The elephant in the room: financing the Croatian low carbon development strategy

August 28, 2017

 

 

In the last four years Croatia has seen many changes in government, especially in the ministries in charge of energy and economy. There were many diverse ideas that came along in this period, starting from the sadly failed plan to transform the Croatian building stock through ESCO models, followed by a wild excursion into drilling the Adriatic for oil and finally reaching its apex by a passionate discussion on the privatisation of INA and HEP, the two main Croatian energy companies that control the domestic power and oil markets. And as these majestic plans have been going through cycles of big media stunts and then even bigger public failures, a group of diligent Croatian energy researchers and consultants has been working quietly on the Croatian Low Carbon Development Strategy (LCDS). And finally after many years of work and stakeholder consultations, its white book has been published in July 2017. The LCDS is the scientific backbone and vision for updating the Energy Strategy from 2009, and so its main messages and conclusions could prove quite relevant for the future of energy in Croatia.

 

The first glance reveals some very ambitious goals, summarised by a reduction of GHG emissions by 38 - 44% until 2030 and 52 – 77% until 2050, in comparison to the 1990 as base year. Among other measures, decarbonisation of the power system is supposed to contribute significantly to this reduction. On-shore wind energy is expected to increase until 2030 from the current 435 MW to 1520 – 2000 MW. However the biggest boom is anticipated from solar PV, leading to an increase from the currently installed 51 MW to 1140 – 1860 MW in 2030, and based on net metering and self consumption models.

 

Still this brings me to the main question of this post or should I say the elephant in the room. Who is supposed to pay for this new renewable energy capacity? And how?

 

The Croatian renewable energy support system has been underfinanced from its very start in 2007, when the Feed in Tariff scheme was first introduced. Just like in Germany and other EU countries, the system has relied on a consumer levy, which was at first 0.0089 HRK/kWh and has over the years been increased to 0.035 HRK/kWh, where it still stands now. However this increase came only in 2013 and after two years of the supports system deficit. Croatian politicians seem to create big strategies and goals, however the question of “who will pay for this” oftentimes gets ignored and perhaps left for some future government to deal with. Telling consumers they have to pay more for electricity, especially in time of economic depression, which lasted in Croatia from 2008 until 2014 was very unpopular, even more so when citizens do not see any actual benefits from building renewables.

 

The Croatian renewable energy support system is currently undergoing a change from feed in tariffs to market based feed in premiums and auctioning. It’s expected that the new system will start in 2018. As the power purchase agreements from the feed in tariff era are valid for 14 years, the LCDS expects that the costs of supporting renewable energy projects will increase to about 1 billion EUR until 2020. This would necessitate an increase of the levy to 0.13 HRK/kWh, which is a surge of 350% from the current level. The costs of supporting existing projects or the ones that receive a feed in tariff would in addition amount to around 2.3 billion EUR in the period between 2021 and 2030 and would necessitate an even higher increase in the levy or finding new ways of financing the existing projects.

 

The Feed in Tariff based projects are a “ticking time bomb” for the Croatian renewable energy support system, and only by substantially increasing the levy, or finding alternative ways to finance the system, can they be serviced.

 

 

 

Being aware of this, the LCDS proposes using many other funding sources among which a carbon tax is also mentioned, and various other mechanisms that are supposed to leverage public funding. For example it’s expected that the future European Trading System (ETS) revenues, a mechanism for trading carbon emissions, would increase from 270 to 1100 million EUR, and that part of these funds could also be used to finance the renewable energy contracts. However this increase is mainly based on an assumption made in a EU reference scenario that the price of carbon emissions in the ETS increases from the current 5 EUR/tonne CO2 to around 35 EUR/tonne in 2030, and further to 90 EUR/tonne in 2050.

 

These projections are based on the PRIMES model, an energy model that simulates the European energy system and markets, and which has been disputed in the past due to its oversimplifications and false assumptions. A recent study by Agora Energiewende on the use of PRIMES in the Clean Energy for All Europeans-Package (the so called Winter Package) criticizes the model for assuming EU carbon prices that are higher than other analysts in the market predict, and thus exaggerates the role of markets in driving the development of renewables.

 

Such questionable allowance price predictions unfortunately trickle down to Member States and enter national policy making, as was the case with the Croatian LCDS. But the question of financing the Croatian renewable energy expansion still remains open and most likely new financing sources should be considered, other than the market based EU ETS. Germany is currently considering a range of alternative options to finance renewables[i] among which a tax on CO2 emissions, a surcharge on income and corporate tax etc.

 

Another solution would be to simply decrease the costs of capital for renewable energy projects. Solar and wind energy projects have almost no operating costs since their fuel is for free – sunshine and wind do not have to be mined like coal, natural gas or oil. Consequently these investments mainly consist of fixed capital expenditures that are subject to financing costs. According to recent research Croatia has among the highest costs of capital in the EU, and so decreasing these could reduce the need for public support.

 

The Croatian Low Carbon Development Strategy will significantly impact the new Energy Strategy that is now being discussed. Foremost it shows that until 2030 Croatia needs to come up with 2.3 billion EUR to finance the renewable energy expansion under the Feed in Tariff scheme. And it also shows that future expansion plans will have to rely on financing other than the consumer levy, and in my opinion new robust financing policies and not market-based systems like the EU ETS.

 

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Mak Dukan is the founder of Starfish Energy, a consultancy company for energy and climate policies and low carbon development in South East Europe. He is a Croatian from Zagreb who is living in Berlin, where he is active in the renewable energy and energy policy fields. 

 

 

 

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