Partitioning the SDE++ budget

Authors: Daan van der Tas, Oscar Kraan

In the Netherlands, the SDE++ is an operating subsidy for climate-friendly technologies that compensates for the difference between the cost price of the technologies and the market value of the product that the technologies deliver. It is the main subsidy mechanism to support the goals of the Climate Agreement. This governmental support is necessary because CO₂ reducing technologies are often not market competitive against fossil alternatives in which climate change effects are not priced in. Since 2011 more than 56 bn has been provided to project developers. Meanwhile in Europe the ‘Fit for 55’ package has set even more ambitious policy goals. The ultimate goal: a climate neutral continent by 2050.

To achieve these ambitions, policy makers can make use of the typical carrots and sticks. Examples of sticks are taxes and the European Union Emission Trading System (ETS). Subsidy instruments such as SDE++ are the carrots. SDE+ was originally designed for the large-scale roll-out of technologies for renewable energy production. This scheme was expanded in 2020 (SDE++) and now also supports other technologies that reduce CO₂ or other greenhouse gases (including e.g., carbon capture and storage). This explains the extra plus in the name compared to its predecessor.

The SDE++ is an operating subsidy. This means that the applicant receives a subsidy during the operating period of their project based on the product created (e.g., green electricity). This instrument compensates the difference between the cost price of the sustainable energy or the reduction in CO₂ emissions and the revenue; in other words the scheme only subsidizes the unprofitable top (in Dutch “de onrendabele top”). Using a tender mechanism, the government allocates a fixed subsidy budget towards the subsidy applications based on the lowest subsidy requirement per tonne of CO₂ reduction. In this way all potential technologies compete for subsidy with each other. In other words, the cost effectiveness to achieve the policy objective is the most important criterium for the government to select the projects.

This focus on cost effectiveness has three major drawbacks:

1. Technologies that focus on electricity prevail. In general, these are more cost effective than, for example, heat technologies. Focus on electrification of easy-to-abate sectors instead of the transition in the hard-to-abate sectors for which electricity most-often is not an option is a pitfall; especially because our current energy system relies only for 20% on electricity (the other 80% is provided by fuels). In practice, many solar PV applications are approved, but no hydrogen production for example, see figure 1.
2. Emerging technologies that are at the beginning of the learning curve do not qualify due to the tender mechanism focused on costs. These technologies are considered mainly beneficial in the long term (i.e. hydrogen, e-boilers and thermal energy from surface water), but require time and investments to have a chance to grow into a mature cost-effective technology. Currently they fall-out of the subsidy budgets, but we do need these technologies to achieve our climate targets.
3. The Regional Energy Strategies (RES) do not always seem to fit into the current tender system. In a RES, each energy region describes its own choices for implementing the energy transition, but these choices are not aligned with the subsidy allocation of projects.

On the third Tuesday of September 2021, the cabinet stated in the budget memorandum that it would not only allocate 3 billion euros extra for the SDE++, but will also build in partitions between electricity, sustainable heat, green gas, and CO2 reduction technologies. Introduction of these different categories is necessary, according to the reasoning, in order to be able to support techniques that are often not subsidized as the result of the competition on cost effectiveness. In addition, the ceiling on eligible solar and wind projects that currently applies (35 TWh) will be maintained. This ceiling has been agreed in the Climate Agreement.

The introduction of partitions in the SDE++ budget certainly provide a solution to the first drawback previously mentioned. It would be wise to place these partitions in such a way that more expensive technologies like e-boilers can also qualify, so that these technologies can also achieve a cost reduction through scaling up. As mentioned, we need all the technologies to achieve the agreed goals. However, it remains to be discussed whether an operating subsidy, such as the SDE++ is actually the best subsidy mechanism to support emerging technologies.

Further improvement would lie in the alignment between the RESs and SDE++. Since the tender mechanism is the foundation of the SDE++ program itself, it is unlikely the necessary alignment will be achieved by a change on the SDE++ side. The solution seems to lie more within the RESs. In the RESs, the mechanism of the SDE++ seems not to have been taken into account. In any case, the introduction of the partitions will also have a positive effect here, because various RESs also focus for example on renewable heat, which often falls by the wayside in the current tender system.

Furthermore, it remains a question whether maintaining the ceiling of 35 TWh is smart as long as there is an unprofitable top for solar and wind on land. Advances in insight show that there is an enormous additional demand for electricity in the Netherlands, for example for the generation of green hydrogen. Let us not conclude too quickly that subsidies for solar and wind on land are no longer necessary.

To close, it looks like the Cabinet's intention to place partitions in the SDE++ budget will certainly have positive effects. Although further improvement is still necessary, the SDE++ will remain one of the important instruments for achieving the energy transition in the Netherlands. In particular, support for technologies (such as hydrogen) that would enable the hart-to-abate sectors (such as the steel-industry) to transition should be welcomed. In the past ten years more than 56 bn has gone to electricity related technologies, so it’s about time that we focus on the other 80% of our energy system. The new SDE++ reform might actually be the start of the answer to this challenge.