(The author is a Reuters market analyst. The views expressed are his own.)
By Gerard Wynn
LONDON, March 6 (Reuters) - The European Commission is backing a gradual shift away from renewable energy subsidies, where it must tread a fine line between phasing out support and killing investment.
It is significant that the European Union's executive Commission is signalling such a shift after European Union countries already pared back subsidies.
The Commission will publish this year new guidelines for support programmes, aiming to curb over-compensation and promote trade with nations rich in renewable power.
Europe ramped up ambition in a 2009 EU directive which set each member state a mandatory renewable energy target in 2020.
But growth in solar and wind power has been much faster than expected, impacting wholesale power markets and swelling consumer liabilities, as stated by the Commission last June in its note "Renewable Energy: a major player in the European energy market".
The Commission found that technologies were maturing and would have to survive without subsidies, while some "limited but effective" support may remain after 2020 for newer technologies.
The EU's renewable energy programme has been successful but it is right to signal an end to support around 2020.
The EU's 2009 renewable energy directive set binding targets for member states' renewable energy as a certain proportion of final energy consumption.
It actively encouraged renewable energy subsidies and assured state aid approval.
It gave no specific guidelines or timeline for phasing out support and demanded that member states also guaranteed priority grid access for renewable power.
The Commission's recent shift follows signs of a conflict with its other flagship project, for an internal energy market which aims to erase power price differences between member states.
Rising renewable power has eroded market incentives to build conventional gas-fired and nuclear back-up, because of lower peak wholesale power prices, leading to a renewed focus on national rather than cross-border capacity amid concerns of blackouts.
In an extreme example, the Czech Republic has threatened to block cross-border German wind power to maintain market incentives for its planned new nuclear power plant.
The Commission's new approach came under the title "Optimising state intervention: steering the energy mix to low carbon", in its publication last November, "Making the internal energy market work".
"Support schemes for renewables - as well as a number of mandatory rules on priority grid access - were introduced on the grounds of incomplete market opening, incomplete internalisation of the external costs of conventional generation, and the early stage of development of most renewable-energy technologies," the Commission report said.
"Markets and technologies have evolved since then," it added.
The Commission has hinted that various advantages for renewable power enshrined in the directive may be rolled back, including state aid approval for subsidies.
The original 2009 directive said, in a footnote: "In order to be able to achieve the national objectives set out in this Annex (renewable energy targets), it is underlined that the State aid guidelines for environmental protection recognise the continued need for national mechanisms of support for the promotion of energy from renewable sources."
Last November's document said such guidelines were under review.
"The Commission is in the process of reviewing the guidelines on State aid for environmental protection to reflect changes in the technological landscape and EU policy objectives in the energy sector, while minimising competition distortions in the internal market," the document said.
"In particular, the revision aims at ensuring that State aid control facilitates the granting of aid provided that it is well-designed, targeted, least distortive and provided that no better alternatives (regulatory, market-based instruments) are available."
The Commission has also said that renewable power producers should, in time, provide grid-balancing services where they would be disconnected when electricity supply exceeded demand, called curtailment, as required by conventional power.
That would be a shift from the directive, which said: "Member states shall ensure that appropriate grid and market-related operational measures are taken in order to minimise the curtailment of electricity produced from renewable energy sources."
And in November the Commission published a consultation which canvassed support for priority grid access. This was was questioned by the trade body for grid operators, the European Network of Transmission System Operators for Electricity (ENTSO-E), which is responsible for managing intermittent power.
"ENTSO-E would note that priority dispatch and access is also a support and, in their current format, is likely to lead to inefficiencies with increasing levels of renewable power. There may be merit in examining this going forward as well," it said in its response published last month.
The tricky part for the Commission will be guiding countries between phasing out renewable energy support and deterring investors.
There is a sense that the pace of growth in renewable power capacity is creating unforeseen and perhaps uncontrollable consequences.
For example, many major electric utilities have come out forcefully in favour of capacity markets where they would be paid to build reserve capacity, risking a new market distortion.
And several member states have made retroactive cuts in renewable energy support, for example by increasing taxes on project returns.
Several utilities have pushed for an end to renewable energy subsidies in their responses to the November consultation, from "at least by 2030" (E.ON ); to "as soon as possible" (Enel ); and "should be discontinued", implying immediately (CEZ ).
EU renewable policy after 2020 may depend above all on how fast technologies can become competitive, given no easy solution between paying subsidies which are increasingly hurting consumers and utilities, or else halting support altogether and risk missing long-term climate targets.
(Editing by Stephen Nisbet)