Feed-in Tariffs Have Earned a Role in US Energy Policy

While significant progress has been madein government funding and support of solar power in the United States,the most effective renewable energy policy and solar incentiveavailable—the feed-in tariff—has yet to receive major attention outsideof the Europe Union.

Photovoltaic (PV) energy conversion isbased on semiconductor technology, and the experience of the lastdecades has shown that the cost of PV electricity is reduced by 20%with each doubling of the total installed volume. Thus, it is necessaryto design market incentives that allow for a rapid increase of themarket size in order to quickly reach production volumes with theaccompanying cost reductions to first reach parity with householdelectricity rates, and later with production costs of fossil andnuclear energy.

The feed-in tariff, or FIT, has provento be a powerful tool to create managed economic incentives that yieldmeaningful results in system deployments, job creation, cost reduction,and market development–yet many policy makers, especially in the US,continue to rely upon renewable portfolio standards, investment taxcredits, low interest loan guarantees, and other mechanisms to reducefossil fuel dependency. The solar industry in the US should take pridein achieving recent legislative and funding victories, but also mustrecognize the powerful role that FITs can bring to rational andresponsible energy policy.

Simply speaking, a capless FIT offersany producer of solar power a pre-determined rate for any kWh ofelectricity produced, regardless of the own consumption. If this rateis guaranteed for e.g. 20 years, and set in order to allow a decentreturn on investment for the owner of the system, it mobilizes powerfulmarket forces towards rapid implementation of growing amounts of solarenergy.

The German Solar Miracle

FITs are the highly effective policyengine behind the German solar miracle. Recognizing thatreturn-on-investment is the principle barrier to wider marketpenetration for renewable energy alternatives (not lowering up-frontcosts), German policy makers required utilities to pay a rate ofbetween €0.35/kWh and €0.47/kWh for solar electricity from newlyinstalled PV systems. The German FIT program authorizes the utilitiesto pass on this extra cost, spread equally, to all electricityconsumers through their electricity bill. In this way, the feed-inprogram works through market incentives independent of governmentbudgets and subsidies.

In Germany, the monthly extra cost perhousehold due to the feed-in rates for solar electricity is estimatedat less than €1.25 in 2008. The result is that every electricityconsumer contributes to the restructuring of the national electricitysupply network. Equally important, by assuring a rate of return over asufficient period of time, the German FIT has proven to be an excellentaccelerator for private financing. To encourage cost reduction and theeventual elimination of tariffs, the feed-in rate in Germany is reducedeach year by 5% (increased to 8 -10 % starting 2009), but only fornewly-installed PV systems. Once a PV system is connected to the grid,the guaranteed feed-in rate remains constant over a 20-year period.This approach allows solar customers to easily calculate the return oninvestment in their PV system, while exerting price pressure on theindustry to continuously reduce costs to remain in the market.

A remarkable feature of a FIT is thebuilt-in sunset clause: With the annual degression of the feed-in rateoffered to new customers this rate will in only a few years dip belowthe rate of household electricity, and later compete with conventionalpower. Thus, the financial burden on today’s rate payers remainslimited, and it provides the basis for more stable energy prices in thefuture, based on a larger fraction of secure, domestically producedelectricity.

Spain’s FIT

FITs have been implemented throughoutthe world with enormously successful results. In Spain’swidely-reported experience, nearly 3 GW in 2008 of solar power projectswere deployed last year after generous tariffs were adopted. The resultwas that Spain briefly became the largest solar power market on theworld, adding more than 45% of the world’s new installations and threetimes more than analysts expected. Today, in response to the impact onutility rate payers, Spain has capped its FIT at 500 MW, an amountstill larger than all newly installed systems the in the US last year.While Spain’s FIT is often cited as what not to do in solar policy, andthis is partly true, the case clearly demonstrates the effectiveness ofFITs to quickly establish a viable solar market.

Part of the confusion and controversysurrounding feed-in tariff is the wide variety of incentive schemesproposed and implemented across the world. In addition to the Germanexample, classic tariffs or premium pricing schemes can be used; FITscan be technology targeted or neutral; capped or uncapped; generationcost based or value based.

FITs Enacted in ROW

FITs have been enacted with varyingdegrees of success in Australia, Brazil, Greece, Portugal, Korea,Singapore, and in some states in the US. South Korea adopted feed-intariffs for solar PV in 2006 that distinguishes between systems>30kWp and systems <30kWp. Feed-in rates are quite generous, butnecessary when considering the countries’ low solar irradiance profile.The result has been that South Korea’s solar demand now rivals Japan’sas Asia’s largest market (the country has set a goal of installing1,300MWp by 2012).

By using relatively simple marketincentives implemented through regulated utility monopolies, feed-intariffs have proven effective at overcoming thorny downstream barrierssuch as financing, market education, distribution and sales,installation support, permitting and zoning fears, and environmentalregulations. Energy investors with resources, experience andentrepreneurial zeal can quickly make markets when they understand therisk and have confidence in reasonable rates of return. Policy makerscan target residential, commercial and power generation solar marketsfor development and choose tariff rates or caps to achieve the level ofsolar penetration desired. Successful fossil fuel reduction–withancillary beneFITs of job creation, peak management, stable fuelsupplies, and more—can be achieved more efficiently, more accuratelyand more cost effectively than any other policy instrument. Inaddition, the considerable cost of red tape that is necessary toadministrate complicated support schemes like the ones we got used toin the US to prevent fraud can almost be completely eliminated, as thePV system operator will take care to have the system run in the optimumway in order to ensure its profitability.

Reliance on Subsidies

So, why the reliance on tax credits,loans, subsidies and solar energy standards in the US and China, toname two countries, to achieve desired policy outcomes? For one, taxcredits have been the traditional incentive instruments in the UnitedStates for a variety of worthy goals such as home ownership, R&D,education, and more. It is an instrument that is familiar andpolitically expedient.

Confusion over the term “feed-in tariff”has also been cited as a barrier. In fact, a FIT scheme is not a tax,it just offers a certain rate to be paid for the production of power.Therefore, some advocates prefer the term “feed-in rates”,“performance-based incentives,” “advanced renewable incentives” or“clean energy buy back” mechanisms.

Most solar policies today rely upon hardor soft mandates on utilities and electrical power providers toestablish renewable energy production targets. The American CleanEnergy and Security Act of 2009, as passed by the U.S. House ofRepresentatives in June, relies upon the Renewable Portfolio Standards(RPS) to place an obligation on electricity supply companies to producea specified fraction of their electricity from renewable energysources. A majority of US states also use RPS policies to achievefavorable renewable energy outcomes. Advocates of RPS mechanisms claimthey will result in competition, efficiency and innovation that willdeliver renewable energy at the lowest possible cost.

Barriers to FITs

The barriers to FITs in the UnitedStates are also related to the state and local control over electricutilities and the widely decentralized structure of the electricalgeneration and distribution system. The US is a labyrinth of 3,100public utilities, 2,100 non-utility power producers and a not-so-smarttransmission system. Despite the complexity, movement is underway touse FITs as an instrument of state, local and national energy policy.In May, Vermont joined California as the only states to pass feed-intariffs for renewable energy. Several other states, including Michigan,Minnesota, New York, Indiana, and Wisconsin are considering FITs.

"The feed-intariff has proven to be the best way to get quick movement in renewableenergy development and create a lot of jobs," said state Rep. MattPierce (D), who has introduced a feed-in tariff proposal in Indiana.(New York Times)

In Florida, the Gainesville RegionalUtilities adopted a feed-in tariff with a rate of $0.32 perkilowatt-hour guaranteed for the next 20 years. The program is modeledclosely after European systems and reached its self imposed cap of 4 MWin minutes after accepting applications. In comparison, the USDepartment of Energy took over three years to award the first loanguarantee for solar after the Energy Policy Act passage in 2005.

Perhaps similar to the problems in usingEuropean benchmarks in the current US health care debate, FITs arestill seen by some as some strange, exotic policy not applicable to theUS market. Some observers have even claimed that that the type ofincentives does not matter, just the amount. One solar lobbyist evensaid about Germany, "They’ve been handing out bags of money and callingit a feed-in tariff. People think that they want a feed-in tariff, butwhat they really want is those bags of money.”

“A lot of thecharm of the feed-in tariff is solid, take-it-to-the-bank security andconfidence for the investing community," said U.S. Representative JayInslee (D-Wash), a sponsor of legislation that would establish anationwide FIT. His bill was introduced in Congress last year and woulduse FITs to incent small projects up to 20 MW and help streamline gridinterconnections.

An analysis by the National RenewableEnergy Laboratory (NREL) also confirmed that countries with feed-intariffs have cheaper renewable electricity than those with renewableenergy credits, the mechanism behind RPS. The tariff system is lessrisky, and investors are willing to accept lower profits for long-termstability, according to the report.

"We deal with data and the evidence isvery clear," said Toby Couture, a researcher with the NREL in a reportby the Sarasota Herald-Tribune (March 22, 2009). "Feed-in tariffs haveconsistently proven to be cheaper for consumers. That’s the bottomline."

Increasingly, FITs are seen ascomplimentary to well-crafted RPS policies. One report concluded, “RPSpolicies appear to be converging with some of the designcharacteristics typically associated with feed-in tariffs. As a result,it could become increasingly possible to incorporate elements offeed-in tariffs into RPS policy making,” (Feed-in Tariffs and RenewableEnergy in the USA –a Policy Update, May 2008). A similar conclusion wasmade in a March, 2009 report by the NREL that concluded: “FITpolicies…can be used in parallel and wholly separate from RPS policies,they can replace a part of the current mechanism (perhaps to support asolar carve-out, or distributed generation), or they can be used toentirely replace RPS mechanisms. Of course, they can also be used bystates with voluntary renewable energy goals to advance renewableenergy development (Technical Report, NREL/TP-6A2 45549 March 2009).

Despite their proven effectiveness andability to work in conjunction with RPS policies, national, state andregional FIT legislation has been a grass roots affair, not supportedby national environmental or renewable energy associations. Rhone Reschof the Solar Energy Industries Association said in January, “What youare also going to see is a focus by industry to create feed-in tariffsat the state level. Creating these programs at the state level willprovide a laboratory that shows the federal government how this kind ofincentive program stimulates the market. So we are probably a coupleyears away from a major push on feed-in tariffs at the federal level.”

Call them what you will, but feed-intariffs or performance-based incentives need be seriously considered byevery country and every policy maker in the world looking to expand thecontribution of solar energy .They will be required to reach meaningfulnational climate goals and achieve significant job creation andeconomic stimulus. Elimination or marginalization of FITs by manypolicy makers in the US cannot be a healthy sign for optimallegislation in the future. While near-term legislative action needs tofocus on winnable, achievable victories, long-term success will requireeffective instruments grounded in solid economics.

By Dan Martin, Executive Vice President, SEMI PV Group

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