Renewables and Cities Energy - Current Events in Europe

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1 EWEA Position on the future EU legislation for renewable energy and its impact on the wind industry

2 Introduction Europe is the world leader in wind energy, a technology that is vital to help address the issues of security of supply, oil and gas price volatility, sustainable development, climate change, strong economic growth, technological progress, employment creation and higher exports. Not only does wind power reduce carbon emissions and provide security of supply, it also helps the EU to make progress on the Lisbon agenda through greater investment in clean technology with up to 368,000 new jobs expected to be created in the EU between 2000 and According to European Wind Energy Association (EWEA) forecasts, 180 GW could be installed in the European Union by 2020, capable of meeting approximately 15% of EU electricity demand. The decision by the European Council in Spring 2007, for a binding target of a 20% share of renewable energies in overall EU energy consumption by 2020, has laid the groundwork for renewable energy sources, particularly wind, to become a major pillar of future EU energy supply. Together with the agreed 20% GHG reduction target (or 30% if other industrialized nations do likewise), a sound vision for a sustainable energy policy has been laid. Although targets themselves do not guarantee success they act as an important catalyst as they encourage investors to commit, enable stable technological deployment and cost reductions, and encourage research. The 20% RES target by 2020 will also dramatically increase the possibility of meeting the existing targets for 2010, by signaling to Member States and industry that the Union is serious about renewables and that they will be part of the political agenda beyond the next three years. In order to meet the 20% RES target, the Heads of State agreed the following:.. an overall coherent framework for renewable energies which could be established on the basis of a Commission proposal in 2007 for a new comprehensive directive on the use of all renewable energy resources. This proposal should be in line with other Community legislation and could contain provisions as regards: = Member States' overall national targets; = National Action Plans containing sectoral targets and measures to meet them;.. invites the Commission to analyze the potential of cross-border and EU-wide synergies and of interconnection for reaching the overall renewable energy target, thereby also addressing the situation of countries and regions largely isolated from the EU energy market; 1 European Commission (2004): MITRE project (Monitoring and Modeling Initiative on the Targets for Renewable Energy). Overview report. Available at: 2 While Governments do not systematically collect statistics on the renewable energy sector, some countries have started making the effort to quantify the direct jobs that can be attributed to wind. In Spain, there are 31,500 (AEE, 2006); in Germany 64,000 (The Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, 2006) and 21,600 in Denmark (DWEA, 2006). Other countries, such as Italy, the UK, the Netherlands or Portugal collect figures not always comparable- which are then published in the annual reports of the International Energy Agency (IEA, 2007) page 2

3 invites the Commission to work with Member States to develop renewable energies, for example through an expanded Forum on renewable energies and to promote the exchange of best practice. This position paper seeks to address the main issues that could arise during the debate. It constitutes the agreed vision of the wind energy sector on the desired content of the new legislative package. The position paper has been divided into two main sections. The first tackles the main elements of the current debate about the future design of support systems; the second discusses other main issues that are relevant for the successful implementation of the Commission s proposal and of the design of the future Renewables Directive. Section 1). Primary Issues 1. Should the EU have a single EU-wide harmonized support scheme? 2. Should cross border trade in guarantees of origin for electricity produced from RES be possible in order to allow underperforming Member States to meet the national target? 3. The question of national targets: how they should be distributed ( burden sharing / opportunity sharing )? Section 2). Secondary Issues 4. Should the RES Directive and the ETS Directive be linked? If so, what is the best way? 5. Questions concerning the Renewables Action Plans: Should the Commission propose a format for the RAPs?; Should the Commission be able to reject a RAP and on what grounds?; Should the RAPs be legally binding?; How often should RAPs be submitted and updated by Member States? Is an interim target appropriate? 6. Questions concerning administrative barriers: Should the proposal require or encourage further measures? 7. Questions concerning Grid System Issues: Should the proposal require or encourage further measures? 8. Questions concerning the development of Offshore wind: Should the proposal contain a legal commitment for the Commission to publish an Offshore Action Plan leading to a fast adoption of an EU legal framework for offshore wind, and if so, when? page 3

4 SECTION 1: Primary Issues 1) Should the EU have a single EU-wide harmonized support scheme? On the 7th of December 2005, the European Commission published a communication on The support for electricity from renewable energy sources 3 which looked into the range of support schemes for renewable energy in operation around Europe. It concluded that it is too soon to attempt any form of harmonization, stating it is too early to compare the advantages and disadvantages of well-established support mechanisms with systems with a rather short history. Therefore, and considering all the analyses in this Communication, the Commission does not regard it appropriate to present at this stage a harmonized European system. Before the end of this year, a new progress report has to be prepared. In EWEA s view, the conclusions from two years ago remain valid: it is still too early to implement a harmonized system in the European Union; the changes in the past two years (since the 2005 review) are not enough to support new steps. Since 2005 the vast majority of Member States have maintained or established their preferred support mechanism, be that premium systems/feed-in tariffs or certificate systems.in premium/feed-in systems the support levels are often differentiated for different technologies. Certificate systems are often technology neutral. This has led to different results. During % of new wind capacity was installed in countries with premium systems (feed-in tariffs), rising to 87% in In 2006 this was 83% 5. This figure can in part be explained by the fact that certificate systems have been introduced only recently and therefore there is still insufficient information for a proper and objective evaluation of their performance. The Stern Review on the Economics of Climate Change states Comparisons between deployment support through tradable quotas and feed-in tariff price support suggest that feed-in mechanisms achieve larger deployment at lower costs. Central to this is the assurance of long-term price guarantees. 6 EWEA believes that a hasty move towards a harmonized EU-wide payment mechanism for renewable electricity would put European leadership in wind power technology and other renewables at risk. Changes in frameworks always create uncertainty and have to be based on sound knowledge and well-proven tools. Experience shows that even small adjustments to a framework can have a profoundly negative effect on the markets for wind power and other renewables, particularly changes to the basic framework of a successful system. More fundamental changes will have an even greater effect on the markets. A dramatic shift in all Member States frameworks would jeopardize national renewable targets and undermine investor confidence. 3 COM(2005)627 final 4 Iberdrola reply to the Commission consultation on EC Guidelines for State Aid for Environmental Protection 5 EWEA 6 Stern Review on the Economics of Climate Change Stern report p366 page 4

5 Changing the 27 national frameworks simultaneously now would undermine the work, progress and efforts that Member States have put into developing mechanisms over the past few years. A premature move towards a common approach will stop, or seriously delay, development even before it starts. The EU-wide 20% target is ambitious and reaching it could be jeopardised by a discussion on changing framework conditions and abolishing formerly successful systems. Furthermore, harmonization would only make sense if a single EU electricity market existed. At present, we have 27 different electricity markets with different electricity prices. Why, then, should we have only one support mechanism for renewable electricity? The creation of a single - truly competitive - internal electricity market must precede, and not follow, the establishment of a single payment mechanism for RES-e. Were the Commission to pursue a harmonized EU system, the optimal way to do so would be through the application of the polluter pays principle (Article 174 of the Treaty), by imposing a tax on electricity production that is equivalent to the externality that is not taken into account by the market. This would require an agreement at EU level on an energy tax, something that until now some Member States have been reluctant to accept. Yet it would be the most appropriate way to approach harmonization while addressing market failures resulting from the lack of internalisation of external costs. Another important consideration is that successful frameworks require more than a good payment mechanism. Twenty five years of wind power experience in Europe show that a successful framework for the development and deployment of renewable energy requires political effort in four fields: Well designed payment mechanism; Grid access and strategic development of the grids; Good governance and appropriate administrative and planning procedures; Public acceptance and support. Indeed, market analysts Emerging Energy Research uses the following five key components to qualify wind energy market growth prospects and investment attractiveness. page 5

6 7 If one or more of these key components are missing, little progress will happen. Looking at payment mechanisms in isolation may lead to wrong conclusions about the effectiveness of a specific mechanism. It is important that any analysis of the success or failure of national support mechanisms seeks to identify whether a positive or negative development can be attributed to the design of the payment mechanism, or whether other factors in the form of administrative, grid access and/or public acceptance barriers affected the development. Finally, it must also be acknowledged that no country has ever managed to develop a market for renewable electricity through the application of just one policy. Historically, success has been the result of combinations of policies as stated by the International Energy Agency (IEA) 8 : Significant market growth has always resulted from combinations of policies, rather than single policies. ( ) In no case is there evidence of strong market growth with only one policy in place. Those countries that have experienced strong growth in new renewables, such as wind and solar, including Germany, Spain, the United States and Denmark, have done so through a combination of financial incentives and guaranteed prices, underpinned by strong R&D. EWEA recommends that the Commission s efforts to identify successful and unsuccessful approaches to support mechanisms in the Member States takes a more holistic approach, and includes identification of the sources leading to success/failure, i.e. a cause effect analysis. Otherwise the assessment of support mechanisms may lead to the wrong conclusions. In addition, prior to a decision on harmonisation the Commission should conduct an analysis of the various market distortions that exist such as the varying grid connection costs throughout the EU and the differing administrative barriers (for example planning procedures). Such an analysis should be followed by a Road Map on Harmonisation specifying the stepwise approach to be taken to remove the various market distortions prior to the harmonisation of the support mechanisms. EWEA considers there are 10 main requirements that any future Community-wide mechanism must meet in order to create a sound investment climate for renewables: (1) Compatibility with the polluter pays principle; (2) High long-term investor confidence, i.e stability and that it remains active for a sufficient period of time to provide stable planning horizons; (3) Simple and transparent in design and implementation; (4) High effectiveness in deployment of renewables; (5) Encouraging technology diversity; (6) Encouraging innovation, manufacturing, R & D, technology development and lower costs, including optimal wind farm operation; (7) Compatibility with the liberalised electricity market and with other policy instruments; 7 Emerging Energy Research. European Wind Power Markets and Strategies, June OECD/IEA 2004: Renewable Energy. Market and Policy Trends in IEA Countries; p. 94. page 6

7 (8) Facilitating a smooth transition ( Grandfathering ); (9) Encouraging local and regional benefits, public acceptance and site dispersion; (10) Transparency and integrity: Protecting consumers, avoiding fraud and free riding. 2.) Should cross border trade of guarantees of origin for electricity produced from RES be possible in order to allow underperforming Member States to meet national targets? A number of stakeholders are pushing for the possibility of a virtual trade between Member States in order to offer flexibility in meeting the 20% RES 2020 target. This would enable one (underperforming) Member State to buy production from another (presumably over performing) Member State to meet its target. EWEA is of the opinion that any deliberations on the introduction of cross border trade should be preceded by careful consideration of: The complexity of the process; Cross border trade resulting in additional/new investments (additionality principle); Avoiding double counting of renewable electricity production; Avoiding double counting of CO2 reductions; The effect on existing national support schemes. Results from experiments with cross-border trade of renewable electricity so far, notably between Denmark, Sweden and the Netherlands a few years ago, have been discouraging and show that the process of cross border trade in the absence of a wellfunctioning electricity market is very complex at best. Imports into the Netherlands came predominantly from existing, already depreciated, renewable plants electricity that would have been produced regardless of the increased Dutch demand. Thus, no additional renewable electricity was produced. It is crucial that the development of international trading in renewable electricity and emission allowances does not unintentionally undermine existing national support schemes, the meeting of the national renewable energy targets and the exploitation of national potential. This fundamental question must be investigated and addressed prior to proposing a trading mechanism. If a trade system is to be created, a strict cap should be placed on the purchase/import of renewable energy obligations, to minimise the negative effects on investor confidence. In EWEA s view, possibly a percentage of the national target could be traded, provided that the country who acts as seller is over-performing in terms of electricity produced by renewables. Cross border trade in renewable energy certificates of origin should only occur once national targets are achieved, and strictly controlled by the Commission on an annual basis. The excess of production in one country (or one company for countries with quota systems) could be acquired by another running a deficit. It would also be necessary to ensure that the transaction results in the seller loosing the financial support, tariff or other support mechanism to the purchaser. It must be clearly understood that trading page 7

8 would be a mechanism to allow for production optimisation, and not a substitute for existing national support mechanisms. Target compliance periods would need to be short, preferably one year duration. As such annual/ biannual targets would have to be set as part of overall national targets, and be monitored on a regular basis as is the case with the existing RES-E Directive.. Cross-border trade of certificates of origin coming from renewables does not require the harmonization of support schemes, and shall under no circumstances overlap with them, creating a regulatory risk. What it requires is a very strict EU-wide monitoring mechanism for both CO2 and target fulfilment - so that double counting does not happen. A European system of guarantees of origin (GoO), as already established by article 5 in the RES-E Directive 9 can be a tool to achieve this 10, given they can be used as an auditing and tracking mechanism. Finally, the European Commission should not forget that there are other, possibly less complex means, to introduce flexibility in the system without managing an intricate EUwide trade mechanism. For instance, one could foresee the creation of an EU fund, which starts paying each kwh of electricity that exceeds the national target, thus alleviating the financial burden of the Member States that are performing well and contributing to reaching the overall EU commitment. The fund can be fed with the fines paid by the countries that are not reaching their targets. Where feed-in tariffs exist, the Governments will receive the payment corresponding to their over-performance which can then be used to reduce the electricity bill of the consumers- while in countries with a green certificate model, the companies who exceed their assigned quotas will directly get the financial reward from the fund. A slightly different option would be the creation of an EU fund in which the countries (where feed-in tariffs exist) or companies (guarantees of origin model) that foresee difficulties in complying with the target internally could place a pre-defined amount of financial resources to be used by countries/ companies who can over-achieve their national target/ company quota, so that the EU overall target can be met. Fines would only be applied to those who did not comply with the target, not did they put the appropriate financial resources in the fund. In any event, a legal compliance mechanism is needed if the Heads of State s decision to have a binding renewable energy target is to have any meaning. 3) The question of national targets: how they should be distributed ( burden sharing / opportunity sharing )? The binding EU target of 20% renewable energy by 2020 will need to be divided up amongst the Member States, as overall national targets. Following the Spring Council the Commission initiated bilateral discussions with all Member States in order to develop 9 Directive 2001/77/EC on the promotion of electricity from renewable energy sources 10 It should be pointed out that a possible EU-trading of Guarantees of Origin would be distinct from a (Green) Certificate System, as currently used by a minority of Member States (UK, Italy, Sweden, Belgium) with varying degrees of success. page 8

9 national targets. However, the Member States have adopted tough negotiating positions, resulting in difficult negotiations for the Commission. EWEA would favour a sharing of the 20% target using a model based on available potential in each Member State. However, such an approach would most likely entail a very long negotiation process with an undecided end, resulting in uncertainty for the industry over the coming years. EWEA therefore proposes an alternative, simpler approach, which would consist of adopting a basic 1% increase of renewable energy per country per year until Given that the EU currently produces 7% of its energy consumption with renewable energy, a 1% annual increase each year until 2020 would achieve the 20% target. The 20% target should be split in a transparent and fair manner. The national share should be ambitious for all countries, take into account the potential that is available, and possibly other factors such as effort made in the past or wealth of the country. But the responsibility sharing should also be clear and easy to understand - hence a simple methodology should be preferred. As such, a 1% annual increase until year 2020 provides a good starting point, whilst taking into account other considerations. The use of Cohesion and Structural Funds could help alleviate the costs of this approach in the less well off Member States. The EU could also foresee some additional financial mechanisms to support those countries, so that certain equity in terms of GDP per capita/financial effort can be achieved. Overall, though, the 13% increase remains a good and practical option in our view, at least as a starting point for the negotiations. SECTION 2: Secondary Issues 4) Should the RES Directive and the ETS Directive be linked? If so, what is the best way? The Commission will publish a legislative environment and energy package containing legislative proposals on: Creating the framework for reaching the 20% RES 2020 target; Reviewing the EU Emissions Trading Scheme (post 2012); Reducing C02 emissions from sectors not included in the Emissions Trading Scheme. Whilst linking the proposals as part of a legislative package is not necessarily a concern in itself, a regulatory link could be of concern. There are a number of reasons, including but not limited to CO2 reductions, for promoting renewable energies in the EU. These consist of security of supply, employment creation, indigenous production, energy independence, technological development, social cohesion and exports. The coherence between the Emissions Trading Scheme and other legislation for wind energy has page 9

10 naturally to be pursued, but should not result in a very complex system that could hamper the growth of wind power and other renewables. The Emissions Trading Scheme should therefore be designed to: Ensure a stable and appropriate regulatory framework which gives investors the confidence they require for long term development plans; Create a level playing field for wind energy in comparison with other often more polluting - energy technologies i.e. internalisation of external costs; Take into account all benefits associated with wind-generated electricity; Allow the wind energy sector to receive sufficient compensation in recognition of those benefits. A single payment mechanism based on CO2 price would not be sufficient to promote renewable energies and would ensure Europe fails to meet its 20% renewables target. EWEA wants to stress that the ETS, in its current form, does not encourage an increased incentive to invest in RES in the European Union. Even with a substantially higher price of CO2 certificates, renewable energies would not be adequately supported, due to the current design flaws and adverse incentives in the system. EWEA hopes that these flaws will be sufficiently addressed in the ongoing review of the ETS post For the wind investor, reasonable prices are important, as well as a stable, predictable and long-term framework for investment, something that the variable and highly unpredictable CO2 price cannot guarantee. EWEA calls for full auctioning as a means to correct the market failures and adverse incentives, e.g. leading to windfall profits for fossil fuel technologies, as it has been the case during the present period. Also more sectors and more GHG gases should be included in the scheme. Otherwise, the very limited scope of the legislation undermines its effectiveness in fighting climate change and establishing a emissions reduction market. In EWEA s view, the appropriate approach to setting the CO2 and the RE targets would be to work out the renewable and energy efficiency targets first; take into account the emissions reduction that these efforts will bring for each country, and then work out how to distribute the remaining CO2 reduction among the other sectors covered by the ETS. Crucially, full auctioning will avoid double counting of CO2 reduction. 5) Questions concerning the Renewables Action Plans (RAP): Should the Commission propose a format for the RAPs?; Should the Commission be able to reject a RAP and on what grounds?; Should the RAPs be legally binding?; How often should RAPs be submitted and updated by Member States? Is an interim target appropriate?; Taking into account the experience gained from the Emissions Trading Scheme, it would be appropriate for the Commission to propose a format for the Renewables Action Plans for use by all Member States, to allow for comparability and transparency. In January 2007 the Commission, in its Renewable Energy Road Map and accompanying impact assessment, when looking at the sector breakdown stated Electricity production from renewables could increase from the current 15% to approximately 34% of overall page 10

11 electricity consumption in Wind could contribute 12% of EU electricity by For such potential to be realized the RAPs themselves should be sector specific (i.e. contain targets for each sector) and contain a detailed analysis on how the target will be achieved for each sector (listing of measures and performance indicators). It is important that the RAPs are legally binding and the Commission is able to reject or require an amendment to a RAP if it judges it not sufficiently ambitious, or when the measures/funds devoted to reach the target are judged not sufficient. RAP progress reports should be submitted every two years, to allow the Commission to make a timely analysis of possible delays or barriers. A mechanism should be put in place to allow the Commission to require Member States to take further action in order to meet its national target. To assist this process an interim binding target for 2014 or 2015 would be appropriate. In addition, if cross-border trade is allowed (see question 2), then annual targets would also be necessary. Moreover, the RAPs should also contain a report on the financial resources that will be made available by the Member State. Given the importance of developing offshore wind power in order to meet the 20% target, the RAPs should distinguish between onshore and offshore wind power, to ensure that Member States fully exploit their onshore/ offshore potential. Also repowering should be part of the plans, in view of the possibilities it offers to today s leading markets to continue their growth at a lower cost. 6) Questions concerning administrative barriers: Should the proposal require/encourage further measures? Which ones? Administrative barriers vary from country to country and are also related to market technology (on/offshore) maturity. Today, they are considered as one of the main stumbling blocks for the development of wind. As stated in the recent Communication of the European Commission on the follow-up action Report on progress in renewable electricity 12 : [( ) one third of EU countries do not give enough support to wind energy. The main cause of this slow development is not deliberate policy but delays in authorisations, unfair grid conditions and slow reinforcement and extension of he electric power grid. These continue to pose a threat to the future growth of wind energy]. It should therefore be a requirement of the new Directive that administrative processes are optimized onshore and offshore, by promoting the one-stop-shop approach, improving transparency and dialogue with developers, ensuring that spatial planning is used to help deploy technologies and not to raise new barriers, or delay projects, for example as a result of planning departments lacking the necessary resources. Furthermore, Member States should be encouraged to standardise/co-operate on administrative procedures, 11 Renewable Energy Road Map SEC(2006)1719 explaining the Green-x balanced scenario as outlined in the accompanying Impact Assessment (SEG(2006) Page 10 of the communication. page 11

12 for example where a cross-border project would otherwise require two environmental certifications/assessments, particularly offshore. Nature conservation legislation should carefully balance the need for environmental protection and the need for renewable energy deployment, particularly given the role renewable energy deployment plays in combating climate change. Environmental impact assessments of wind power projects should also compare impacts of wind power with the environmental impact of producing the electricity by other means. 7) Questions concerning Grid System Issues: Should the proposal require/encourage further measures? Which ones? With increasing penetration of wind power the grid system issues become more critical. The European grid infrastructure needs upgrading at national, cross-border and trans- European level, not only to accommodate increasing amounts of wind power cost efficiently, but also other technologies. In effect a trans-european grid that is smart and up to the standard of modern technology should be developed. In addition to the measures of the 2001 Directive (Article 7) the following measures should be proposed: Grid infrastructure availability. A large geographical spread of wind power on a system should be encouraged, through planning and payment mechanisms and the establishment of adequate interconnection. The fact that grid reinforcements benefit all system users also has to be taken into account. Therefore, an integrated approach to future grid infrastructure decisions is needed, which should allow for the particularities of wind power technology, as well as those of other technologies. Member States should be required to put in place a legal framework or require transmission system operators to provide grid infrastructure to collect onshore and offshore wind power under a national regulatory regime providing for cost recovery through the tarification system of the consumers. Grid connection charges should be fair and transparent and competition should be encouraged. Operation of the system dispatch by proper market mechanisms. In future developments of European power systems, increased flexibility as a major design principle should be encouraged by proper market incentives (flexible generation, demand side management, interconnections, storage etc.), in order to manage the increased variability induced by renewables. Long gate-closure times should be reduced to allow for smooth market integration of electricity from variable output technologies. Balance market rules (and governing legislation) should be adjusted to improve accuracy of forecasts and enable temporal and spatial aggregation of wind power output forecasts. Balance market consolidation by further developing regional electricity market initiatives should be encouraged by proper legislation at European level, also in order to ensure optimal utilisation of the interconnectors. Curtailment of electricity production from wind power plants should be managed according to least-cost principles from a complete-system point of view. Harmonisation of grid code requirements. Grid codes including technical connection requirements for wind power plants should reflect the true technical needs for system operation and should be developed cooperatively between grid operator, the wind energy sector government bodies and regulators. Defining technical standards needs to be undertaken with high degree of technical rationale. page 12

13 Priority Grid Access. Given the absence of full ownership unbundling, article 7 of the RES- E directive 13, should be strengthened to ensure priority access to the grid in all Member States. 8) Questions concerning the development of Offshore wind: Should the proposal contain a legal commitment for the Commission to publish an Offshore Action Plan leading to the fast adoption of a EU framework for offshore wind, and if so, when? There is little argument that the potential for developing wind energy in the seas round Europe is enormous. Indeed, without harnessing this potential, the target of 12% electricity from wind energy by 2020, as indicated by the Commission 14, will not be met. Therefore, an EU legal framework for the development of offshore wind power 15, is absolutely necessary. If necessary, legislation could be preceded by a Commission Offshore Action Plan. This framework should encourage the countries with coastlines to use this resource and be based on four pillars: legislation and policy measures; grid reinforcement and expansion measures and Member State interconnections; environment measures, including planning and administrative measures; and R&D measures, Brussels, 13 th of September, 2007 Annex Why support schemes are necessary Failure to apply the polluter pays principle Electricity prices do not reflect the full cost to society of electricity generation. That constitutes a market failure that the Internal Electricity Market will have to address. However, it is not politically feasible to remove energy subsidies to conventional sources overnight or agree on measures to fully internalize external costs, especially considering the challenges of introducing harmonized EU-wide taxes. Support mechanisms for renewables are in some respects compensation mechanisms for correcting these electricity market failures. 13 Directive 2001/77/EC on the promotion of electricity from renewable energy sources 14 SEC(2006) As suggested by the Commission - COM(2004) 366 ; p. 38 page 13

14 A Commission-funded project - ExternE 16 has tried to quantify the true costs, including environmental costs of electricity generation. It estimates that the cost of producing electricity from coal or oil would double and the cost of electricity production from gas would increase by 30 %, if external costs, in the form of damage to the environment and health, were taken into account. The study further estimates that these costs amount to 1-2 % of EU GDP or between 85 billion and 170 billion, and this excludes the costs of climate change. If those environmental costs were levied on electricity generation according to their impact, many renewables, including wind power, would possibly not need any support. Malfunctioning markets There are numerous distortions of the electricity market for conventional electricity, and competition is far from being effective. This is recognized by the European Commission itself 17, also by the European Regulatory bodies. The gradual development of the Internal Electricity Market (IEM) should reflect the European Community s intention to reach a 20% share of renewable energy by The distortions in the conventional power market include, for example: institutional and legal barriers; large subsidies and state aid to conventional players; exclusion of external costs from prices; existence of regional and national dominant players; potential for abuse of dominant positions; barriers to third party access; limited interconnection between regional and national markets; discriminatory tariffs, no effective unbundling of production and transmission. One big challenge is to make the necessary redesigns of the grid infrastructure, system management, grid regulation and grid codes that reflect the characteristics of renewable energy technologies and create incentives to build infrastructure. The malfunctioning and bias of the electricity markets further support the existence of corrective measures, such as the support mechanisms, which balance the disadvantages faced by the renewable electricity producers EC, 1998: Externalities of Energy. ExternE project. National Implementation. Volume 10. EC, DG XVII, Joule Programme. 17 Internal Energy market Communication COM (2006) 841 final; Final Report of the Competition Sectoral Inquiry SEC (2006) Page 7 of the Communication An Energy Policy for Europe, January 2007: [( ) There are signs that this lack of progress is leading Member States to impose generalised caps on electricity and gas prices. Depending on the level at which such price caps are set and whether they are generalised in nature, they can prevent the Internal Energy Market from functioning and suppress price signals that new capacity is needed, leading to underinvestment and future supply crunches. They can, under such circumstances make it harder for new entrants, including those offering clean energy, to enter the market]. 19 Page 7 of the Communication An Energy Policy for Europe, January 2007: [( ) There are signs that this lack of progress is leading Member States to impose generalised caps on electricity and gas prices. Depending on the level at which such price caps are set and whether they are generalised in nature, they can prevent the Internal Energy Market from functioning and suppress price signals that new capacity is needed, leading to underinvestment and future supply crunches. They can, under such circumstances make it harder for new entrants, including those offering clean energy, to enter the market]. page 14