How do you encourage local investment in renewable energy? Gainesville, Florida, seems to have found the answer: feed-in tariffs. Under this system, the local power company is required to buy renewable energy, in any amount, from anyone who has it. It’s the system Germany used to become the fastest-growing producer of renewable energy in the world, and it’s a model many states here in the US are considering to get the renewable energy sector booming again.
This winter, as Congress was scrambling to pass the stimulus package, the bottom fell out of the renewable energy sector — the very industry that lawmakers have held out as our best hope of salvaging the economy. Trade groups like the American Wind Energy Association, which as recently as December was forecasting “another record-shattering year of growth,” began predicting that new installations would plunge by 30 to 50 percent. Solar panel manufacturers that had been blazing a trail of growth announced a wave of layoffs. Some have since cut their workforces in half, as stock prices tumble and plans for new green energy projects stall.
But there is one place where capital is still flowing: Gainesville, Florida. Even as solar panels are stacking up in warehouses around the country, this city of 120,000 is gearing up for a solar power boom, fueled by homegrown businesses and scrappy investors who have descended on the community and are hiring local contractors to install photovoltaic panels on rooftops around town.
One of those investors is Tim Morgan, a tall fiftysomething man with slicked-back hair and ostrich-skin boots who owns a chain of electrical contracting companies. His industry has been hit hard by the downturn, but he has a plan to salvage his business, which he explained over a drink at the Ballyhoo Grill, a gritty Gainesville bar with rusty license plates nailed to the wall and Jimmy Buffett blaring on the jukebox. Morgan intends to rent roof space from eighty Gainesville businesses and install twenty-five-kilowatt solar generating systems on each of them, for a total of two megawatts — a project that would nearly double Florida’s solar-generating capacity. He estimates the venture will cost between $16 million and $20 million and bring in $1.4 million a year. Already, he has lined up financing, found local contractors to do the installation, and staked claims to the rooftops of at least fifty businesses. “And we’re just one tiny player,” he told me. “Look around. You can see how fast this thing is going to move.”
Indeed, around Gainesville similar projects abound. Paradigm Properties, a residential real estate company, plans to install photovoltaic arrays on fifty local apartment buildings and its downtown headquarters. Achira Wood, a custom carpentry outlet, is plastering the roof of its workshop — roughly 50,000 square feet of galvanized steel — with solar panels. Interstate Mini Storage is doing the same with its sprawling flat-roofed compound. Tom Lane, who owns ECS Solar Energy Systems, a local solar contractor, told me he’s planning to expand his staff from eleven to at least fifty. “The activity we’ve seen is just explosive,” he said. “I’ve been in the business thirty years and I’ve never seen anything like it.”
Why is the renewable energy market in Gainesville booming while it’s collapsing elsewhere in the country? The answer boils down to policy. In early February, the city became the first in the nation to adopt a “feed-in tariff” — a clunky and un-descriptive name for a bold incentive to foster renewable energy. Under this system, the local power company is required to buy renewable energy from independent producers, no matter how small, at rates slightly higher than the average cost of production. This means anyone with a cluster of solar cells on their roof can sell the power they produce at a profit. The costs of the program are passed on to ratepayers, who see a small rise in their electric bills (in Gainesville the annual increase is capped at 1 percent). While rate hikes are seldom popular, the community has rallied behind this policy, because unlike big power plant construction — the costs of which are also passed on to the public — everyone has the opportunity to profit, either by investing themselves or by tapping into the groundswell of economic activity the incentive creates.
Though Gainesville is the first to take the leap, other U.S. cities are also moving toward adopting feed-in tariffs. Hawaii plans to enact one this summer, and at least ten other states are considering following suit. Among them is hard-hit Michigan, where Governor Jennifer Granholm has promised that the policy will help salvage the state’s economy and create thousands of jobs by allowing “every homeowner, every business” to become “a renewable energy entrepreneur.” There is also a bill for a federal feed-in tariff before Congress.
Could this approach help revive our renewable energy market, and give a needed jolt to the U.S. economy? There is reason to believe it could. In Germany, which pioneered the modern feed-in tariff, it has given rise to the world’s most vibrant green energy sector. More than forty countries, from Nicaragua to Israel, have followed Germany’s lead, often with dramatic results. Study after study has shown that not only do feed-in tariffs deliver more renewable energy than other market incentives, they do so at a lower cost. “People hesitate to call anything a panacea,” says Toby Couture, an energy and financial markets analyst at the Department of Energy’s National Renewable Energy Laboratory. “But if you’re interested in creating jobs, getting capital flowing, and expanding renewable energy, feed-in tariffs get the job done — often more cost effectively than other policies.”
To understand why feed-in tariffs are potentially revolutionary, you first have to understand how they differ from the system we’ve been using to drive investment in renewable energy so far. For the last fifteen years, the United States has relied on a patchwork of state subsidies and federal tax breaks — mostly production tax credits for wind power, which let investors take write-offs for the energy produced. When Wall Street was riding high on mortgage-backed securities, this made green energy an appealing option for big banks, which funneled billions of dollars into sprawling wind farms as a way of lowering their taxes. But when the market collapsed and corporate profits dried up, so did the incentive to invest. Since last year, the number of tax equity investors — mainly big investment banks — sinking money into wind farms has dwindled from as many as eighteen to four, and the remaining players have scaled back.
This tax-based system has other drawbacks as well. Because Congress has to renew the tax credits — and has often failed to do so — renewable energy is a risky market. Frenzied bursts of investment are followed by near-total collapse, a pattern that has hampered the growth of our domestic green manufacturing sector. Also, tax incentives (and the quota systems in place in about half of U.S. states) end up favoring large-scale projects, mostly monster wind farms concentrated in remote places like the Texas panhandle. This has been lucrative for the companies, like GE and Siemens, that build them, but of limited economic benefit to local communities. What’s more, a lot of energy is wasted transporting power from the sparsely populated areas where it’s produced to the cities and coasts — assuming it can be transported at all. Transmission lines are in such short supply that turbines (and occasionally entire wind farms) sometimes have to be shut down because of bottlenecks in the grid.
Feed-in tariffs promise to solve many of these problems by encouraging small, local production, driven not by Wall Street banks but by ordinary entrepreneurs — a system that boosts efficiency and fortifies local economies.
Feed-in tariffs are not a new idea. In fact the United States tried them once before, in the 1970s. At the time the global economy was in shambles, the result of OPEC choking off the world’s oil supply. In a bid to ward off future oil shocks, Congress passed the Public Utility Regulatory Policies Act of 1978 (PURPA), which required power companies to buy electricity from small renewable generators. This spurred a green energy boom, especially in California, which offered producers long-term contracts at rates that were tied to the then-soaring price of natural gas (specifically, they were linked to future-cost projections). Virtually all of the renewable generating power the state has today came online under the policy. More importantly, the technical breakthroughs made in California during this era helped give rise to the modern renewable energy industry.
But this approach also had some glaring flaws, which came into focus in the early 1990s, when the price of natural gas tumbled. Rates for renewable energy sank so low that there was no incentive to invest, and the industry collapsed. Power companies were also stuck with high-priced contracts, which stirred a well of public resentment. Several key states, including California, rolled back the contract requirements, essentially taking the teeth out of PURPA.
But not every nation had the luxury of cheap, abundant fossil fuels. Even in the 1980s and ’90s, when the United States was flush with energy, Germany was struggling to meet its demand — a by-product of its scant oil and gas reserves and the groundswell of opposition to nuclear power after the Chernobyl meltdown. One of the solutions the country settled on was dusting off the feed-in tariff model. The original German bill, passed in 1991, only created an incentive for wind and hydropower. Still, it doubled the share of renewable electricity the country produced, from 3 to 6 percent, over the next nine years. In 2000, the incentive was extended to all renewable energy sources. The pricing structure was also overhauled so rates were tied to the cost of production and varied by energy source — a key point of distinction from PURPA. The aim of the policy was to cultivate a broad enough portfolio of renewable options that Germany could one day replace fossil fuels entirely, and do so outside conventional energy markets. “Big power companies have too many vested interests against renewable energy,” explains Hermann Scheer, a member of the German parliament, who championed the policy. “They will never be the driving forces behind its development.”
The policy has allowed Germany not only to meet but to exceed its renewable energy goals. Initially, the aim was to get 12 percent of its electricity from renewable sources by 2010. But it passed that milestone three years early, and has since reached the 15 percent mark — the most rapid growth seen in any country. By mid-century, Germany aims to increase that share to 50 percent. Already, the nation, which is about as sunny as Juneau, Alaska, is home to almost half the world’s solar generating capacity, and churns out more solar power than any country except Japan. Although it is half the size of Texas, and far less windy, it is also vying with the United States for the number one spot when it comes to generating capacity for wind power.
The driving forces behind this boom are local communities and small entrepreneurs. If you travel the country top to bottom, you’ll see the signs of this everywhere, from the drizzly port of Hamburg, where wind turbines are tucked between stacks of rusty shipping containers, to villages in the Black Forest, where farmers are ripping out ancient waterwheels and replacing them with modern turbines. In Freiburg, a walled medieval city full of cobbled streets and Gothic spires, there are roof-mounted photovoltaic panels everywhere, from churches and schools to train stations and factories, even the local soccer stadium. Some residents have also found more creative ways to harvest energy. Among them is local architect Rolf Disch: his home, which looks like a squat upside-down rocket, has a billboard-sized solar array on the roof and wrap-around balconies with liquid-filled railings that double as solar heat collectors. It also rotates to follow the sun. All told, the building generates five times more electricity than it uses. Disch has also designed solar gas stations and a suburban housing development, where the homes act like mini power stations. But he is careful to note that his clients are not hippies or eco-rebels. “These are doctors, teachers, engineers,” he told me when I visited Freiburg last June. “In other words, ordinary people.”