Creating suitable regulatory conditions

The revision of the Energy Act is complex, and discussions on this topic often lead to misunderstandings. Some argue that, by promoting renewable energies, the electricity sector is supporting a system that is harmful and ineffective in a regulatory sense. The idea of floating market premiums has also come under fire, with suggestions that they are nothing more than a trick to shift the market risk to the government. Both arguments are wrong. This contribution aims to help create a solid basis for constructive debate on this issue going forward. This section, part 1, deals with the topic of promoting renewable energies, while the funding efficiency of floating market premiums is addressed in the second part.

To answer the question as to whether government measures for promoting renewable energies are effective, we first need to look at the existing market and regulatory conditions, which includes considering economic realities and political objectives alike. The economic reality is that investments in renewable energies in Switzerland are not profitable at the current low electricity prices, which are caused primarily by government subsidisation of renewable energies in the EU, low coal and gas prices, and extremely low European CO2 certificate prices. Switzerland has very little influence on these factors, so there is no choice but to accept them as fixed market and regulatory conditions – at least for now.

Swiss electricity producers are adapting to this market reality, directing most of their investments abroad and postponing the renewal of existing facilities in Switzerland. Swiss policies do not specifically aim to counter this trend. However, they happen to point in another direction. Their aim is to achieve sufficient security of supply and independence for Switzerland in the electricity sector through the domestic expansion of renewable energies. The new draft of the Energy Act even wants to make the expansion targets of the Energy Strategy 2050 legally binding. However, since security of supply is a public good and its value is not reflected in the market price, the state must provide adequate incentives. In other words, suitable measures need to be put in place to make investment in renewables in Switzerland more appealing.

The instruments in the revised Energy Act must be assessed within the context of these market and regulatory conditions. They need to close the gap between the economic reality and policy objectives, while also being made as efficient as possible. 

How the expansion targets are to be achieved

One criticism put forward is that, despite the subsidisation efforts so far, insufficient progress is being made with the expansion of renewable energies. In light of the current legal situation, the lack of expansion is hardly surprising: although the Energy Act sets ambitious expansion targets, the available subsidies are capped by law. Once these funds have dried up, expansion will come to a standstill, even if we are still a long way from achieving these goals. 

The only way to guarantee that we can meet the expansion targets is through greater flexibility in terms of funding. Ultimately, the difference between the high investment costs and the low returns from the electricity market is what determines the individual subsidies required, and, by extension, the funds that are needed for expansion. If funding however remains capped, the expansion targets will not be the main driver of growth in future. Energy policy that aims to control both sides – i.e. by capping subsidy financing and setting mandatory expansion targets – does not work.

The problem of limited funds could be partially mitigated by using funds more efficiently. However, the investment contributions set by the government under the revised Energy Act will lead either to under-subsidisation (in which case no one will invest) or to over-subsidisation (in which case the government will be paying out too much in subsidies for the resulting expansion). This means that funding efficiency is low: it is imperative that it is increased by adjusting the funding instruments (some suggestions are provided in the second part of my contribution). 

The issue of market design

Alternatives for promoting renewable energies might be conceivable in order to create investment incentives for achieving the politically desired expansion. One solution could be to change the design of the market. In this regard, NZZ recently called for ‘a comprehensive control system’ that would ‘impose a levy on electricity obtained from foreign fossil energy sources’ and ‘favour domestic renewable electricity’ (NZZ, 16 July 2020, ‘Caught in the subsidy spiral’).

In fact, Axpo already proposed a ‘Supply and Climate Market Model (SCMM) ’ several years ago. Under this model, a levy would be imposed on foreign electricity, based on European CO2 emissions, which, in turn, would help to make Swiss renewable energy production more competitive. However, as long as this kind of control system is unable to win over a political majority, this must also be accepted as a fixed regulatory condition. As a result, the sensible approach would be to try optimising the design of the market as it currently stands. 

Conclusion

Axpo would like to see an electricity market with minimal government intervention. However, this would require the correct price signals to be given via a control system. Until these regulatory conditions are in place, the market-oriented, efficient promotion of renewable energies should be welcomed as an alternative for bringing the prevailing market reality into line with the political will. 

Fabian Feger, Regulatory Manager at Axpo