants (indicated by theblue area).

The required consumer expenditures will increasesteadily over the next ten years with BAU. In relativeterms, expressing the expenditures as a premium perMWh total demand, these are projected to rise froma level of 2.1 EUR/MWhDEMAND in 2005 up to about5.0 EUR/MWhDEMAND in the final years 2019 and2020. Obviously, within the “improved national poli-


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0

200

400

600

800

1 000

1 200

20

05

20

07

20

09

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19 0

200

400

600

800

1 000

1 200

20

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09

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11

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13

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15

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20

19

Wind offshore

Wind onshore

Tide & wave

Solar thermal electricity

Photovoltaics

Hydro small-scale

Hydro large-scale

Geothermal electricity

Biowaste

Solid biomass

Biogas

Total stock (end of 2004)

COMPARISON OF RES-E GENERATION AT EU25 LEVEL

2005 TO 2020RES-E - electricity generation

BAU case

TWh/year TWh/year

"improved national policies"-variant

Figure 6

0

4

8

12

16

20

24

28

20

05

20

07

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19 0

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20

19

Wind offshore

Wind onshore

Tide & wave

Solar thermal electricity

Photovoltaics

Hydro small-scale

Hydro large-scale

Geothermal electricity

Biowaste

Solid biomass

Biogas

Total stock (end of 2004)

COMPARISON OF NECESSARY CONSUMER EXPENDITURE

AT EU25 LEVEL, 2005 TO 2020yearly transfer cost for consumers due to RES policy

BAU case "improved national policies"-variant

billion EUR/year billion EUR/year

Figure 7


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cies” variant, characterised by a40 percent higher RES-E de-ployment in the investigated pe-riod 2005 to 2020, even greaterfinancial support is required toachieve the ambitious RES-E tar-get set for 2010. Accordingly, asteeper increase in expenditure inthe period up to 2017 occurs, cul-minating in a peak at 7.7 EUR/MWhDEMAND in 2017.

Harmonisation: Technology-

specific versus uniform support

Besides the above discussed na-tional support options (i.e. BAUand “Improved national poli-cies”) the following policy options at the Europeanlevel are investigated below:

– Harmonisation of support based on a uniform

(non technology-specific) support scheme, i.e. aquota obligation based on TGCs commonlyapplied for all RES-E options.

– Harmonisation of support based on a technology

specific support scheme, i.e. a feed-in tariff systemwith technology-specific differentiated tariffs.

In addition, a further variant of each harmonisedRES support case is also taken into consideration.Thereby, in case of technology-specific support it isassumed that the support is limited to less novelRES-E technologies, whilst in the case of non-tech-nology-specific support the variant refers to the neg-ligence of the investor’s risk (as commonly associat-ed with uncertain earnings in the TGC market).

One target is assumed for future RES-E deploymentin 2020 in all cases based on harmonised support inorder to be able to compare the economic efficiencyof the different policy options – i.e. it is assumed thatabout 1156 TWh have to be generated by RES-E atthe EU-25 level by 2020, similar to the “improvednational policies” case. Note that regarding har-monised support options a transition period is takeninto account. Accordingly, new and improved har-monised policies offering equal financial incentivesthroughout Europe are then applied to new RES-Einstallations from 2015 onwards.

A comparison of the cumulated consumer expendi-ture for new RES-E installations – i.e. the total trans-

fer costs due to the promotion of new installations inthe observed period 2005 to 2020 as well as the resid-ual costs after 2020 – is shown in Figure 8 for theinvestigated cases. This figure illustrates both thecost-efficiency and the effectiveness of RES-E sup-port options, expressing the cumulated consumerexpenditures in specific terms, i.e. per MWh inducedRES-E generation. The following conclusions aredrawn from this diagram:

– The cumulated transfer costs for consumers arelowest when applying technology-specific supportharmonised throughout Europe achieved byapplying feed-in tariffs. There are marginal differ-ences between the two variants, i.e. by consideringor neglecting novel RES-E options.

– Improved national policies with a similar deploy-ment of new RES-E result in slightly higher spe-cific costs corresponding to an increase of +18percent compared to the technology-specific sup-port provided within a harmonised scheme(including novel RES-E options).

– Higher specific costs can be expected from con-tinuing current RES-E support. With BAU, thespecific costs are 49 percent higher compared toharmonised technology-specific support. It isworth mentioning that the overall deployment ofnew RES-E is 29 percent lower with BAU thanwith all other policy options.

– The most inefficient policy option in terms ofcosts is harmonised, but non technology-specificsupport as provided by a uniform EU-wide TGCsystem, which results in much higher consumerexpenditures ranging from + 60 to + 68 per-cent compared to its technology-specific coun-

32.6

21.8

20.4

36.6

34.9

25.8

0 5 10 15 20 25 30 35 40

BAU - continuationof current national RES-E policies

Improved national policies

Harmonised technology-specific support(from 2015 on)

Harmonised technology-specific supportwith less novel technologies (from 2015 on)

Harmonised non technology-specific support

(from 2015 on)

Harmonised non technology-specific support

(from 2015 on) - neglecting risk

COMPARISON OF NECESSARY CUMULATED CONSUMER EXPENDITURE

FOR NEW RES-E

Note: This depiction shows the necessary cumulated consumer expenditure (i.e. the cumulated present value

(2005) of yearly transfer cost) due to the support of new RES-E (installed 2005 to 2020), expressed per MWh

EUR/MWhRES

induced RES-E generation for the investigated cases.

Figure 8

terpart incl. novel RES-E options – dependingwhether the investor’s risk is neglected or takeninto account.

Conclusions

The empirical findings presented in this paper showthat instruments which have proven to be effectivealso tend to be economically efficient. Feed-in sys-tems, which are implemented in the majority of EUmember states, have initiated significant growth ofrenewable energy generation at moderate costs forsociety. The main reason for this observation is thelong-term price security of the system combinedwith technology diversification of support. Com-pared to short-term trading in renewable certificatemarkets, the intrinsic stability of feed-in systemsappears to be a key element for success.

The key criterion for achieving an enhanced futuredeployment of RES-E in an effective and efficientmanner, besides the continuity and long-term stabil-ity of any implemented policy, is the technologyspecification of the necessary support. Concentrat-ing on only the currently most cost-competitive tech-nologies would exclude the more innovative tech-nologies needed in the long run. Furthermore, itwould not be possible to achieve any moderate toambitious RES-E target without considering thesenovel RES-E options. In other words technologyneutrality may be cost-efficient in the short term butis more expensive in the long term.

Even in the short term, the producer profits involvedin the promotion of RES-E as well as observable costdifferences among cheap to moderate RES-E optionssuggest a diversification of support. Most of theEuropean success stories of promoting RES-E overthe past decades in an effective and economically effi-cient way were driven by feed-in tariffs, which areimplemented in a technology-specific manner.

The results of the modelling exercise clearly indicatethat the major part of possible efficiency gains canalready be exploited by optimising RES-E supportmeasures at the national level – about two thirds ofthe overall cost reduction potential can be attributedto optimising national support schemes. Further effi-ciency improvements at a considerably lower level(about one third of the overall cost reduction poten-tial) are possible through an EU wide harmonisationof the support schemes provided that technology-

specific support is implemented. In contrast, if har-monisation meant putting all the RES-E options inone basket and giving equal support to all the RES-E technologies considered, then the accompanyingconsumer expenditures would increase significantlyif the RES-E target is ambitious. Consequently, aharmonised non technology-specific support woulddecrease efficiency of support.

References

European Parliament and Council (2001), Directive 2001/77/EC ofSeptember 27th 2001 on the Promotion of Electricity Producedfrom Renewable Energy Sources in the Internal Electricity Market.

Ragwitz, M., A. Held, G. Resch, T. Faber, R. Haas, C. Huber, P.E.Morthorst, S.G. Jensen, R. Coenraads, M. Voogt, G. Reece, I.Konstantinaviciute and B. Heyder (2007), OPTRES: Assessmentand Optimisation of Renewable Energy Support Measures in theEuropean Electricity Market, final report of the research projectOPTRES of the European Commission, DGTREN, IntelligentEnergy for Europe - Programme(Contract No. EIE/04/073/S07.38567), Karlsruhe, Germany.


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