RED II and electricity support: market premiums, auctions and protection against retroactive changes

RED II, that is Directive (EU) 2018/2001, does not set rates for electricity from biogas or biomass, but lays down the rules under which Member States may set such rates: support is to be market-based, predictable for the investor and subject to sustainability criteria. The directive entered into force on 24 December 2018, and the deadline for its transposition expires on 30 June 2021.

Market-based support

Article 4 of the directive sets out the general principles of support schemes. Support is to encourage the integration of renewable energy into the market, and generators should respond to price signals and maximise market revenues. That is why new schemes are dominated by premiums on the market price (feed-in premium) and auctions, and less often by fixed tariffs. A generator of energy from biogas sells electricity on the market and receives from the state a top-up to a set level, not the whole price.

For a biogas plant this matters for two reasons. First, the premium rewards flexible operation of the engine, which can produce energy when the market pays the most and store biogas during periods of low prices. Second, in auctions biogas competes with technologies with lower unit costs, so countries often create separate baskets for biogas and biomass (as Poland does; see the 2019 auction results).

Protection against retroactive changes

Article 6 of the directive says that Member States may not change the level and conditions of support for projects in a way that negatively affects the rights granted or undermines the viability of the supported undertakings. This is a safeguard against sudden cuts in rates such as the renewable energy markets in some countries experienced in the past decade. Changes to the scheme are permissible, but they may not act retroactively on installations that have already received support. For an investor in a biogas plant Article 6 is an argument that a support agreement concluded in an auction or in an administrative decision is protected by EU law.

Opening schemes to foreign generators

Article 5 provides that Member States may open part of their renewable electricity support schemes to projects located in other countries. For support opened in this way the directive sets indicative, rising shares of newly supported capacity (or budget): in 2023–2026 at least 5% a year, and in 2027–2030 at least 10% (or less, if that is the level of the Member State's interconnection). For a biogas plant this means a theoretical possibility of competing in auctions outside the country, but in practice it requires agreements between countries and concerns primarily technologies that are mobile on the market.

Sustainability criteria (Article 29)

Electricity from biomass fuels may be counted towards the renewable energy target and covered by support only if it meets the sustainability and greenhouse gas emission saving criteria. The thresholds for applying the criteria in RED II are at least 2 MW of total rated thermal input for gaseous fuels (biogas) and at least 20 MW for solid fuels. For a typical Polish agricultural biogas plant with an electrical capacity of 1 MW the criteria of Article 29 apply only if the total rated thermal input of the installation reaches at least 2 MW. The details are discussed in the post on the criteria of Article 29.

What next

RED II set the framework that Member States were implementing until mid-2021. In practice, however, rates are determined by national law and by Commission state aid decisions, which must fit within the framework of RED II.

How it looks in practice

The directive leaves the choice of instruments to the Member States, so different solutions coexist in the EU: premium auctions, certificates, sliding-scale settlements and fixed tariffs for small installations. The common principle is that the larger the installation, the more strongly support should be linked to the market and to competition. An investor planning a biogas plant should therefore check three things: whether the installation is subject to the requirements of competitive selection, how the premium is calculated (from the hourly price or from the average for the period) and whether the criteria of Article 29 will be required and who verifies them. Each of these elements affects both the level of revenue per MWh and the certification costs.

Key takeaways

• The directive does not guarantee a rate, but requires support to be market-based.
• Article 6 protects against retroactive changes, which matters for the bankability of projects.
• The sustainability criteria are a condition for counting energy from biogas towards national targets.