We need better incentives for sustainable electricity

Switzerland has the wrong instruments for promoting renewable energies. A guest article by Thomas Sieber (Chairman of the Board of Directors Axpo) and Gianni Operto (President AEE) published in the Tages Anzeiger of 20 July 2020.

The future is renewable: That's a conclusion, not an assertion. The necessary technologies for energy production are widely available and the solutions within reach. However, investments in Swiss production capacities remain elusive. As of the end of 2019, Swiss energy supply companies and institutional investors increased the expansion of renewable capacities abroad to 11.5 terawatt-hours, which is nearly a fifth of total Swiss annual production, whilst investments at home remain low.

This is because economic and regulatory framework conditions abroad are more favourable. In contrast, Switzerland lacks investment incentives, in particular for large-scale renewable plants. The result: Switzerland's energy turnaround remains a pipe dream.

In terms of technical supply our country faces great challenges. Nuclear energy will disappear in the medium term, hydropower suffers under regulatory burdens and growing electrification in the transport and building sector will increase power consumption. The Federal Council wants to strengthen security of supply in Switzerland and simultaneously achieve climate goals.

Hence, the rapid expansion of domestic renewable energy capacities is urgent. The corona-crisis has showed us: Relying on imports in emergencies is reckless. The Swiss energy industry is ready to help and, from an experience and technical expertise perspective, could start right away.

But: Under Switzerland’s prevailing framework conditions, investments in new plants are simply not worthwhile. A conflict of objectives exists between the need for supply security and economic reality. In order to reach the expansion called for under the Energy Strategy 2050, Switzerland needs a new, effective financing model.

A broad Swiss energy industry alliance proposes a model using a "floating market premium". In this model, production capacities are competitively tendered. The interested party with the lowest offer is ensured minimal remuneration for the produced power over a certain time period ­– but only when the market price does not cover production costs. This model is already being used successfully in many countries around the world and has triggered a strong expansion dynamic, especially in our larger neighbouring countries.

The Federal Council envisions a different path. Under the revision of the Energy Act, the Council proposes investment contributions. The contribution amounts are determined in advance. The problem: It is nearly impossible to determine the economically most efficient contribution level. Consumer financial resources would be inefficiently used. Either the contribution amount is too high, which results in excessive expansion, or the amount is too low, which could lead to plant shut downs owing to low returns. In contrast, the floating market premium promotes precisely and only as much as is needed. The operator has a strong incentive to adapt the plant to the market and to produce as much as possible for as long as possible.

Supply security is unquestionably an important public asset, but this has its price. However, energy providers do not have a monetary incentive to offer supply security because they are not compensated for the service in today's energy market. The floating market premium correlates precisely with these costs. As a result, the premium is not a subsidy, but rather a fair price tag for a key service.

Gianni Operto is President of AEE Suisse, the industry umbrella organisation for renewable energies and energy efficiency. Thomas Sieber is Chairman of the Board of Axpo.