Insights and Opportunities
Overview: Domestic gross electricity consumption has grown by an average of 1.7% over the last 10 years, reaching 95,182 GWheq in 2006. Sources of electricity are nuclear power plants (49%), fossil fuel power plants (35.6%), biomass fuels (2.7%), pumped storage (1.3%), hydroelectric installations (0.4%) and renewable energy sources (0.4%). Current political will has determined that no further investments will be made to replace ageing nuclear power plants and there is pressure to gradually abandon Belgium’s nuclear facilities. As a result, the share of electricity generated by nuclear power plants will need to be derived from other energy sources, and massive investments, research and development will be expected in those areas.
Renewable energy sources (including biomass) amounted to a mere 2630 GWheq of Belgium’s electricity production in 2006. With oil prices having increased tenfold in the past decade, the renewable energy sector has received sustained political interest at the European Union (EU) and national levels due to the common interests of energy security policies and the diversification of energy sources. Policy instruments to develop renewable energies have been implemented in the last couple of years, generally in the form of financial incentives. Since July 1st 2007, the liberalization of the European energy markets and imposed separation of distribution and production activities have also acted as a catalyst to reform the European energy sector through increased competition. The result is a strong growth in Belgium’s renewable energy market. While European and Belgian federal policies have launched large-scale schemes, such as green-certificate trade, that target large utility companies and electricity distribution companies, the resulting financial incentives have led businesses to invest in renewable energy generation projects. Individual citizens are also encouraged, via important subsidies, to install alternative energy generators in their homes. The result is a broad demand base for renewable energy products and services on an industrial as well as a private residential scale.
For the southern region of Wallonia alone, investments in alternative energy sources are forecast to reach about $1.180 billion for the period of 2007 to 2012, but it is becoming increasingly apparent that this figure will be at least twice as high. Therefore, Belgium delivers opportunities for U.S. firms offering energy-related products or services for industrial plants and home-based appliances alike.
An important EU policy goal, described in the Renewables Directive 2001/77/EC, is to produce 21% of all EU electricity from renewable energy sources by the year 2010. Under a “burden sharing agreement”, this target differs among the various Member States according to their perceived individual potential in renewable energy production, i.e., hydraulic power, solar and wind energy.
Given the slow pace of sustainable and renewable energy development in certain Member States within the last few years, the European Commission has recommended an improvement in the investment climate for green energy projects by reducing the risks (notably through continuous commitment to the support schemes by national policymakers) and increasing liquidity, which will support the development of long-term contracts. With the 2010 deadline approaching, the consolidation of the green certificate trading scheme and the explicit long-term commitment to green energy, Belgium is promoting renewable energy projects at both the regional and federal level.
U.S. companies should be aware of Belgium’s federal structure, with different levels of competencies. Federal competencies have been hollowed out in recent years through regionalization. The notable federal competencies are electricity grids above 70 kV, nuclear plants, For various reasons, the green electricity production target of Belgium has been limited to 6% of overall production by 2010. Despite a rather low percentage, Belgium has been slow to own up to its obligation. In 2006, electricity generation from renewable sources was just 3% (including biomass). The current trend shows a rapidly increasing interest in green energy developments and regulatory incentives offering support in the form of subsidies, as the 2010 deadline quickly approaches.
Of the four support mechanisms available (feed-in tariffs, green certificates, tendering and tax incentives), Belgium has opted for green certificates. Producers of electricity from renewable sources can sell their excess production through the electricity grid, with their production representing a certain amount of green energy quantified in certificates. These certificates can then be traded between producers of green electricity and distributors, or electricity companies, which have to meet a minimum quota of green electricity in their overall production.
Support comes from the trade in green certificates, which is managed by the regional energy regulators (VREG in Flanders, CWAPE in Wallonia, IBGE in Brussels, CREG at the federal level). The minimum quota of green electricity in each producer’s overall production determines the demand for green certificates; the regional energy regulators impose this quota. By gradually increasing the quota, the demand for green certificates will rise. The desired result is to more investment in renewable energy generation infrastructure.
In Brussels and Wallonia, a green certificate is valued in terms of its savings in CO2 output. In Flanders this applies to Combined Heat Power (CHP), but for renewable energy generation the rationale is the actually produced quantity of green electricity (one certificate represents 1 MW of green electricity). These separate weighting methods, and higher subsidies lead to different monetary values for certificates; the average trading value in Wallonia and Brussels has been $128, versus $153 in Flanders. Flanders does not recognize the Walloon certificates and inter-regional trade is not possible. (Note: draft legislation is underway at the European Commission for a pan-European green certificate trading market.)
In Wallonia, the imposed minimum quota for green electricity started at 3% of the overall electricity production for 2003, with a 1% increment each year until 2012 (for a total quota of 12%). The penalty for electricity companies is $139 per missing certificate, weighted each quarter. The downside of this indirect regulatory support mechanism was that the long-term value of green certificates remained uncertain, even more so since policy makers had not made any clear commitments until recently. This has proven to be a major risk factor in green energy investments. At an average value of $128 per certificate, the penalty for each missing certificate is only $11 (i.e., penalty cost minus certificate purchase cost), which was unlikely to encourage long-term investment. Furthermore, utility companies simply passed on the penalty costs in end users’ electricity bills. Investment incentive has recently been created, and risk decreased, through increased competition among electricity providers and longer-term contracts for support schemes.
In Flanders, support mechanisms depend on the nature of the renewable energy: (passive) CHP on the one hand, and (active) renewable electricity generation on the other. Both have a green certificate scheme, but the support mechanism for renewable electricity generation is enhanced by the intervention of the electricity grid administrator, who has an obligation to purchase green certificates from installations connected to his network, at predetermined prices. As the prices are guaranteed for a very long period (10 years after commissioning, even 20 years, in the case of photovoltaic generation), the long-term value of green certificates is set and investment risk is entirely mitigated. Furthermore, certain mandatory buy-in prices are very high (see below “economic market drivers”), so break-even periods are short and return on capital can be very lucrative. Wallonia and Brussels are starting to emulate a similar approach to Flanders (currently still limited to photovoltaic generators) with long-term buy-back prices for green certificates guaranteed by the regional energy regulators.
Private companies are assessing their interest in renewable energy-related developments. Direct investment in infrastructure can be profitable by selling electricity to the grid, combined with green certificate trade, or by reaping the benefit of private electricity production for individual consumption. Industrial sites invest in combined heat power for their existing processing plants to lower energy bills and receive tax rebates. For example, a 300MW offshore wind park that produces 1000 GWh of green electricity, the equivalent of four times Belgium’s wind electricity production in 2005, will cost $1.180 billion. This project is the result of an investment from a consortium of private companies not associated with the electricity trade. In the port of Antwerp, a major chemicals company has invested in an 800 MW combined heat power plant, ensuring energy self sufficiency for its facilities.
In Flanders, the guaranteed price of green certificates from photovoltaic generators greatly exceeds its trading value (a $625 buy-in price versus a $153 trade value). Furthermore, installation is relatively simple and capital requirements are limited, so many enterprises, such as warehouses and logistic centers with large roof areas, are installing solar panels. One company reported reaching a break-even point after nine years, while the manufacturer guaranteed the system for 20 years. This leaves at least 11 years of net profit generation. Partial independence from energy price fluctuations is also a major advantage for energy-intensive businesses. With long-term buy-back guarantees now also applicable in Wallonia, demand for photovoltaic generators will come from all across Belgium. Banks have been stepping back from high-risk investments recently, but are very favorable to providing capital for privately developed renewable energy projects. One company had to cover only 15% of investment costs with its own capital, the remaining 85% came from bank loans. Fortis, a major European bank, has allocated 10% of its investment portfolio to renewable energy, up from only 1% in 2000. Cash is therefore readily available for businesses willing to invest in renewable energies.
The participation of private users in the electricity market has been an important development in the shifting dynamics of the European energy sector: not only are individual citizens now able to choose their own electricity provider, they can also participate in the production of electricity. For example, a farmer with wind turbines can sell his green electricity to the local grid at regular market rates, or offset his electricity bills by consuming his own production. Since the electricity comes from renewable sources, the producer is eligible to receive an amount of green certificates proportional to the amount of electricity generated. The farmer can sell the electricity directly to electric companies (in Wallonia and Brussels) or to the network administrator at a firm price (in Flanders).
Residential heating is one of two sectors where energy consumption and greenhouse gas emissions have grown unchecked, so this makes it a preferred target of policymakers keen to promote sustainable energies. This is reinforced through the support schemes that are available to private users; all regions have a support system for private individuals’ residential use, generally in the form of a contribution to procurement and installation costs. In Wallonia, capital expenses (purchase plus installation costs) for private investments in photovoltaic systems are subsidized by 20%, up to a maximum of € 3500 per installation. In Brussels, subsidies of € 3 per installed watt are given, up to a maximum of 50% of the system’s costs. The federal administration also offers incentives via tax rebates proportional to the installed power capacity. Private consumers therefore actively drive market demand, increasing opportunities for providers of domestic renewable energy-generating units and related products and services.
The Federal Commission for the Regulation of Electricity and Gas (CREG) estimates that energy demand in Belgium will rise 1.5% each year until 2019. This increase in demand means that an additional 20 TWh of energy will have to be produced over 2005 levels, ensuring a steady demand from the industrial energy generation sector; part of this increase in energy will have to come from sustainable energy sources. This requirement, in conjunction with the additional demand for renewable energy installations outlined above, the market for green products and services is set to rise for many years to come.
It appears that total installed wind energy production capacity, especially offshore, is nowhere near attaining its 2010 target. This applies to photovoltaic generators. Hydraulic energy is almost fully developed and due to the high capital investments required, little expansion is expected in this field. One exception could be wave and tidal generators, which are still under development, primarily in the United Kingdom. Biomass has already attained its 2010 target and continued development is expected. Geothermal energy is currently not well developed, presumably because of poor subsidy support for its high capital expenses.
The Walloon industrial society for renewable energies, Fierwall, made a prospective survey in 2006 to assess the Region’s demand and growth in renewable energy products. The report estimates the following minimum investments in the sector for the period of 2007-2012: Green electricity: $675 Million; Solar thermal: $121 Million; and Combined Heat Power: $31 Million.
In 2005, the Flemish Institute for Technological Research, VITO, produced a market assessment for alternative energy demand in Flanders until the year 2020. The best prospects for development were Combined Heat Power, wind energy and especially photovoltaic cells (12 GWh were installed in 2008, up from 0.5 GWh in 2005). The EU international trade database confirms an increase in demand for U.S. renewable energy products; as Belgian import volumes for U.S. photosensitive / photovoltaic cells (Taric code # 85414090) jumped from $6million in 2001 to $46 million in 2007. This puts the US in second place, closely behind Germany ($50million), and well ahead of the Netherlands ($21 million), Belgium’s main EU-based trading partners for solar cells.