Feed-in tariffs: A fitting policy for renewable energy

The feed-in tariff is a policy mechanism that applies to the electricity generation industry. It has been applied in many countries with the intent of encouraging the development of renewable power generation. Such a policy typically involves guarantees to certain renewable energy industries specific long-term prices for electricity they produce and guaranteed grid access. This means that renewable power producers are paid higher prices for electricity that they produce and they are guaranteed to be able to sell their power to the grid.

Prices

Why would we want to offer higher prices for certain types of power generation? Because we want more of that sort of energy in our system. This is a market solution because there is still competition among companies and individuals to create power infrastructure that can tap into these power prices. That is, we are tapping into the self-organizing power of the market.

This is also a public solution because it must be centrally led. The public, either through government or through a crown corporation, makes a set of priorities clear through the clearly defined prices. The intent of the public is reflected in a feed-in tariff designed to distort the market in ways that make investment in the renewable energy industry more desirable.

The intent is to harness the natural competition and resource distribution of the market, while keeping some control of the direction of development in public hands. In this way the people can ensure that development happens in the directions that they desire, and the powers of the market lead to increased efficiency of the provided solutions.

In some feed-in tariff systems, the resource intensity is taken into account. So if a wind farm is being placed in an area that has only moderate wind, it may be paid more for its power than a wind farm that is built in a place with very high winds. Generally however, there is still a strong incentive to build in the best locations, since renewable energy is highly dependent on placement. This adjustment according to resource intensity can be justified in a number of ways. One way that we think it is reasonable is if the highest quality renewable energy resources are already in the process of being developed, and additional incentives are necessary to cause development in other less ideal geographical locations. We don’t have an infinite amount of perfect locations, so tailoring the incentives to help grow the industry to less-than-perfect locations makes sense in this regard.

We do not believe however that adjusting rates according to resource intensity should be a way for poor planning and implementation to acquire higher profits than high quality installlations. FITs are intended to nudge the market in the right direction, not destroy the market’s ability to distinguish between economically effective and ineffective businesses. FITs that reward lower resource intensity may be treading on dangerous ground unless they are carefully managed. The most cost-effective implementations of a power system deserve the best profits compared to their less effective counterparts. If someone puts up low-quality wind turbines in a valley with slow wind, the system should not be under an obligation to deliver them a profit, especially a profit above that garnered by high-quality installations in high wind speed zones. If this rule is broken, the market aspect of the FIT is being undermined.

Grid access

The reason that grid access needs to be guaranteed is because quite often grid access can be a very large hurdle for the development of renewable energy. For instance, if you want to build a hydroelectric dam in an area that is currently undeveloped, you would normally have to pay for the transmission infrastructure to carry the power you produce some distance so that you can connect with the power grid. Remote renewable energy resources can have great long term value, despite being located far from existing transmission infrastructure. An excellent example of this is the James Bay Project in Quebec, Canada, which is located several hundred kilometers from any major cities. The transmission infrastructure was expensive, but has been well worth the investment.

Similar transmission issues exist for other renewable energy resources such as windsolar photovoltaicsgeothermaltidal power, and solar thermal power. Cost-effective development of these resources is currently constrained to suitable locations, many of which are located far from transmission infrastructure.

However, providing universal grid access could be very problematic for the power authority in charge. In nations like Canada for instance, transmission costs can be very high due to the nation’s enormous geographic size and generally sparse population. A very aggressive feed-in tariff law in Ontario, Canada kept some discretionary powers in the hands of their power authority regarding which renewable energy projects could be granted grid access, and on what schedule. This allowed them to balance the needs of their residents against the possible decreasing cost-effectiveness of transmission infrastructure construction.

Tapering

Feed-in tariffs (FITs) are generally guaranteed for a few decades. I have seen FIT laws that range from 20 to 60 years in their applicability, often depending on generation type. For instance, hydroelectricity generally has a much longer lifetime than other forms, so it makes sense that the power prices be guaranteed for longer to encourage development.

Many FIT programs are designed so that the highest power prices are delivered at the beginning, and slowly wane over the decades of the agreement. There are several reasons that we have identified for this. Firstly, the most important revenue for investors is often the first few years of their return on investment. This has a lot to do with the realities of financing large power projects, where the money needs to be delivered up front, but the project often does not create revenue until it is completed.  Another goal of slowly reducing the prices is to stimulate the market towards innovation.

Slowly reducing the power prices will be an incentive for companies to improve their methods for producing, installing, and managing power systems. This means that over time, the renewable energy installations will have to improve in order to be able to make money even with a FIT in place. The goal of course is to help renewables through their tumultuous adolescence towards grid parity, where they are equally as cost-effective as the traditional forms. It is important to note that different renewable energy technologies are at different levels of cost effectiveness. For more information, you can check out our review of renewable energy forms.

Utilization and effectiveness

A report published in 2008 by the European Commission stated that “well-adapted Feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity”.1 A large number of jurisdictions in the world have implemented feed-in tariffs for this reason.

Development of renewable energy can actually lead to a reduction in total costs for the consumer. This can happen for instance when the demand for natural gas goes down because less of it is required for peaking power plants. This reduced demand lowers the price, which will lower the cost of heating a home in those areas that use natural gas for heating. The total effect of feed-in tariffs is usually very small, hardly noticeable on a monthly power bill. Some studies, such as this one for instance, show that electricity prices actually end up falling as a result of feed-in tariffs.2

Some of the most notable examples of successful feed-in tariffs are Germany and Spain, where residents have seen very stable electricity prices coupled with tremendous growth of the renewable energy sector of their economies.

Germany

Germany instituted a law in 1990 which guaranteed that wind and solar power producers would be paid electricity rates that were 90% of the residential retail price of electricity. This is substantially higher than standard, which is often less than 50% from what we have seen. Similarly, other renewables were guaranteed rates between 65% and 80%. This law remained in effect until 1999, but subsequent legislation took its place.3 This law was very effective at stimulating private investment in renewable energy sources. By 1999, Germany had approximately one third of the world’s wind generation capacity.4

In 2000, Germany adopted the Erneuerbare Energien Gesetz (EEG) which expanded the mandate and goals of the original legislation. Under the EEG, solar photovoltaic (PV) power production in Germany increased 9 fold between 2000 and 2005.5 Since 2005, solar PV production has continued to explode in Germany, making them the world’s largest provider of solar PV power in the world, with 47% of global solar PV installations (9.8 GW) at the end of 2009.6

Ontario

Ontario introduced the Renewable Energy Standard Offer Program on November 22, 2006 with the intent of stimulating growth in the development of renewable energy in the province. The program exceeded expectations with 1400MW of contracted projects since its inception.7

On May 14th, 2009 Ontario passed into law the Green Energy and Green Economy Act, 2009. The act is intended to help phase out the last coal generation in Ontario and boost the economy. The act is also intended to stimulate research into renewable technologies and create environmentally friendly industry and jobs.8 It is important to note that the Ontario FIT provided a small but notable additional incentive for Native groups to propose projects. It also included a requirement of certain percentages of renewable energy equipment had to be purchased from Ontario companies. The goal was to create a strong Ontario renewable energy industry.

When Ontario’s Feed-in tariff program was one year old, there was some journalistic coverage of how successful it had been. It seems to have been incredibly successful, with many projects waiting in the queue for transmission line space to be built. Tens of thousands of proposals are for rooftop solar, but this represents only a small portion of the proposed power production. It is expected that this aggressive policy is bringing many jobs to Ontario. People have been complaining, often comparing the electricity rates for green power to the rates they have paid in the past. As this reporter correctly points out: that is the wrong question to ask. The right question to ask is how they compare to the rates that Ontario is paying for its current power, and what it will be paying for power in the near future.

Further Reading

In early 2010 Vision of Earth took part in the public consultations on Saskatchewan’s Energy Future, in which we tabled a proposal for a Saskatchewan feed-in tariff. We also wrote a piece about why we proposed a feed-in tariff for Saskatchewan.

An alternative or complementary policy to the feed-in tariff is proposed in our piece publicly administered green energy futures. Essentially what we propose is the ability of citizens to invest directly in guaranteeing their energy future by choosing publicly vetted projects that they want to support. On this topic we also wrote a piece regarding the debate of public ownership or feed-in tariffs for Saskatchewan’s power development.

Paul Gipe, a prolific author, renewable energy advocate, energy industry analyst, and the creator of Wind Works, recently completed an interview with us. See our interview with wind power guru Paul Gipe.

Wind Works has an excellent table of renewable tariffs in the world. As of the time of this writing, it was last updated February 1st, 2010.

An aggressive Swiss Feed-In-Tariff was launched in 2008.

Feed In Tarriffs for Grid Connected Systems. This is an overview of the feed-in tariff as a mechanism. It looks in detail at Germany’s progress and policy. Written with the intent of making it clear how Australia has tremendous potential in the renewable energy scene if they adopt a feed-in tariff.

Call for submissions

This concludes the sixth issue of the Renewable Energy Review. See the launch of the renewable energy review for a listing of all our publications.

If you are interested in submitting a blog post or article to this carnival, see our submission page on the Blog Carnival website. This carnival is currently being published weekly, and we are always interested in seeing new material.

The intent of this blog carnival is an ongoing investigation of the progress and potential of renewable energy in our world. Our goal is to collect the best writing and news on the subject of renewable energy projects and policies. We have observed that humanity is innovating rapidly as the energy security of the future becomes a global priority.

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  1. European Commission (COM), 2008. Commission Staff Working Document, Brussels, 57, 23 January 2008. Retrieved Sept 12th, 2010. []
  2. de Miera, G. S.; González P. del Río, Vizcaíno, I. (2008) “Analysing the impact of renewable electricity support schemes on power prices: The case of wind electricity in Spain.” Energy Policy (36, 9) pp. 3345-3359 []
  3. Germany, Stromeinspeisungsgesetz (StrEG) (1990). “Germany’s Act on Feeding Renewable Energies into the Grid of 7 December 1990,” Federal Law Gazette I p.2663, unofficial translation from Wind-Works. Retrieved Sept 12th, 2010. []
  4. Germany, Renewable Energy Sources Act (RES Act) (2000). “Act on Granting Priority to Renewable Energy Sources,”Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU). Retrieved Sept 12th, 2010. []
  5. Solar Choice: Solar Energy Update from Germany. Accessed November 16th, 2010. []
  6. Renewables 2010 Global Status Report. Ren21. Accessed November 16th, 2010. []
  7. RESOP Program Update. Ontario Power Authority. March 12, 2009. Retrieved Sept 12th, 2010. []
  8. What is the Feed In Tariff Program? Ontario Power Authority, 2009.  Retrieved Sept 12th, 2010. []