Renewable energy projects in Sweden: An overview of subsidies, taxation, ownership and finance.

Transcription

1 September 1998 Renewable energy projects in Sweden: An overview of subsidies, taxation, ownership and finance. by Peter Helby Tel , Department of Environmental and Energy System Studies Gerdagatan 13, S Lund, Sweden Download available from: ISBN Also published December 2000 as IMES/EESS Report No. 32 ISSN ; ISRN LUTFD2/TFEM--00/3027--SE + (1-36) This study has also been published as: Peter Helby (1998). Swedish country report. Ole Langniß (ed.): Financing renewable energy systems. Country reports. JOULE contract JOR 3-CT DLR: Stuttgart Pp This study was prepared as a background report for the FIRE-project. For further project information, please refer to: Ole Langniß (ed.), Peter Helby, Suzanne Joosen, Arturo Lorenzoni, Catherine Mitchell, Marcella Schlotterbeck (1999). Financing renewable energy systems (Final report). JOULE contract JOR 3-CT DLR: Stuttgart 1999.

2 1 The policy context National CO 2 policies Nuclear power policies Renewables activities Support for renewables Investment support Grid connection costs Direct investment subsidies General support for procurement programmes Bioenergy Small scale hydro Wind power Solar heating Preferential access to credit Support for cash flow Relief from energy related taxes / Environmental bonus Tax rates for heat production Tax rates for electric power production Resulting price structure Relief from income taxes Tax exempt use of resources Asymmetric taxation of household investments Accelerated depreciation Tax reduction for renovation activities in housing Relief from other taxes REFIT prices Grid tariffs Electricity tariffs Prevailing schemes for ownership and finance Main sources of finance Interest rate structure Household ownership Direct ownership Ownership through participation Ownership through housing associations Taxation Small business ownership Integrated, individual ownership Partnerships Ownership through participation Taxation Non-incorporated ownership forms Total amount of taxable income Categorisation of taxable income Tax rates Real estate and property taxes Incorporated ownership forms Arms-length principle vs. distribution of profit via prices Profit transfer between holding and subsidiary companies Distribution of profits vs. capital gains Distribution of profits to shareholders with personal tax subjectivity Distribution of profits to shareholders with corporate tax subjectivity Real estate and property taxes Large business ownership Taxation Ownership by electric power and district heating utilities Taxation

3 3 3.6 Complex forms of ownership Joint ownership between utilities and others Third party finance Limited recourse finance (project finance) Taxation References... 35

4 4 1 The policy context 1.1 National CO 2 policies Sweden has defined its official CO 2 goal as a stabilisation of emissions in 2000 at the same level as 1990, and a reduction thereafter. Sweden has a relatively low level of CO 2 emissions. Measured per capita per year, it is only 6,4 tons, against an OECD average of 11,1 tons and national values such as 10,8 tons for Germany and 11,6 tons for Denmark. (1995-figures). This is particularly impressive, as Sweden at the same time hosts significant energy intensive industries, and has to cope with cold climate and long transport distances. These nice CO 2 figures are explained first and foremost by the fact, that CO 2 -emissions are very low from the electric power sector, relying mostly on nuclear power and hydro power, and including also a fair amount of industrial CHP based on bioenergy. Compared to other countries, the heating sector also has relatively low CO 2 -emissions, even though the Swedish climate is cold. Energy use is very efficient, with excellent insulation of buildings, wide-spread use of heat pumps and a large share of district heating. Around 44% of apartment buildings are connected to district heating, but only 7% of individual housing. Most of the energy for heating comes from biofuels and electric power. In district heating, fossil fuels account for less than 1/3 of the energy used. The largest Swedish source of CO 2 emissions is the transport sector. Railroads are electrified, but account only for a small part of transport work. Cars and lorries are the dominant means of transport, for goods as well as for people. Air transport is also significant. As in other countries, these activities have strong growth, and no effective policies have been devised to stem this growth. In consequence, there is strong focus on the transport sector in Swedish CO 2 policies. There is a considerable amount of research on the implementation of biofuels in this sector, but the practical importance is not yet of any significance. At present, the main policy instruments for reducing CO 2 emissions are directed at fuel efficiency and total system efficiency in the energy sector, rather at the introduction of renewables. 1.2 Nuclear power policies The exploitation of renewables in Sweden does not have the same direct relation to CO 2 policies as in most other countries. Rather, the most direct connectionn is with nuclear power policies. Nuclear power has been controversial in Sweden for decades. On basis of a consultative referendum, parliament decided in 1980 to aim for a shut-down of all reactors by In 1991, this was replaced by a more open position, basically understood to allow existing reactors to complete their technical life time. In 1997 the position was reversed by the decision to start the phase-out by decommissioning 2 reactors in 1998 and 2001, regardless of their potentially much longer technical life time. This decommissioning is presently contested in court, and the decision may also be reversed by a new parliament. Decommissioning of nuclear power will require new sources of energy. It is this replacement of nuclear power, that is the rationale behind renewable energy programmes in Sweden.

5 5 Two main options have been discussed for replacing nuclear energy. One has been the large scale introduction of natural gas. The other has been a vigorous programme for energy efficiency and exploitation of renewables. At present natural gas is available only in a zone at the south-western coasts of Sweden, through extension of the Danish grid. Norway and Russia have eagerly promoted a large scale introduction of natural gas. This has also been supported by a strong industrial lobby, seeing it as the best guarantee for cheap power in the coming decades. The natural gas option would greatly increase Swedish CO 2 emissions, though still to a level that would be low compared to other European countries. A political majority has not been willing to accept such consequences, and thus the natural gas option has been ruled out for the present. Instead, the political majority has opted for a combination of energy efficiency and exploitation of renewables. The most important focus of these efforts is the heating sector, where electric heating will be replaced by bioenergy in individual heating systems and through expansion and conversion of the district heating system. However, there is still a basic lack of national consensus concerning nuclear power policies. Future governments may well reverse the present decommissioning policy. In that case, there would be little need for any large scale conversion to renewables. The natural gas option may also reappear, being still attractive as a cheaper solution to the energy supply problem. 1.3 Renewables activities It might be expected, that renewables should have a strong position in Sweden. The resources are large, and green views are strong in the public opinion. Several factors, however, have worked against an increased reliance on renewables: (a) There has been an excess of power. The supply of power from hydro and nuclear, combined with good efforts at energy efficiency, has been sufficient to secure a good energy balance. There has been little need for extra power production from renewables, (b) Sweden is used to cheap power. The cost of renewables look prohibitive from the view point of energy intensive industry, and even from the view point of households that may easily use kwh per year for electric heating. (c) Nature conservation traditions have strong popular support in Sweden, and result in stricter regulation of wind power and small scale hydro, than experienced in most other European countries. (d) The climate argument has not been effective, as CO 2 emissions outside the transport sector have been fairly moderate. (e) The fact, that clean Swedish power could be exported to reduce CO 2 emissions in other countries does not impress a public opinion used to an autarchic view of the energy sector. This combination of basic sympathy for renewables with no pressing need for their implementation, resulted in a dominant view in Sweden, where renewables were seen as a long-term option, rather than a short-term task. Therefore, government policies have emphasised research, rather than implementation. Sweden has had some of the worlds best funded research programmes in renewables, while at the same time actual implementation activities have been quite limited. Implementation activities have often been the result of political horse-trading, where the renewables lobby has won concessions against the advice of the responsible authorities and against the wishes of dominant political forces. This has created a turbulent implementation situation, with constantly shifting priorities and lack of continuity in support programmes. Wind power, for instance, has experienced several turns between

6 periods with rather generous subsidies and periods where no subsidies were available. Thus the basic conditions for implementation of renewables have been unstable, and detrimental to the development of a viable renewables industry in Sweden. A new turn has now happened, with the decision in 1997 to start the decommissioning of nuclear power plants. This is associated with a goal to increase electric power production from renewables by 1,5 TWh per year over a 5 year period. Bioenergy CHP is expected to provide 0,75 TWh, wind energy 0,5 TWh and small scale hydro 0,25 TWh. On top of this comes additional use of biofuels for heating of buildings and in district heating systems, to replace electric power presently used for these purposes. These renewable energy aims are unlikely to be changed, but beyond that, renewables policies are difficult to predict, and will again depend strongly on nuclear policies, which are still unstable. Thus, renewable energy activities in Sweden continues to be carried out in an atmosphere of basic uncertainty. This obviously makes investors hesitant and sceptical. Even without a concerted implementation policy, however, renewables do already count a great deal in the Swedish energy balance, as evident from table 1. This is due mainly to the traditional strong reliance on large-scale hydro power and to the great availability of biofuels for industrial and district heating applications, as well as for households outside the cities. Table 1: Total energy supply, Sweden TWh Non-renewables Oil Natural gas Coal & coke Nuclear Electricity import Intermediary technologies Heat pumps in district heating Renewables Hydro power Bio energy of which (approximately) peat (not really renewable) garbage used in district heating wood used in district heating industrial waste used in paper and pulp industry industrial waste used in wood industry wood used in single family houses other uses Wind power 0,2 0,1 0,03 0 0

7 7 Total Sources: NUTEK: Energy in Sweden. Facts and Figures 1997; Energimyndigheten: Climate Report Notes: The variation in hydropower in recent years is due to random changes in precipitation. There has been no significant change in capacity. 2 Support for renewables 2.1 Investment support Grid connection costs A renewable energy producer must pay the costs of connecting to the nearest technically suitable point of the grid. These costs include: - The line from his plant to the grid connections point. This line can be established by any competent electrical company. - The control and metering equipment necessary at the grid connection point, and the labour used for making the connection. This is paid to the utility owning the grid. If reinforcement of an existing grid is necessary to connect the renewable energy producer, the cost must usually be paid by the utility owning the grid Direct investment subsidies Direct investment subsidies have been a preferred form of subsidy to renewables in Sweden. A major reason for this is fiscal conservatism. Investment subsidies are included at once as costs in the state budget. They do not involve long-term commitment to continuous public expenses, as do other forms of subsidy. Another reason is the security provided for investors by up-front subsidies. The reduced need for finance may decrease both financial barriers and costs. Direct investment subsidies have also allowed government to maintain a firm control over the amount of activity, and the associated expenses. Once the allocated funds were used up, there would be no more subsidised activity, until a new political decision was made. This also related to the fact, that investment subsidies have often been granted as part of political horse-trading. Parties not favourable to renewables have preferred to accept subsidies that were clearly limited in amount and time, rather than accepting open-ended subsidy mechanisms General support for procurement programmes Mostly, direct investment subsidies are reserved for specific technologies. Sweden has considerable experience, however, with procurement programmes, where a number of independent projects go together, organise a buyers consortium organised, and make one joint tender for their equipment. This has been promoted by Swedish authorities, who see it as an efficient means to increase competition on the sales side and create a market-pull for better technologies. One idea is that one large tender is likely to bring more manufacturers into the Swedish market and create a stronger competitive environment, which can bring down prices. Another idea is that advanced technology specifications can be made part of the tender, thus creating a stronger market-pull for better technology. This last aim is judged worthy of public subsidy, and an amount of 100 MSEK was allocated for this purpose in 1997, to be used over a 5 year period. These funds are not earmarked towards any specific renewable energy source, but can be used at the discretion of the authorities for the organisation of such tenders.

8 8 A large part of wind turbines recently installed in Sweden were procured jointly through a tender of this type. Prices were evidently brought down considerably. Thus, such tendering procedures may be regarded as a significant form of government support to renewable energy projects Bioenergy CHP installations , investment in CHP based on biofuels were eligible for investment subsidies as follows: (a) investments in new plants received SEK per kw e installed capacity (b) existing non-chp heating plants that were retrofitted to CHP based on biofuels received 25% of the retrofit costs, up to a maximum of SEK per kw e (c) fossil fuel CHP plants that were converted to biofuels received 25% of the conversion costs, up to a maximum of SEK per kw e To conform to the requirements, the subsidised parts of the plant had to use at least 85% biofuels for a period of 5 years. The funds allocated for this subsidy were exhausted in There was no refunding until 1998, when the subsidy scheme was reactivated, but with a maximum of SEK per kw e, and with subsidies available only for (a) and (b) above. The previous requirement concerning 85% use of biofuels was reduced to 70%, and exception can granted even for this lower level. The funds allocated would seem to be quickly exhausted. The total budget appropriation is for 450 MSEK, to be used over 5 years. Only one month after the opening of the application procedure early in 1998, applications had come in for a total of MSEK. Thus, unless a refunding is decided, subsidies may in fact no longer be available. Connection of small boilers to district heating grids For small boilers in industry and housing, a subsidy programme was instituted in This programme paid 15% of the costs of connecting such boilers to the district heating network, if it could be documented that a grid connection would reduce CO 2 emissions. Even if this was not strictly a subsidy for biofuels, it was often used as part of the total funding of a biofuel investment. The programme was terminated in Reduction in the use of direct electric heating Starting July 1997, subsidies have been made available for reducing the dependence on direct electric heating in housing buildings. The measures emphasise the reduction of peak demand for electricity, because the Swedish power system will be particularly vulnerable in this respect after the decommissioning of 2 nuclear reactors, and because a reduction of peak demand will reduce the need to activate back-up capacity based on fossil fuels. The subsidies do not directly depend on the use of biofuels. They may as well be used for oil-based installations or other fossil fuel alternatives. But biofuel installations will typically take advantage of these subsidies, so they do constitute an important element in the funding of the implementation of bioenergy. The subsidies are differentiated, depending on the (present or planned) access to district heating. - outside district heating areas

9 The applicant can chose between two types of solutions for reducing the dependence on direct electric heating: (a) to supplement the direct electric heating with direct heating from one or more fuelburning stoves, located in central spots. (b) to replace completely the direct electric heating with a water or air based distribution system, connected to a central fuel-burning furnace. In case (a) the subsidy can be 100%, but is limited to SEK. The subsidy can be used for the stoves themselves, for heat accumulation equipment, and for equipment to govern the availability of electric power in the house. The available electric capacity has to be reduced as a precondition for subsidy. The reduction must be at least 4 Amp s and must remain in force for 5 years. In case (b) the subsidy is 30%, with a maximum of SEK per housing unit. Eligible investment costs are those for the circulation system, for heat accumulation equipment and for chimney. The direct costs for the furnace are not subsidised. - in district heating areas Only a complete conversion from electric heating to district heating is subsidised. The subsidy is 50%, with a maximum of SEK per housing unit. Eligible investment costs are those necessary inside the building to establish a circulation system, including radiators, and those necessary for connection to the outside district heating grid (most of those costs are usually paid by the district heating utility, and thus do not enter into the investment costs). If the electric heating is not direct, but already based on a circulation system, the maximum subsidy is reduced to SEK. As biofuels already have major and increasing importance in district heating systems, this subsidy for connection of more consumers will indirectly be an important subsidy for increased use of bioenergy Small scale hydro Until 1998, there were no investment subsidies for small scale hydro. In 1998 a 15% subsidy was introduced for plants with a capacity between 100 and kw. The subsidy is available for new plants, as well as for renovations. The renovation of a plant that has stopped production before 1997 is regarded as equivalent to investment in a new plant. For renovation of producing plants, subsidy is only given to those parts of the investment, that can be shown to increase production Wind power Until 1996, wind power projects (above 60 kw) were eligible for 35% investment subsidy, calculated on basis of total project costs, except land. This support system was somewhat unstable. A particular amount of investment subsidies were distributed on a first-come first-serve basis. Then there were intervals with no subsidies, until new funding had been negotiated among the political parties. Through most of 1996 and 1997, no subsidy has been available. In 1998, a refunding has taken place, but at a reduced subsidy level of 15%, and with a limit on the available funds, expected to result in queuing or quality selection of projects. Subsidies are no longer available for turbines below 200 kw, or projects with investment costs exceeding SEK per MWh yearly production. If the demand for subsidy exceeds the funds available, the authorities can reserve subsidies for the best projects, as evaluated on basis of the wind resource and the calculated cost of power. They can

10 10 also chose to allocate subsidies according to need. No clear picture has yet emerged of how these priorities are handled. In fact, the funds available would seem to be quickly exhausted. The total budget appropriation is 300 MSEK, to be used over 5 years. Only one month after the opening of the application procedure early in 1998, applications had arrived for a total of 665 MSEK. After 4½ month, 101 MSEK had been allocated to specific projects. Thus, unless a refunding is decided, or very tough selection criteria are adopted, subsidies may not be available for much longer. In the interim period, when national subsidies were unavailable, the EU Thermie programme supported an off shore project (5 turbines) with an investment subsidy of 32%. This was due, however, to the demonstrations character of the project, and does not indicate that this type of funding is normally available for Swedish wind power projects Solar heating Until the end of 1996, solar heating projects received investment subsidies amounting to 25% of total investment costs. Since then, subsidies have not been available Preferential access to credit One Swedish bank (SwedBank) takes advantage of guarantees from the European Investment Fund to offer soft loans to green investments by small and medium size enterprises. Some of these soft loans are made available for renewable energy investments. However, only a total of 150 MSEK guarantees over 3 years is available for all kinds of environmental investments by small businesses, such as farmers. This probably amounts to less than 5% of the environmental investments that need to be financed within this business sector. Thus, the amount of guarantees available is too small for such soft loans to be considered a regular element of renewables finance in Sweden. 2.2 Support for cash flow Relief from energy related taxes / Environmental bonus Energy related taxes have been gradually increased in Sweden through the 1990s. They include several forms of taxes, based either emissions of CO 2, sulphur and NO x or simply on the amount of energy. They are differentiated between industrial and other uses, and between different regions of the country. Industries are partially exempt, in order to protect their competitiveness. Northern regions have reduced levels of some taxes, to promote their development. Special taxes apply to large scale hydropower, to allow the state to capture some of the land rent of these facilities. Nuclear power is also taxed at special rates, to reflect the externalities associated with the production of nuclear waste Tax rates for heat production Biofuels and other renewable sources of heat are mostly exempt from energy related taxes. The competitive advantage that this gives renewable energies, particularly in the non-industrial sector, is evident from the tax levels shown in table 2A.

11 Table 2A: Fossil fuel taxes unit tax rate exemption for biofuels CO 2 tax SEK/ton 360 yes exemption for manufacturing industry 75% reduction of tax (fromjuly 1997: 50%) 11 exemption for electricity production Sulphur tax SEK/kg 30 yes no no NO x tax SEK/kg 40 exemption only for boilers with less than 40 GWh yearly output (1997: 25 GWh) Sources: Swedish Environmental Protection Agency: Environmental taxes in Sweden, Lag (1994:1776) om skatt på energi (with later revisions). Notes: Tax levels in 1997 were substantially the same as Energy intensive industries have special exemptions, beyond those mentioned in the table As CO 2 tax is lower for manufacturing industry than for other applications, a distortionary effect arises, making it more beneficial to use biofuels in district heating than in industrial CHP. Actually, this has lead to perverse situations, where industries convert their own CHP facilities from biofuels to fossil fuels, because it is more advantageous to sell their waste products as biofuels to district heating plants. yes Tax rates for electric power production Fuels for electric power production is exempt from CO 2 tax. Instead, power itself is taxed when delivered to consumers. However, manufacturing industry is exempt from this tax on end-users, and northern regions of the country have a reduced rate. These arrangements reflect several different considerations: - a CO 2 -tax on fuels would tend to move electricity production abroad, to neighbouring countries with no such tax. Any attempt to impose a compensating tax on power imports would be against EU-rules. Therefore, a CO 2 -tax might be ineffective or even counterproductive from a transnational perspective. - even without tax incentives, hydro power and nuclear power can be expected to perform at full capacity, as their variable costs are quite low. - there is no political desire for further investment in nuclear or large scale hydro. Thus, it is not important that the tax arrangement includes a dis-incentive for such investments. - there is a political desire to establish preferential access to cheap, pollution-free power for certain user. These preferred users are manufacturing industry and northern regions (whose natural resources are being exploited for hydro power, and whose economic situation is none too bright). There are also several valid arguments against this tax regime: - it does not promote energy savings in manufacturing industry, and reduces the incentives for energy savings in northern regions of the country. - it reduces incentives to keep existing hydro and nuclear facilities in the most productive state - it works as a disincentive for renewables, including small scale hydro and CHP on basis of biofuels, as these are unable to gain any economic advantage from being CO 2 -free (for wind power, there is a special arrangement, see below). - it does not promote the most CO 2 -efficient technologies when fossil fuels have to be used.

12 A special arrangement has been made for wind power. The end-user tax on electric power is refunded to these producers as an environmental bonus. As the end-user tax on electric power has been gradually increased in the last years, this has meant a gradual increase in incentives for wind power. The environmental bonus refunded to wind power producers are shown in table 2B. The table also show special taxes on large scale hydro and nuclear power, which will tend to improve the competitive position of renewables. Table 2B: Environmental bonus to wind power, (This bonus is a refund of marginal end-user tax on electric power). unit 1996 environmental bonus for wind power SEK/MWh tax on oldest large scale hydro (reduced level for newer plants) SEK/MWh 40 tax on nuclear power SEK/MWh 22 Sources: Swedish Environmental Protection Agency: Environmental taxes in Sweden, Lag (1994:1776) om skatt på energi (with later revisions). Notes: The end-user tax on electric power, and thus the environmental bonus, was increased in July 1997 to 138 SEK/MWh and in July 1998 to 152 SEK/MWh Resulting price structure The energy related taxes explained above, together with the VAT (25%), result in an average price structure as illustrated in table 3.

13 Table 3: Typical price structure for some energy sources (selected for their relevance for the economics of renewable energy projects) 13 unit electricity Residential use (with electric heating, annual consumption 23,3 MWh) Use in manufacturing industries (11,6 GWh per year) SEK/MWh SEK/MWh without tax tax, incl. VAT total without tax tax, excl. VAT total heating Gas oil (before tax refund to manufacturing industries) Wood fuels SEK/MWh SEK/MWh without tax tax, excl. VAT total without tax tax, excl. VAT total District heating (before tax refund to manufacturing industries) SEK/MWh total, with taxes, including VAT Source: NUTEK: Energy in Sweden, Facts and Figures Notes: VAT is 25%. It is included only in those figures relevant for direct household use of energy. Business consumers of district heating can subtract VAT. Household users of wood fuels must add VAT, if the fuels are not from their own land (but no doubt there is a lot of tax evasion, when wood fuels are traded among friends and relatives) Relief from income taxes Tax exempt use of resources A farmer or forest owner is allowed free use of biofuels from his enterprise in his private household. The expenses for growing and collecting the biofuels are thus tax deductible as enterprise costs, but their use value is not included in personal income from the enterprise. This asymmetry constitutes a tax subsidy. This tax advantage is not available to competing sources of energy Asymmetric taxation of household investments As described in more detail in later chapters concerning taxation, interest costs associated with household investments in renewables are partly deductible in the income tax, whereas the returns on the investment, i.e. the value of the energy produced, are

14 14 often not taxed. Thus, the project creates a net reduction of income tax, i.e. is subsidised through an income tax reduction. This tax advantage is available for many other types of household investments, including some fossil fuel investments, such as an oil furnace. It is not available however for competing energy investments that take place outside the household, for instance in central generators or distribution grids. Thus when a comparison is made between, for instance, solar heating and direct electric heating, it must be taken into account, that the household can deduct interest cost paid for the solar panel, but not interest costs included in the price of electricity Accelerated depreciation As described in more detail in later chapters, renewable investments in mobiles such as wind turbines, can be depreciated for income tax purposes at the much faster rate, than they actually lose economic value. This in effect is finance through the tax system, at no interest, with no security, i.e. on much better terms than any commercial finance. The same tax advantage will often be available to competing technologies, but the quantitative value will often be smaller. Large scale hydro facilities, for instance, are not allowed much acceleration of depreciation. Gas turbines are not nearly as capital intensive as renewables, and therefore gain less from the depreciation rules Tax reduction for renovation activities in housing A subsidy of 30% of labour costs is available for many types of renovation work in housing buildings, including work to install renewable energy. The maximum subsidy provided this way is SEK for an individual house and SEK for an apartment. Only labour costs are eligible for subsidy. In an apartment building the for each apartment can be accumulated by the owner(s) to provide subsidy for a major project. Formally, this subsidy is organised as a reduction of income tax, and it is administered by the tax authorities. This subsidy cannot come on top of the investment subsidies mentioned above (under bioenergy) for the reduction of direct electric heating, i.e. cannot cover the same expenses. But it can be used for further bioenergy measures, as well as for solar heating. The income tax reduction will often enter into the calculation when the cost of solar heating or bioenergy is compared with the cost of traditional sources of energy. This tax advantage is also available for individual fuel investments, for instance in oil or natural gas systems. It is not available, however, for competing technologies that require investment in centralised facilities Relief from other taxes Capital invested in business is exempt from property taxes, that otherwise amount to 1,5% each year on all personal property above SEK. Renewable energy investments, that are not integrated in personal housing, would be regarded as business investments. Moving excess capital into such projects, instead of buying bonds or stocks, is thus an effective means of reducing property tax. In fact, an investment in bonds must pay 2,14 percentage points higher yearly returns to be equivalent with a renewable energy investment after tax. In case of an investment in bonds, 30% of these extra 2,14 percentage points are paid as income tax. The remaining 1,5 percentage points are needed to cover the property tax.

15 REFIT prices Grid ownership is strickly separated in Sweden from production and sale of electric power. Therefore, when feeding electricity into the grid, the renewable energy producer must deal with two different utilities: - the grid utility - the utility buying the power Grid tariffs Grid tariffs work according to the idea of the grid as a kind of pool. You pay to be allowed to put something into the pool and to take something out of the pool, but not for any transport costs. What you pay depends only your geographical location, because electricity has greater value to the system at certain feed-in points that at others. The value of embedded generation belongs to the producer of electric power. He has a right to compensation from the grid utility corresponding to any reduction of grid loses due to embedded generation. As this value will usually be larges for small generators, this is clearly an advantage for renewable energy projects. Independent producers with a capacity below kw are completely free of any grid use payments, except metering and billing costs Electricity tariffs Even though the Swedish electric power market is liberalised, local power trade utilities still have an obligation to buy from small independent producers in their concessions area. Small in this context means below 1,5 MW installed capacity. The law requires a fair price, and in the recommendations of the power sales and distribution utilities own organisation (Sveriges El Leverantörer, 1996) this is defined as the average price at which the utility otherwise buys power plus (in the case of wind power) compensation for the added value due to the seasonal pattern of wind, which shows a statistical tendency to coincide in a nice way with peak periods of electric power demand. These recommendations must be regarded as basically friendly to independent producers of renewable energies. They are administered by most utilities in the same spirit, but some utilities are more hostile in their approach. Differences can in the end be resolved by the regulator. Rather than fighting local independent producers, many utilities have chosen to make a business out of their obligation to buy from these producers. They offer green power to consumers, often labelled under a scheme organised by the Swedish Nature Conservation Association. This green power can come from their own facilities, which often include district heating based on biofuels, or it can come from the power they are obliged to buy from independent producers. Owners of small scale renewable energy facilities, that basically serve their household or a small business, are often allowed by local utilities to run their meters backwards. This is a friendly gesture, that is significantly more favourable than the official recommendations. Large scale power contracts are also sometimes agreed on more favourable conditions than required by the official recommendations. Thus on the island of Gotland, where approximately half of the nations wind capacity is located, a collective deal has been made between the Swedish Wind Power Association (representing the independent producers) and the local utility, GEAB. It is reported to provide pricing substantially above the recommended level, but details are confidential. GEAB clearly expects to make money in an intermediary role, by reselling the power to other utilities that want to offer green power to their customers. More hostile utilities also exist, and in a few places independent producers must fight hard to get the fair price mandated by law.

16 16 The resulting average national prices for wind power have been: 1995: 259 SEK/MWh 1996: 272 SEK/MWh 1997: 270 SEK/MWh (Source: Medvind 1997/2) On top of these prices, the environmental bonus must be added. Independent electricity producers can sell their product anywhere in Sweden, Norway and Finland, on the integrated Scandinavian market. Transmission tariffs are independent of distance, which effectively enlarge the market. Sale is possible directly to consumers (such as households), if these are willing to invest SEK in an advanced meter. This means, that independent producers have a huge potential market for their green power. Until now, the green power market has hardly been exploited by independent producers. In fact, it is large generators that have conducted the most significant marketing effort for green power, as a part of their strategy to invade new retail territories. In the present competitive situation, where utilities are eager to prove their green credentials, and may even be using green power as a loss-leader. The conditions they offer independent producers may be too favourable to motivate any large scale attempt by independents to sell directly to consumers.

17 17 3 Prevailing schemes for ownership and finance 3.1 Main sources of finance Renewable energy investments in Sweden are financed by many different means. Typically, finance comes from traditional sources, and is provided with traditional methods. Thus, there is no big difference between finance for renewable energy investments and finance for other long term investments in fixed assets. The cost of finance depends strongly on the sources and methods chosen. At one low end of the cost scale, there is corporate finance by large utilities, but also small scale finance through personal savings. Large Swedish utilities have excellent credit ratings, and are able to procure debt capital in domestic or international markets at rates only marginally above the interbank rates. This form of corporate finance is of great importance as a dominant form of finance for renewables. Another dominant source of finance is savings by households and within small business enterprises. Many renewable energy investments are made by well-consolidated private persons, typically middle-aged or older, in their own house or business. Especially farmers are an important group of such investors. An investment in renewable energy may often be regarded by these investors as a conservative, long-term investment, constituting an alternative to other forms of conservative, long-term savings, such as bonds or pension funds. Their cost of capital may therefore also be quite low, comparable in fact to corporate debt by utilities, or even lower. Well-consolidated households and small businesses are also able to get debt at quite low rates from mortgage banks, by using their real estate as collateral. At the other end of the cost scale are private, unsecured loans and credit lines, that are often available through the ordinary banks for investors in renewable energy projects. They may well be twice as expensive as the cheap forms of credit mentioned above. They are used to some extent by investors in participatory schemes, such as wind power, or for small or moderate scale household investments, such as solar panels or conversion of the heating system to biofuels. They may be useful in situations, where savings are unavailable or insufficient, where mortgage bank loans are unavailable due to lack of collateral, or where the amount is to small or the duration too short to motivate the complications and costs of mortgage bank finance. More fancifull financial schemes, such as leasing arrangements or project finance are rarely seen in the renewables sector in Sweden. The main reason seems to be, that they cannot really compete with more traditional forms of finance, and that traditional sources of finance have a fairly positive attitude to renewables investments, and have sufficient resources to provide the moderate amounts of capital needed at the present level of activity. In particular, corporate finance by utilities and savings finance by households and small business constitute fairly abundant sources of cheap capital, with which more fanciful schemes have no chance of competing. The first chapter outlines the interest structure associated with different sources of finance, and the following chapters discuss the ways that different sources and methods of finance are used in different ownership schemes Interest rate structure This figure illustrates in general terms the interest structure in Sweden. The basic rates (bonds and money market) are those applying February 24, The loan and credit rates are based on typical margins over these basic rates.

18 18 fixed interest 0 % 1 % variable interest 2 % government bonds mortgage secured bonds 5 years 5 years 10 years mortgage bank loans 5 years 10 years 3 % 4 % 5 % 6 % 7 % 8 % 9 % (DEM3) 3 month government debt (ECU3) STIBOR3 largest utilities loans to small and medium business credit lines to small and medium business private loans, major banks 10 % 11 % private credit lines, major banks 12 % 13 % 14 %

19 19 The recent development of basic Swedish interest rates are shown in the table 4. The lending rates of the banks follow approximately the ups and downs of these basic rates, but often with some delay or moderation. Table 4: Basic Swedish interest rates Basic rates, 3 months 5 years government debt STIBOR government bonds mortgage secured bonds Jan 8,02 8,22 10,60 11,08 Feb 7,90 8,13 10,27 10,73 Mar 8,67 8,75 10,70 11,07 Apr 8,78 8,92 10,88 11,21 Maj 8,77 8,80 10,29 10,64 Jun 9,16 9,18 10,27 10,60 Jul 9,26 9,29 10,23 10,55 Aug 9,15 9,17 9,89 10,23 Sep 8,92 9,04 9,38 9,74 Okt 8,86 8,93 9,01 9,42 Nov 8,84 8,82 8,68 9,18 Dec 8,62 8,72 8,28 8,88 Jan 8,19 8,40 7,81 8,33 Feb 7,66 8,04 8,11 8,64 Mar 7,08 7,29 8,08 8,57 Apr 6,25 6,54 7,67 8,25 Maj 6,19 6,34 7,67 8,37 Jun 5,79 5,99 7,54 8,20 Jul 5,43 5,66 7,47 8,10 Aug 5,17 5,36 7,31 7,94 Sep 4,80 5,01 7,00 7,55 Okt 4,61 4,77 6,34 6,83 Nov 4,43 4,64 6,24 6,72 Dec 3,88 4,18 5,72 6,21 Jan 3,76 5,39 Feb 3,93 5,61 Mar 4,13 6,17 Apr 4,03 6,27 Maj 4,09 6,11 Jun 4,05 5,92 Jul 4,06 5,64 Aug 4,17 5,82 Sep 4,11 5,70 Okt 4,23 5,76 Nov 4,31 5,88 Dec 4,42 5,71 Jan 4,41 5,33 Feb Mar Sources : Sveriges riksbank (1997). Statistisk Årsbok / Statistical Yearbook Stockholm: Sveriges riksbank. Statistics Sweden (1998). Allmän månadsstatistik / Monthly Digest of Swedish Statistics. No. 1998:2. Örebro: Statistics Sweden The average lending rates for major banks and mortgage banks are shown in table 5

20 Table 5: Average lending rates for major banks and mortgage banks standard banks mortgage banks Average bank lending rates (% p.a.) variabel interest rate corporate clients (nonfinancial) households and nonincorporated business variabel interest rate variabel interest rate These average rates may blur the distinction between different form of credit. To exemplify such details, table 6 shows the considerable differentiation of interest rates according to the form of the credit. Table 6: Differentiation of interest rates business clients fixed interest rate, 1-5 years fixed interest rate, >5 years variabel interest rate household clients fixed interest rate, 1-5 years 20 fixed interest rate, >5 years st Quarter 10,4 11,7 2nd Quarter 10,8 12,3 3rd Quarter 4th Quarter 10,8 10,6 12,3 12, st Quarter 9,7 11,6 8,4 8,8 9,0 8,8 9,0 9,5 2nd Quarter 8,7 10,2 7,0 8,3 8,7 7,5 8,6 9,5 3rd Quarter 7,7 9,5 5,8 7,8 8,0 6,5 8,1 9,3 4th Quarter 6,9 8,7 4,9 6,8 7,9 5,7 7,1 8, st Quarter 6,7 8,4 4,7 6,7 7,4 5,7 6,8 7,8 2nd Quarter 6,6 8,4 4,9 6,8 7,2 5,6 6,9 8,0 3rd Quarter 6,5 8,3 4,9 6,3 6,5 5,7 6,7 7,5 4th Quarter 6,5 8,3 5,2 6,6 6,8 5,7 6,9 7,3 Source : Sveriges riksbank, avdelningen för finansiell statistik: Bankernas och bostadsinstitutens genomsnittliga ut- och inlåningsräntor. December Differentiation of bank interest rates, according to type of loan. (% p.a.) standard banks, variable interest rate corporate clients (non-financial) households and non-incorporated business 1997, 4th Quarter Day-to-day loans 4,6 --- Loans of longer duration Permanent credit facility 6,2 7,7 7,9 10,7 Source : Sveriges riksbank, avdelningen för finansiell statistik: Bankernas och bostadsinstitutens genomsnittliga ut- och inlåningsräntor. December Household ownership Direct ownership Direct ownership by households is common for technologies, that serve a single household, such as solar heating and furnaces for biofuels.

21 Personal savings finance is very common, and is probably the dominating form of finance. Households investing in renewable energy are often middle-aged or older, well consolidated and economically somewhat conservative. In this situation, they often have a considerable capacity for personal savings, and choose to use some of this for improvements to their house, including renewable energy investment. The cost of finance is low in this case. Typically, the household makes a comparison with conservative forms of savings, such as government bonds. Bank loans are also a common source of finance. Households with stable income, sound economics, and a stable banking relationship can usually without any security get standard bank loans up to around ECU. The duration of such a loan would often be 5 years, with a fixed monthly debt service drawn automatically from the account used for wage income. This type of loan provides sufficient capital for most renewable energy investments that are directly owned by households. Mortgage bank loans are also easily available for renewable energy investments. The carry a lower interest rate than ordinary bank loans, and often have longer duration. However, they are more complicated and costly to arrange than ordinary bank loans, and constitute a more long range type of finance than typically needed by the household for a renewable energy investment. Therefore, they seem to be a less common form of finance than the normal bank loans. They are mostly used in circumstances, where the renewable energy investment is combined with other home improvement investments, so that the total need for finance exceeds what is available as ordinary bank loans without collateral. This type of loans are normally available up to 65-75% of the market value of the real estate. If this has not been bought recently, there will often be a margin for an increased mortgage bank loan. The renewable energy investment itself may increase this margin. Often a combination of loans and personal savings is used. This can happen up-front, with savings as the primary source of finance and a loan for residual finance. Even more typical is the use of savings to replace the loan in the years following the investment. The planned amortisation of the loan is often based more on a conservative estimate of the savings capacity of the household, than on principles of investment finance. Often the estimated savings capacity turns out to be too conservative, and the household may amortise the loan before schedule. In this way, finance for the investment is often shifted within a few years from loans to personal savings Ownership through participation For wind power projects, some form of participation ownership is common, i.e. a form of shared ownership based on an open call for investment, and a large number of owners. Several legal arrangements are used, including real-estate communes (a traditional Swedish ownership form), consumer co-operatives, and companies limited by shares. The prevailing sources of finance are savings and bank loans, used on the same principles as mentioned above. The individual investment is often a quite limited sum of money, from 500 ECU to a few thousand ECU. This probably means, that savings dominate more as the source of finance, than for directly owned investments. As the household is usually free to chose the size of its investment, it may often be limited to the savings available Ownership through housing associations