Can Feed-In Tariffs Power a Renewables Revolution?

Posted on Thursday, May 21st, 2009 at 11:24 pm by dpacheco

First, the obvious question: What the heck is a feed-in tariff? Well, as I learned from visiting author Paul Gipe‘s website, Wind-Works.org, feed-in tariffs are simply payments per kilowatt-hour for electricity generated by a renewable resource.

You generate your own electricity, with your wind turbines or solar panels, and sell it to the power companies at a better-than-market rate.

Now that the basics are out of the way…

The following is an excerpt from Wind Energy Basics: A Guide to Home- and Community-Scale Wind Energy Systems by Paul Gipe. It has been adapted for the Web.

Electricity Feed Laws

Electricity feed laws are the world’s most successful policy mechanism for stimulating the rapid development of massive amounts of renewable energy. Feed laws are also the most egalitarian method for determining where, when, and how much renewable generating capacity will be installed. Feed laws enable homeowners, farmers, small businesses, community groups, and the continent’s indigenous population to become renewable energy entrepreneurs. All can sell electricity to their utility company for a profit, whether it’s homeowners installing solar photovoltaic systems on their rooftops, farmers installing large wind turbines on their land, or cooperatives building small wind farms in their communities. John Geesman, a former commissioner on the California Energy Commission, suggests that it is this feature of feed laws that makes them so powerful: They can democratize the generation of electricity by distributing the opportunity for ownership to all.

Feed laws, like all policy mechanisms for spurring the renewable generation of electricity, must, at a minimum, include measures for priority access to the grid and payment of a fair price for the electricity produced. These elements are the two essential parts of the development equation. One without the other will not lead to the kind of rapid growth required to meet any but the most unambitious target. Germany’s groundbreaking feed law provided both elements: access and price.

The idea is not foreign to North America. In 1978 the US Congress passed the Public Utility Regulatory Policies Act that permitted interconnection of renewable energy generators with the grid. Unfortunately, PURPA didn’t specify the price, only the means for calculating it. Feed laws, like PURPA, grant priority to the interconnection of renewable sources of electricity with the electric utility network. Unlike PURPA, however, feed laws specify the tariffs, or rates, that renewable generators are paid for their electricity.

Germany’s more recent Erneuerbare Energien Gesetz (Renewable Energy Sources Act), for example, in its preamble again clearly provides for access to the grid. The law, one of several examples of Advanced Renewable Tariffs, is formally known as the “act on granting priority to renewable energy sources” and goes on to specify in detail the prices that will be paid for different sources of renewable generation.

Successful feed laws—those that produce the rapid growth of a diverse mix of renewable technologies—provide a payment for feeding electricity into the grid that is both fair and reasonable, while encouraging robust growth. Balancing these demands is less difficult than it first appears. Geesman, a former regulator himself, points out that utility commissions in both Canada and the United States have been making just such judgment calls for decades.

The objective is to calculate a tariff based on the cost of renewable generation plus a reasonable profit. This is in fact how we used to regulate the price of electricity. Regulators were charged with ensuring that utility companies made a fair profit while at the same time protecting ratepayers from price gouging because of the utility’s monopoly power.

The difference with past practice is that we determine the appropriate price up front, and then make it available to all comers. We say, in effect, Here’s the tariff. If you can build a renewable energy project and make a profit, go right ahead. The sooner you can build it, the better. We need clean, renewable generation and we need it now.

Advanced Renewable Tariffs differ from simpler feed-in tariffs by differentiating the tariffs according to several factors. Tariffs within each technology can be differentiated by project size and application or, in the case of wind energy, by the productivity of the resource. There can be several different prices for wind energy, several different tariffs for solar, and so on. What makes the tariffs “advanced” is the increased sophistication in fine-tuning them to achieve the desired objectives. Where we want rapid growth, for example, we increase the profitability by raising the tariff. If we want to spur rooftop solar over ground-mounted solar power plants, we pay more for rooftop solar than we do for ground-mounted systems. This is in fact what Germany and France do with their solar tariffs.

Such tariffs are not a subsidy, explains Jérôme Guillet, a French banker who specializes in financing wind power plants. They offer a fair transaction where the public regulatory authority or elected representatives in effect purchase the guarantee of prices that are capped into the future in exchange for somewhat higher prices today. These tariffs, says Guillet, not only become a hedge against both the volatility of fossil fuel prices and the cost to society of this volatility, but also a hedge against the inevitable increase in the cost of fossil fuels. That’s the grand bargain.

Because renewable sources of generation are capital-intensive, they require long periods of time to return their investments and earn a profit. Consequently, the prerequisite for a successful renewable energy program, above all else, is the political desire—the political will— for the program to succeed. And for it to succeed there must be the willingness to pay what it costs for renewable energy generation. Where the will exists, there is the stability of public policy that ensures investors, and the banks that loan to them, that there will be a fair opportunity to earn a return on their investment.

Feed laws don’t guarantee a profit. They only guarantee that if the project is built, and it generates electricity, the owners will be paid for their electricity at the price—the tariff—that’s advertised. The burden remains on the owner to make sure the wind turbine operates as expected. If it doesn’t, or if it doesn’t produce as much electricity as planned, the owner suffers the loss.

Successful programs must be simple, comprehensible, and transparent. They must provide simplified interconnection requirements with priority access to the grid. They must provide sufficient price per kilowatt-hour to drive rapid development, and they must provide a contract length sufficiently long to reward investment.

Aggressive targets require aggressive programs. Feed laws and the Advanced Renewable Tariffs that make them work are not for the politically faint of heart. We won’t get to 100 percent renewables from where we are today with incremental change in response to timid targets. As one political observer noted, “Incremental change will only get you incremental results.”

Further, successful programs either have no cap on the program size—or the cap is so high that there is no fear of reaching it in the early years of the program. This discourages gaming and the hoarding of contracts. Of course, a target of 100 percent renewables or a goal of eliminating all fossil-fired generation is the equivalent of no cap on the program—it’s the very definition of an aggressive target.

Importantly, renewable tariffs must be sufficiently differentiated to deliver the kind of renewable development from the technology desired in the location desired. There must be tariffs for each technology under a variety of conditions, such as a tariff for small wind turbines as well as large ones. And the tariffs must be high enough to spur development.

Small Wind Tariff

As an example of how aggressive programs must become, consider the special case of small wind. As we’ve seen, small wind turbines must be paid a high price for their generation in order to have any possibility of earning a profit. The tariff needed is far higher than anyone in North America has considered before. It’s not as high as what is needed for solar photovoltaics— the most expensive of the new renewable technologies available today—but a small wind tariff must be far higher than that necessary for its bigger brother, large wind.

France, Germany, and Spain specify tariffs for a host of technologies, but not for small wind turbines. Switzerland introduced its system of Advanced Renewable Tariffs in 2008. This was the first program to offer a specific tariff for small wind: $0.20/kWh. In 2007 several midwestern states introduced bills into their assemblies calling for Advanced Renewable Tariffs; these bills included a tariff for small wind turbines of $0.25/kWh. (As Wind Energy Basics went to press in 2009, none had yet passed.)

Higher tariffs may actually be needed. There’s surprisingly little real-world performance data on small wind turbines. The Swiss tariff or the proposed Midwest tariffs may be a good place to start, until regulators can make a more informed decision.

Tariffs for Distributed Wind

Fortunately, we know a lot more about the costs and productivity of large wind turbines than those of small turbines. The problem with the existing tariffs in Ontario and California is that they’re designed so that one size fits all conditions. That will never work to spur broad geographic development.

If there’s only one price for wind energy and that tariff is low, as in Ontario, then wind development is limited to only certain areas. Commercial developers can move their projects to wherever they like. They will concentrate only on the windiest sites to maximize their profits. Farmers and other landowners, in contrast, are landlocked. Unlike a commercial developer, they can’t move to a windy location to install their own turbines. A one-price-for-all policy favors some, but denies opportunity to everyone else. It can also allow some developers to earn excessive profits, above and beyond those needed to encourage profitable development.

Germany and France wanted to avoid concentrating wind development on scenic coastlines or mountain ridges. They wanted to avoid the kind of wind development seen in California’s windy passes. Instead, they wanted to distribute wind development across the landscape, to gain more of the benefits of this renewable energy technology by moving the turbines closer to the load—the people. As a result, they pioneered renewable tariffs differentiated by wind resource intensity. They have been followed recently by Switzerland. In all three countries, the tariffs for wind energy vary by the productivity of the wind turbine. The turbine’s productivity, or yield, is a surrogate for the wind resource.

The objective was twofold: to lessen development pressure on the windiest sites by enabling development in other, less windy, sites; and to provide siting flexibility. The programs in Germany and France have been successful in spreading development across the landscape of each country. (Switzerland’s program is too new to see any results as yet.) While development still favors the windier regions, development is not solely concentrated in the windiest areas. As a result of the German policy, nearly 60 percent of German wind development is now in the interior of the country and has moved away from the coastline. As in Denmark, wind turbines can now be seen in almost every part of Germany.

Germany and France each use a different mechanism for determining site productivity. However, both use a trial period after which the productivity is calculated and a subsequent tariff is determined. Thus, the maximum tariff is fixed, in order to provide a targeted profitability at the targeted sites, but the final tariff paid for more productive—windier—sites declines on a sliding scale as a function of productivity.

Table 8-3: OSEA Estimate of the Tariff Necessary for
the Profitable Operation of a Large Wind Turbine
Average Annual
Specific Yield
Average Annual
Wind Speed at
Hub Height
Tariff
Needed
kWh/m2/yr ~m/s ~mph CAD/kWh
550 5.2 12 ~0.15
750 5.9 13 ~0.12
1,000 6.7 15 ~0.10

In table 8-3, OSEA Estimate of the Tariff Necessary for the Profitable Operation of a Large Wind Turbine, the wind tariffs calculated by the Ontario Sustainable Energy Association embody this principle. OSEA recommended that for the first five years all wind turbines should be paid a base tariff of $0.15 CAD/ kWh, after which the specific yield of the wind turbine or group of turbines would be calculated. The tariff for the time remaining in the contract, years 6 through 20, would then be found from a formula that includes a measure for the profitability. In this case, a windy site would receive $0.10 CAD/kWh—or less. Wind turbines at low-wind sites would continue to receive the base rate of $0.15 CAD/kWh. Turbines at moderately windy sites would be paid a tariff less than $0.15C CAD/kWh but more than $0.10 CAD/kWh, on a sliding scale.

This principle must be part of any aggressive renewable energy policy. If we are to see wind development from the windy Great Plains to modestly windy sites around the Midwest and throughout Ontario, we’ll need differentiated wind tariffs to make it possible.

Wind tariffs differentiated by productivity can

  • Increase distributed generation,
  • Distribute wind development across a geographic area,
  • Reduce (but not eliminate) development pressure on the windiest sites,
  • Reduce (but not eliminate) social friction by spreading development among many sites,
  • Increase program flexibility by lessening pressure to get prices exactly right the first time,
  • Reduce wind and technology development risk by determining the final tariff after five years of operation,
  • Spread opportunity to all, not just to those fortunate enough to live in the windiest locales, and
  • Enable fair profits at medium wind sites while limiting excessive profits at windy sites.

Tariffs differentiated by site productivity are a powerful tool for encouraging wind development where it is needed most, near the load— that is, urban areas. And the principle is not limited to wind energy; it could be applied to solar photovoltaics as well. Clearly, solar systems installed in the blistering sun of the Southwest will need lower renewable energy payments than a rooftop solar system on a home in Detroit.

Who pays for these tariffs? We do, of course. The cost of Advanced Renewable Tariffs is spread across all of a utility’s ratepayers as a slight increase in the cost per kilowatt-hour of electricity. It’s a far more equitable and stable strategy than billing taxpayers, because those who use more electricity pay more for renewable generation. Besides, we are changing the way we produce and consume electricity. We pay for electricity from conventional sources. As we begin to eliminate those, we can reasonably be expected to start paying for our renewable sources of generation as well.

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