The development of wind power in selected European countries

Figure 7.1 displays the development of wind power capacity in five Western European countries. The choice of countries is motivated, first of all, by the fact that the development of wind power differs among these countries. Germany, Denmark and, more recently, Spain have all experienced considerable increases in the installed capacity of wind turbines, while the corresponding developments in Sweden and the UK have been more modest. For instance, in 1991, Spain and the UK had more or less the same amount of wind energy

Installed Wind Power Country

Figure 7.1 Installed wind power capacity in selected European countries (MW)

Denmark Source: IEA (no date)

Figure 7.1 Installed wind power capacity in selected European countries (MW)

capacity installed (around 4MW to 5MW); but in 1999, Spain's wind capacity amounted to 1584MW while it was only 344MW in the UK. In Sweden, wind power production increased by over 700 per cent over the time period of 1994 to 2002, albeit from a very low level. Thus, in spite of this relative increase, in 2004 the share of domestically generated wind power out of total Swedish electric power supply was only 0.5 per cent. This corresponds to a power generation of about 0.6TWh, far below the Swedish government's policy goal of 10TWh by the year 2015 (Swedish Government, 2002). In Sweden's neighbouring country Denmark, however, wind power's share of total power generation is currently well above 10 per cent.

Moreover, the support systems for wind power differ across the five countries. The UK is the only country that has relied on a competitive bidding system (the so-called Non-Fossil Fuel Obligation). In this system, calls for tenders were made at alternating intervals. Wind power is given a quota. The providers of the lowest asking prices are given contracts, and the contract price received by all wind generators equals the bidding price of the marginal producer. In the fixed feed-in price systems prevailing in Denmark, Germany and Spain (although with some variations), a long-term minimum price is guaranteed ex ante for electricity obtained from wind power. In Sweden, different feed-in tariffs (most notably the so-called 'environmental bonus') have also been used to encourage wind power generation. However, the tariff rates were 'renegotiated' annually, giving rise to substantial uncertainties about the longrun economics of Swedish wind power.2

Most analysts conclude that the fixed feed-in tariff schemes have had the greatest success in promoting the use of wind electricity since they reduce uncertainty and make it easier for wind energy producers to obtain bank financing (e.g. Meyer, 2003). Still, it is unclear whether differences in wind power diffusion rates between, say, the UK and Denmark are due to the support systems or to other factors such as variations in planning procedures and/or local opposition. Moreover, the impact on innovation activities and, thus, on cost reductions may also differ depending upon the support scheme chosen (see, for example, Menanteau et al, 2003).

Empirical results from the simultaneous innovation-diffusion model

Given this inconclusive situation, we provide quantitative tests of the impact of wind support schemes on technology diffusion and on innovation activities. Figure 7.2 summarizes the estimation results from the quantitative innovation-diffusion model (see Soderholm and Klaassen, forthcoming, as well as Ek and Soderholm, 2005, for details). The results confirm the notion that innovation and cost reductions - spurred partly by public R&D support - are necessary conditions for the successful diffusion of wind power; but the opposite is also true. A wind turbine is not only built because it has become cheap and efficient; it is also true that it becomes cheap because it is built and operated (i.e. the learning effect).

Furthermore, the role of price subsidies is important for the diffusion of wind power; but there is a need to carefully design the time development of the support. Increases in the feed-in price for wind power promote diffusion of wind capacity, which, in turn, encourages learning and generates cost reductions. However, there also exists a direct negative effect of feed-in price increases on learning. The reasons for this are that high feed-in prices:

Source: chapter authors

Figure 7.2 Illustration of wind power innovation-diffusion model results

Source: chapter authors

Figure 7.2 Illustration of wind power innovation-diffusion model results

• induce wind power producers to select high-cost sites (e.g. locations with expensive grid connections and/or poor wind conditions); and

• discourage the competitive pressure from other energy sources - as a result, innovation activities become less attractive.

This notion has an important policy implication since it suggests that there is an opportunity cost in the promotion of new technologies. Thus, clearly announced gradual decreases in feed-in tariff levels over the lifetime of the wind turbine may be an important element of an efficient renewable energy technology policy. Recent policy developments also move in this direction. The new German Renewable Energy Sources Act of 2000 stipulates decreasing feed-in tariffs over the years in order to take into account technical progress over the lifetime of the turbines. The Danish Council for Sustainable Energy has proposed a similar arrangement for renewable energy sources in Denmark.

Moreover, we find limited support for the notion that the impact on wind turbine investments of a marginal increase in the price subsidy level will differ depending upon the type of support system used.3 Furthermore, we found no support for the hypothesis that the different price support systems induce varying incentives for cost reduction. These results put in doubt the common assertion that the differing wind power developments are primarily the result of the design of implemented policy instruments. In addition, wind conditions are no worse in Sweden compared to, say, Denmark or Germany. The price subsidy levels do not differ significantly across the countries (e.g. Cerveny and Resch, 1998), and modern wind turbines can be bought on the global market (most notably from Denmark). However, what does appear to differ between the countries is the consistency with which the national wind power policies have been implemented. The economic and policy-related uncertainties that face a wind turbine investor vary heavily across countries in terms of both type and size. The same is true for the public's view regarding wind power development and the legal possibilities to hinder wind turbine installations at the local level (e.g. Reiche and Bechberger, 2004). In sum, a comprehensive analysis of the prospects for future wind power development must not only address the relative costs of wind power generation and the impact of the different policy instruments on these costs. It must also deal with the uncertainties that are created by the regulatory and legal systems, as well as the impact of public perception on wind power development.

Continue reading here: The impact of national energy policy on the economics of wind power

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