Thursday, April 8, 2010

Feed-in-tariff article on Carbon Pig

This is an article that was posted recently on Carbon Pig (www.carbonpig.com)
Article Link: http://carbonpig.com/article/feed-tariffs

What are Feed-in-Tariffs?
Feed-in tariffs are a payment received for every kilowatt of electricity returned, or “fed in,” to the grid. The concept originated in Germany 20 years ago as a system of subsidies to promote renewable energy development. In Germany it is referred as EEG (Erneuerbare-Energien-Gesetz), or Renewable Energy Law. This policy was the first of its kind and regarded as very successful because there is high participation in the program, a massive investment in renewable energy, local job creation and a home-grown industry. As of 2007, Germany had 5.3 gigawatts of solar PV installed, more than 10 times California’s installed capacity of .5 gigawatts (as of 2009). It is even more impressive considering Germany is smaller than California and has a lot less sunshine.

The German program is unique for a few different reasons. First, the renewable energy payments are exceptionally high. For a typical roof-mounted system, the government pays .41 Euro cents a kilowatt hour (about $.56 cents in US dollars). However, the beginning of the program saw payments as high as .52 Euros per kw/h ($.70 kw/h) for some systems. When compared to US retail utility rates of around $.12, it is easy to understand the high participation in the program. Second, the energy payments are guaranteed for 20 years. This creates a stable market where lenders are willing and eager to invest in a solar rooftop. The payback calculation becomes simple with a set rate of electricity payments because the government guarantees the payments for 20 years and the manufacturer guarantees the panel performance for 20 years. There is stability in the market that creates investor confidence. This is unlike the US market that has historically seen renewable energy subsidies come and go, with no assurance they will exist in the long term, scaring off long term investment. Third, the utilities were forced to take the “feed-in” electricity. Utilities were required by law to accept the electricity generated by independent power producers. Finally, the German people were willing to accept a tax on their utility bill for this investment in renewable energy. There was a public acceptance and willingness to pay an additional tax for renewable energy. Currently the tax is about 3 Euros a month, not exorbitantly high because the cost is spread among every ratepayer in Germany. However, it is expected to rise slowly over time as more renewables are added to the market.

The German feed-in tariff program has a complex design of reducing rates over time, varying subsidies for different types of renewable technologies and configurations. For example, in 2007, off-shore wind received a subsidy of .087 Euro cents a kilowatt hour, for 20 years, with a 2% a year digression, whereas roof-mounted solar less than 30kw would receive .43 Euro cents. Although the program design and management is complicated, the payments schedules are easy to understand and set for 20 years making it easy to obtain financing. The program is closely monitored and adjusted by the government to keep the growth of renewable adoption at a manageable rate.

Criticisms
Keeping growth manageable has been one of the criticisms feed-in-tariff programs in recent years. There have been about 20 countries that have adopted similar versions of a feed-in tariff program. Spain saw a massive growth in large-scale utility size power plants that almost bankrupted their program. Creating an incentive that encourages adoption, but encourages it at a manageable rate is difficult. Gainesville, Florida was the first municipality in the US to create a sizable feed-in tariff. The program achieved full participation almost as fast as it was announced. A criticism is that programs of this size will not create a new industry; it will only see a short influx of installers that will leave as soon as the funding runs out.

Another criticism is that it puts money in the pockets of a select few. The program creates profits for one subset of a population by taxing the rest of the ratepayers.

California has been looking into feed-in tariffs closely the last year with meetings being held by the California Public Utilities Commission (CPUC) and the Investor Owned Utilities (IOUs). California has largely adopted “net-metering” which allows a customers meter to run backward when producing electricity, to reduce the electricity bill over the course of the year, but does not get paid a cash amount for the electricity produced.

It is unclear whether California will adopt a feed-in tariff. As described by the unique situation for Germany, it has been difficult for other countries to recreate the success Germany has experienced. California will find challenges because there is not a single utility provider in the state; there is a mix of local municipal power producers (such as LADWP) and IOUs (such as Southern California Edison). Most likely some sort of hybrid feed-in tariff would need to be created, but that could invite a new host of problems.

I personally believe that California could benefit from a targeted feed-in tariff program directed at medium scale solar. There are already many subsidy programs for solar including SB1 funds at the state level, and the 30% Investment Tax Credit at the federal level. These subsidies have encouraged small systems for homeowners and large-scale utility projects in the desert. However, there is currently a lack of 1 to 5MW urban projects that could create substantial power without the need for transmission lines. A targeted feed-in tariff, with construction to match grid capabilities, could efficiently increase the level of urban renewable solar electricity produced in California. This would continue to keep California a leader in renewable energy and further develop local green jobs.