"The floating market premium is the more effective solution"

If the Federal Council gets its way, subsidised renewable energy will continue to remain a “special case” in Switzerland. This, despite the fact that a fairly well functioning, highly efficient system has been established worldwide. Christoph Sutter, Head of New Energies at Axpo, talks about his experience with the "floating market premium" in the international environment.

 

Christoph, according to the intentions of the Swiss Federal Council – investment contributions to promote renewable energies will remain in place in the future. However, Axpo and a broad section of the industry are calling for a "floating market premium". Where's the difference?

Christoph Sutter: The major difference is: Investment contributions are paid no matter what. That means, whoever offers the best price gets the contract and, hence the investment contribution. Subsidies flow regardless of whether the plant is subsequently profitable or not. The floating market premium is the more effective solution. The government guarantees the project operator with the best offer a price per produced megawatt-hour over a time period of 15 to 20 years. Subsidies only flow when the market price is under the offered price. When this occurs, the operator gets the difference. That makes the floating market premium much more efficient than the proposed investment contribution model. We can see that the premium model functions in our activities in Germany and France. This auctioning system has established itself around the globe.

But: Doesn’t that mean that with the floating market premium, the government bears the entire market risk and the investor is off the hook?

Christoph Sutter: No. This model cushions the market risk and distributes it between the government and the investor. Reducing risk is a basic premise for any governmental subsidy programme. Investment only happens when risks are manageable. Swiss citizens want the expansion of renewables to go forward more quickly. That's why a subsidy is part of the discussion in the first place. Unfortunately, the Federal Council is targeting the wrong area with investment contributions. The great uncertainty in the development of renewables isn’t the initial investment, but rather the power price in the future. Once in operation, these plants are exposed to the fluctuating market price for years. That's the biggest unknown. A floating market premium would reduce this risk.

In the future, subsidies are going to be auctioned anyway. Does it make a difference whether it's investment contributions or a market premium? Ultimately the best offer wins anyway.

Christoph Sutter: In the end, we really need to consider which system generates more renewable energy per subsidy Franc. The floating market premium functions so well that it has established itself around the world. It offers precisely the support that is needed to move forward and doesn't cost a Franc or Euro more than necessary. In contrast, an investment contribution becomes due even if the plant is highly profitable in the future. So it subsidises plants that don't need the support. Instead, we advocate a subsidy model that is as market-oriented as possible. In any event, we want to avoid unnecessary over-subsidisation.

A controversial aspect of the floating market premium is the duration of the support. While investment contributions are paid out once, the government is obligated to pay a market premium over years.

Christoph Sutter: The question is: Should the government pay a lot once, or small subsidies over years. It’s a fallacy to think the government will fare better with investment contributions. As said: The big uncertainty in investing in renewables is and will continue to be the future power price. And any profit-oriented company will calculate this into its offer under the investment contribution model. The risk is compensated even if the market prices are good later on.

Christoph Sutter
"In the end, we really need to consider which system generates more renewable energy per subsidy Franc."
Christoph Sutter

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