Energy Freedom Is Not Free
Buildings & Energy
As tens of thousands arrive inAnaheim, California for the Solar International Convention there islots to talk about: Renewable Portfolio Standards, Feed-in Tariffs, theStimulus Package, and the Climate Bill…just to name a few.
While many hope renewableenergy will power us out of the recession, hone our competitive edge,and make us energy independent their optimism may be misplaced. Here’swhy.
Renewable energy is currentlyfinanced through a complex mix of tax subsidies, tax deductions, cashincentives, production incentives, and – yes – even a bit of powergeneration. Some solar developers still succeed with that model. Whenthe financial markets collapsed at the end of 2008, however,construction of new renewable energy facilities was severelycurtailed. The financial crisis revealed a basic flaw in how wefinance renewable energy: Tax subsidies cannot successfully fund a renewable future.
We propose a more robuststrategy: pay for renewable energy development by – paying for it. Bylinking three basic policy initiatives, we can have a realisticrenewable energy future.
First, we need a national renewable portfolio standard (RPS). RPS legislation requires utilities to purchase or generate a percentageof their power from renewable sources by a certain date. Where stateshave established minimum targets for renewable energy production,utilities and state agencies have created a wide range of incentiveprograms to meet the challenge. With few exceptions, construction ofnew renewable power plants correlates with the financial commitment tostate and local incentive programs. A national standard will create anational commitment and opportunities for every local form of renewableenergy.
Second, replace wildlydivergent state, federal, and local subsidies and incentives with asingle, national, above-market price for every kilowatt-hour ofrenewable energy generated and delivered to the grid: a “Feed-inTariff” (FiT). A feed-in tariff replaces the complex mix oftax subsidies and incentives by offering a premium price for clean,renewable power. This substitute for inefficient subsidies has helpedmake Germany a leader in solar energy.
Instead of complex partnershipswith investor groups seeking access to tax breaks and incentive funds ,FiT allows renewable energy ventures to be run like conventionalbusiness ventures. Entrepreneurs would have a direct incentive: thelarger the difference between the cost of producing alternative energyand the FiT, the more you make. If we guarantee the FiT (even at adeclining rate) for twenty years, we will create a huge businessopportunity and inspire competition.
Who pays for this above-market rate? We all do. No leap into the future is free. Current FiT proposals suggest a fraction of a cent per kWh be added to every ratepayer’s bill. But rate-payers should not bear the entire cost or even a majority of the cost.
Instead, we proposechanneling the money generated by carbon pollution permits -essentially pollution penalties – into a DOE pool to fund a significantpercentage of FiT costs. Every renewable energy producer ispaid from that pool based on the kilowatt-hours of electricity itproduces. Utility-scale installations, every wind turbine, every smallbusiness with a solar roof, and perhaps even homeowners, would becompensated for generating carbon-free energy with pollution permitsfunds, In this way, carbon polluters pay a large part of the cost ofthe FiT, minimizing the cost to ratepayers.
Initially, the DOE pool wouldgrow quickly because less than 300 MW of renewable power is currentlyon line. As more projects are commissioned, more money is paid out. At times determined in the initial legislation, the FiT is reduced. Asthe cost of conventional energy increases, the cost of renewable energydecrease. When they approximate each other, the Fit is the marketrate, and the cost of renewable energy reflects the fair market valueof the previously externalized cost of carbon pollution.
Initially, everyone paysa small price for energy independence and carbon polluters areencouraged to convert to renewable technologies. Ultimately, the valueof energy independence more than equals its cost.
There are practical challenges. Utility companies are concerned about “wildcat” energy developersunbalancing the grid. Just as national security justified the creationof the Interstate Highway system, it justifies a federal commitment toupgrading grid infrastructure to create energy independence. .
Critics will ask: What about whenthe sun goes down? What about variations in electric demand by seasonand time of day? Initially, solar and wind power will be such a smallinput to the grid that there will be little or no noticeabledifference. As both expand, the “smart grid” will grow, givingrenewable generation priority when it is online. Renewable storagetechnologies, currently in development, will become a reality longbefore “clean coal.”
What about existing state andfederal programs? While there would be no immediate change, taxsubsidies would be phased out. Fit will ultimately take the place ofstate incentive programs that are already designed to declinegradually. Won’t Feed-in Tariffs tend to keep the costs of renewableenergy artificially high? A carefully modeled policy for feed-intariffs will have them decline over time, as technology costs declineand power generation becomes more efficient.
All energy is subsidizedin some form. Unfortunately, the current mix of subsidies andincentives is failing to make us energy independent. But if we movefrom tax subsidies to pollution permits, RPS, and Fit, we can unleashcapitalism to create a renewable energy future.
And best of all, we will investing in America – kilowatt-hour by kilowatt-hour.
Co-authored by David M Adams ofBuildings and Energy and Norman Brand, Ph.D., J.D, with support fromMarsha Shenk, a pioneer of Business Anthropology
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