D&I Energy, Infrastructure & Natural Resources Alert 23 April 2018

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Finnish Government Plans to Ban Coal and Redirect State Aid for Renewable Energy

The Finnish government plans to ban coal in energy production in 2029. The government prepares a EUR 90 million incentive package for energy producers to voluntarily commit to phase-out of coal by 2025. The incentives package would be financed by lowering the annual production level proposed for the planned tendering scheme for renewable electricity from 2 TWh to 1.4 TWh. The tendering processes are expected to be tough also due to large amount of partly developed projects.

Ban on Coal and Compensation for Energy Producers

The Ministry of Economic Affairs and Employment pronounced on 10 April 2018 that the use of coal in energy production will be prohibited by law in 2029, a year earlier than stated in the energy and climate strategy. In connection with the ban the government would introduce an incentives package designed for cities to phase out coal already by 2025 to support investments in energy technologies to replace coal. Half of the package would be reserved for renewable heat and power (CHP) and the other half for other technologies needed in the conversion from coal. The government supports renewable CHP also in order to ensure the security of supply in peak load conditions.

The planned ban is part of Finnish government's efforts to reduce greenhouse gas emissions to mitigate climate change. According to Minister Tiilikainen, phasing out coal-based energy production would enable Finland to significantly reduce the emissions from heating.

The ban and the incentives package have already raised criticism of inefficient climate policy, as the use of coal is expected to phase out during the early 2030s without government intervention. Industry representatives have demanded that the government should focus its efforts to ensure efficient operation of the emissions trading scheme (ETS).

Prices of district heating are expected to rise in cities where coal is used for heating (mainly metropolitan area and Vaasa and Turku). This may further lead to increased demand of alternative heating solutions, such as heat pumps.  Furthermore, prices of alternative fuels (such as wood and gas) may rise.

The ban must comply with the requirements of protection of private property and the incentives package must comply with the EU state aid rules. The incentives package could be seen as a way for the government to decrease the likelihood of compensation processes or the potential amounts payable. Further details concerning the ban and the incentives package are expected during the autumn.

Support for Renewable Energy Is Redirected from Electricity to Heat

The incentives package will be financed by lowering the required annual production level proposed for the tendering scheme for renewable electricity, from 2 TWh to 1.4 TWh. According to Minister Tiilikainen, "Redirecting support from renewable electricity to renewable heating is justified on the grounds that while nearly 80 per cent of electricity production is already emission-free, only 36 per cent of district heating uses renewable energy sources.”

The planned temporary support scheme for the production of renewable energy is expected to move forward. Production aid would be granted for 1.4 TWh of new renewable production in technology-neutral auctions to be held during 2019 and 2020. The temporary scheme has been considered a transition to a subsidy-free system. After the scheme has been approved in the Parliament, it must be notified to the EU Commission to check compliance under the EU state aid rules.

The expected aggregate amount of the proposed new production aid for renewable electricity is 100 million euros in 10 years whereas the current costs of the feed-in tariff scheme is approximately 245 million euros annually.

Although being technology-neutral, we expect that the new scheme will attract mostly wind power projects and especially larger wind farms. There are already partly-developed wind power projects available with necessary land use planning completed or construction permits granted by municipalities corresponding to an annual production capacity of approximately 7.3 TWh. Investors should carefully review the legal validity of the plans and permits relating to a particular project.

The large number of potential projects means that the competitive bidding process will be tough.

Investment Aid for Biofuel and New Technology

In addition to the production subsidies, discretionary energy investment aid would continue to be granted. Investment aid would be paid primarily for projects commercializing new energy technology such as electricity storage, integration of variable production into the electricity system and arctic offshore wind power.

Investment aid would also be granted to new biofuel production facilities. The government strives to cut the import of oil to half from the current level by increasing the local production of biofuels which would require investments of approximately 1.5 billion euros to new production facilities. The investments depend heavily on the final wording of the EU renewable energy directive (RED II) currently under negotiation.

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