KEF, Alm.del - 2023-24 - Bilag 179: Henvendelse af 26/1-24 fra European Solar Manufacturing Council (ESMC) om beskyttelse af europæiske industri ifm. udbudskriterier og forhandling om “Net Zero Industry Act

Klima-, Energi- og Forsyningsudvalget 2023-24
KEF Alm.del Bilag 179
Offentligt

Modeling different pathways for

the introduction of sustainability

and resilience criteria (SRC) in

the PV auctioning regime

Assessing cost and RES roll-out implications

from alternative approaches de-risking and PV

industrial support through the NZIA

January 2024

KEF, Alm.del - 2023-24 - Bilag 179: Henvendelse af 26/1-24 fra European Solar Manufacturing Council (ESMC) om beskyttelse af europæiske industri ifm. udbudskriterier og forhandling om “Net Zero Industry Act

Background

information

Political framework

Net-Zero Industry Act (NZIA) Articles 19 und 20:

Objectives

•

Creation of a Level-Playing-Field:

Closing the price gap between Chinese PV modules and modules

from Europe due to a lack of compliance with environmental and social standards as well as substantial

government subsidies.

Promoting resilience in the European solar industry:

Reducing dependencies on third countries for a

secure and affordable energy transition.

•

Implementation

•

Prequalification:

Introduction of a ban on modules produced under forced labor on the EU market as a

prerequisite for participation in any tender (already contributes to closing the price gap, as fairly

produced modules are associated with higher costs).

Sustainability and resilience criteria (SRC):

Fulfillment of the criteria is rewarded with a bonus, which

aims at closing the remaining price gap and thus creates fair market conditions.

•

Model assumptions: Phase-in pathways

Unclear design of the SRC threatens to diminish the leverage of

NZIA Art. 19 and 20:

Latest discussions to finalize the text of the NZIA have raised questions about whether a phase-in

of SRC by segmenting the market would reduce costs to the public and pace of RES roll-out in the

EU. To assess this, and how they related to the achievement of NZIA’s strategic goals of

increasing economic resilience and supporting net zero industrial production in the EU, a modelling

of different phase-in scenarios has been undertaken.

Pathway A:

Market segmentation of 20% subject to SRC on an ongoing basis

Pathway B:

Slow phase-in of 20% subject to SRC in 2025 to 100% in 2029

Pathway C:

Quick phase-in of 50% subject to SRC in 2025, 75% in 2026, and 100% in 2027

Pathway D:

Immediate phase-in of 100% with SRC in 2025

Model assumptions: Build-out scenarios

The costs of the phase-in pathways are calculated depending on various

possible build-out scenarios:

•

The modelling of the four pathways assesses the different public cost implications and impact on achieving RES targets for each and considers the extent to which each

addresses the objective of de-risking EU dependence on a single non-EU supplier, currently China, with the objective of supporting the continuation and development of

domestic EU industrial SV manufacturing capacity.

To illustrate the main strategic variations of relevance in establishing the most appropriate phase-in approach, there are four scenarios established as follows with

different combinations of de-risking dependence and support for domestic manufacturing through application of SRC:

Reference or “Dependence and de-

industrialization” Scenario

“High de-risking and ambitious

industrialization” Scenario

“Moderate de-risking through

friendshoring” Scenario

“Smart Industrialization through risk

diversification” Scenario

•

Assumes the lowest use of SRC for PV

tendering, closest to a continuation of the

status quo. Because the impact of SRC is

so small, the cost cap between Chinese

and non-Chinese modules is maintained,

EU module production therefore has

insufficient scale to compete and declines

without being replaced by non-Chinese

suppliers.

•

Ambitiously estimated capacities for EU

production (= all announced production

capacities are realized. Remaining required

capacities are provided from

“friendshored” overcapacities.

Demand for modules can primarily be

covered by EU modules (conservative

estimate of production capacities) and

“friendshored” overcapacities

sustainable modules, primarily from the

USA & India). This scenario will be

sufficient to satisfy EU module demand but

comes with a cost premium.

Combination of conservative EU

production capacities, “friendshored”

overcapacities and “clean” (i.e., forced

labor-free) Chinese modules. Describes the

most realistic and feasible scenario.

The four phase-in pathways using different approaches to market segmentation (or none) have been assessed and four main scenarios identified. The minimal additional cost

implications from the scenario described as ‘industrial development through risk diversification’ scenario delivers no negative impact on RES roll-out whilst achieving the

primary of goals of the NZIA. All other scenarios entail failure of NZIA to achieve its primary goals, resulting in de-industrialization and high dependence on a single non-EU PV

producer, or additional unnecessary costs.

Variables for resilience criteria

The model examines the pathways and scenarios with regard to two

variables that are decisive for the leverage effect of the criteria:

Effects on the LCOE and associated subsidy needs

Determination of exceptions to the criteria: Benchmark for disproportionate price

differences (NZIA Art. 20 Paragraph 3)

EU PV build-out

trajectories 2024-2027

With an ambitious industrial policy regime, EU and friendshore

capacities can potentially satisfy future module demand

Production capacities vs. EU utility scale build-out trajectories:

Module capacities in GW

+30,6

+23,5

6,6

+41,7

53,5

6,7

Gap of

8,8 GW

Targeted

annual utility

scale PV

installation in

the EU

+45,2

58,5

Gap of

16,8 GW

6,5

35,5

28,0

6,7

31,0

“Moderate de-risking through

friendshoring” Scenario:

Theoretically, the EU's PV expansion targets

for 2024 and 2025 can be achieved with the

conservatively estimated available module

capacities from EU and friendshore

production.

•

For 2026 and 2027, a gap of 8,8 GW and

16,8 GW respectively arises with

conservative EU production capacities.

“High de-risking and ambitious

industrialization” Scenario:

In the case of ambitious EU production

capacities (i.e., all announced capacities

from the Member States can actually be

realized), the available modules would even

far exceed the demand for the expansion

targets.

28,5

26,0

9,0

10,5

9,5

9,0

2024

Potential US imports due to overcapacity

2025

2026

2027

Potential Indian imports due to overcapacity

Additional European production capacities (ambitious)

European production capacities (conservative)

Hitting build-out targets is most probable

under a diversified module supply

Chinese modules that meet the prequalification requirements can continue

to participate in tenders

Module capacities in GW

11,3

18,7

6,5

35,5

28,0

6,6

27,8

53,5

6,7

34,3

58,5

Targeted

annual utility

scale PV

installation in

the EU

“Smart Industrialization through risk

diversification” Scenario:

Achieving the expansion paths with European and

friendshore capacities alone is possible but unlikely due to

uncertain domestic production and an import surplus from

the USA and India that cannot be planned with certainty.

Potential existing supply gaps therefore continue to

require Chinese modules. The strictest ecological and

social standards are essential in order to minimize

negative environmental impacts and legal violations.

•

Not all Chinese modules are affected by exclusions:

Around 40% of Chinese polysilicon already comes from

Xinjiang-free production, and this proportion is set to rise

to over 70% by 2026.

These modules meet the prequalification standards and

would continue to have access to the EU market. The

cost gap compared to EU modules would also be smaller

due to compliance with social standards for these

modules, which would also reduce the need for subsidies.

6,7

26,0

31,0

28,5

9,0

10,5

9,5

9,0

2024

2025

2026

2027

•

Potential US imports due to

overcapacity

European production capacities

(conservative)

Potential Indian imports due to

overcapacity

Possible Chinese imports of “clean”

modules

Cost implications

An immediate phase-in is rather unlikely in view

of the required module capacities

Share of the resilience segment

in %

2025

Phase-in

Pathway B:

Slow

Phase-in

Pathway C:

Quick

Phase-in

Pathway D:

Immediate

Phase-in

in GW

in %

2026

in GW

in %

2027

in GW

in %

2028

in GW

in %

2029

in GW

20%

9,2 GW

40%

21,4 GW

60%

35,1 GW

80%

54,0 GW

100%

73,8GW

50%

23,0 GW

75%

40,1 GW

100%

58,5 GW

100%

67,5 GW

100%

73,8 GW

100%

46,0 GW

100%

53,5 GW

100%

58,5 GW

100%

67,5 GW

100%

73,8 GW

The total subsidy needs hardly differ in the

phase-in pathways

Subsidy needs utility scale (in Bn.

€)

4,68

4,72

4,46

Modeling assumptions:

•

The model assumes that after reaching 100% market applicability of

the resilience bonus, subsidies will still be needed for 7 years until the

level playing field is reached.

3,33

2,87

3,55

3,30

3,55

3,18

•

Exclusion of path A, as a level playing field cannot be achieved under

the scenario of continued market segmentation, which distorts

competition and creates artificial demand.

Conclusion:

•

The immediate phase-in is ultimately the most cost-effective due to

the shorter funding period, despite the higher average annual subsidy

requirements compared to the other pathways.

•

Nevertheless, the implementation of pathway D is unlikely in reality, as

it will take at least two years to plan and implement investments for

the construction of the European production facilities required for the

market ramp-up.

Pathway B:

Slow Phase-in

(Subsidies until 2036)

Pathway C:

Quick Phase-in

(Subsidies until 2034)

Pathway D:

Immediate Phase-in

(Subsidies until 2032)

•

The gradual introduction of the resilience bonus is therefore

recommended. Rapid introduction is both the cheaper and more

immediate solution.

“High de-risking and

ambitious industrialization”

Scenario

“Moderate de-risking

through friendshoring”

Scenario

“Smart Industrialization

through risk diversification”

Scenario

Benchmark for

disproportionate

price differences

Investment proof benchmark for disproportionate

price differences must be at least 30%

24%

23%

21%

20%

18%

17%

15%

13%

20%

18%

Explanation of the calculation:

•

If we compare the LCOE for modules from conservative

European production capacities (= highest price) with the

LCOE for Chinese modules (= lowest price), taking into

account the reference wholesale prices defined by each

Member States (here the example of France), we obtain the

percentage price gap that must be overcome by the resilience

bonus in order to establish a level playing field.

•

The actual price gap of the modules is significantly higher (up

to 68%); however, as the share of modules in the total LCOE is

only 29%, a significantly lower benchmark is sufficient.

The benchmark for disproportionate price differences in the

case of prequalification must accordingly be at least 20%.

Taking into account error variance and the possibility that

effects of scale are less pronounced than our model

assumes, we recommend a price excemption rule of 30-40%

to ensure the effectiveness of the SRC instrument.

2025

2026

2027

2028

2029

No prequalification

Prequalification