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Feed-in TariffsUsing Feed-in Tariffs to Encourage Growth of the Renewable Energy Industry in the US
By: Rebecca [email protected]
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Feed-in-Tariff: Definition
A guaranteed payment for renewableenergy fed into the grid.
*Feed-in tariffs are also called Feed Laws, Advanced Renewable Tariffs, Renewable Energy Payments.
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Elements of a FIT
• 1) Guaranteed grid connection▫ Anyone who wants to produce renewable power
should be able to easily access the grid• 2) Guaranteed payment▫ Must be at a level to provide rate of return high
enough to attract investors• 3) Long term contract (usually 20-25 years)
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Policy Design Options
1) Payment Options2) Differentiation by:
Type of TechnologySize of ProjectResource qualityLocation
3) Degression4) Periodic Review
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1) Payment Options: Setting the Tariff
• Fixed: Cost of Production + Reasonable rate of return
• Variable: Payment based avoided costs or value of electricity▫ Avoided cost - Price varies based on costs of other
sources of energy (PURPA)▫ Value of Electricity - Tariff is a certain amount
over the price of energy on the market.
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Guaranteed Payment FIT payment choices• Fixed price based on cost of
production• Value based payment above
market price
Time
FIT Premium (c/kWh) FIT Premium
(c/kWh)
ElectricityPrice
Actual FITPremium Amount (c/kWh)
Time
FIT Purchase Price (c/kWh)
FIT Price(c/kWh)
ElectricityPrice(c/kWh)
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2) Differentiations• Differentiations by:▫ Type of Technology▫ Size of Project▫ Resource quality▫ Location▫ Year of installation
Differentiating prices allows for FITs to be adaptable to local conditions and goals
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Differentiated Prices• Differentiation by technology:▫ Price based on cost of production of wind, solar, hydro,
geothermal, etc. Allows profits in variety of renewable energy sectors.
• Differentiation by size▫ Higher prices for small projects counteracts additional
costs.• Differentiation by location:▫ Higher prices for rooftop solar, lower prices for projects
that use previously undeveloped land.• Differentiation by resource quality▫ Lower prices in windy sites, higher prices in less windy
sites.
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3) Degression
• Tariff price decreases each year• Two effects:▫ Encourages investment sooner rather than later▫ Forces green energy sector to innovate
If they want to stay in business and keep being profitable, they must find ways to be more efficient, or create more efficient technology.
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4) Periodic Review
• Determine if prices are set adequately based on costs of production and adjust prices to avoid windfalls or inadequate incentives.
• Determine if targets are being met• Should occur every 1-4 years
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The Big Questions: How and Why?
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How Does it work?
• Allows everyone (homeowners, farmers, cities, non-profits, businesses) to become an energy generator and profit from renewable energy.
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See Jane FIT
Jane gets paid tariff price for what she feeds in to the grid
Jane pays only retail price on the electricity she uses from the grid
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BIOMASS
HYDRO
WIND
GEOTHERMAL
LOCAL GRID
SOLAR
TRANSMISSION GRID
SUPPLY COMPA
NY
CONSUMERS
$ $
$
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Why Do FITs Work?• Stability▫ Predictable revenues allows for financing.▫ Price based on cost of generation, so you are
guaranteed a rate of return.▫ About as safe as government bonds, but with better
returns• Flexibility▫ Feed-in tariffs can vary from place to place to meet
local objectives and accommodate local constraints.• Ease▫ Standardized purchase offer
• Everyone can participate▫ Encourages small, medium, and large scale producers
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Benefits: too many to count• Economic Security▫ Creates Jobs
InstallationManufacturing
▫ Increases local ownership▫ Creates economic growth
Directly through investing themselves, or through tapping into the growth of economic activity the incentive creates
• Environmental and Climate Security▫ Less GHGs▫ Promotes technological innovation▫ Drives economy of scale- costs of RE are lowered over time
• National Security▫ Diversify Energy Supply▫ More energy independence
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NegativesSetting FIT payment level is challenging: if set too low, little new RE development; if too high, surplus profits to developers
Cost: supporting emerging technologies leads to small initial increase in electricity rates.Policy design challenge: Tracking technological improvement and cost reduction accurately over time
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Money, money, money.The feed-in compensation paid to producers makes up only 3% of the total power expenses invoiced to private German Households
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Why is increase in price ok?
• Unlike big power plant constructions – the costs of which are also passed on to the consumer-everyone has the opportunity to profit.
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Costs continued
Merit-Order Effect
In the long term, the reduced-risk FIT delivers a lower price compared with renewable energy certificates.
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FITs around the worldHistory and Success Stories
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History of FIT policy
• Oil embargo• Denmark• Spain• Germany
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Denmark: the rise and fall of Feed-in tariffs
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Spain
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A picture of perfection
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Growth of Renewables in Germany
Renewable Tariffs Launched
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07
Year
0
1
2
3
4
MW Total (Thousands)
Renewable Tariffs Launched
1,000-Rooftops (2,500 x 3kW)
100,000 Rooftops
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Result of Germany’s Feed-in Tariff• Jobs created:• Renewables: 15% of
Energy Supply• Cost of German EEG per
household: 1.5 Euro• 97 million tonnes of CO2
emissions avoided in 2006 from use of renewables
• Breathing Cleaner Air and Slowing Global Warming: Priceless
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FITs are accelerating cost convergence with conventional generation
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Creates five times more electricity than it uses
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“If the incentives are right, there’s no reason there couldn’t be solar panels on every Walgreens and Sam’s Club across the country.”
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Renewable Energy Generation in the US Lags Way Behind Germany
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Current US Policies• 1) Patchwork of state subsidies and federal tax
breaks▫ One source of revenue makes financing European
RE Projects Simpler
Feed-in Tariff
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2) Renewable Portfolio Standards
FIT vs. RPS= Frienemies?• RPS ▫ Favors large-scale projects, and cheapest technologies
(wind), in cheapest areas (rural)▫ A lot of energy is waste in transporting▫ Benefits the large companies that fund and invest, but
not the local communities in which they are located• FIT▫ Allows all Res to profit, no matter the size or cost▫ Distributed energy means less transmission needed▫ Benefits local communities economically, and
everyone that breathes physically• FITs are better than RPSs, but they can work
together. FITs can be used to meet RPS goals
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FITs deliver lower prices compared to RPS
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3) Net Metering
100 kWh
100 kWh
60 kWh +40kWh
40 kWh
Homeowner uses power to offset domestic use and gets paid at wholesale rate for excess power
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Feed-in Tariff
100 kWh
100 kWh
60 kWh
+40kWh
Homeowner sells all their power to the grid for a premium price, but buys all their power from the grid at retail rates
60 kWh
Paid Tariff price for all power produced
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US vs. Germany• Size of Germany vs. US
Germany 41%
Spain 25%
Japan 17%
US 9%
Rest of World 8%
World Solar Capacity 2008
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Current US Policies are Not Working
What the US is lacking:• Guaranteed grid connection• Stability▫ Current policies expire creating a boom-bust cycle.
• Simplicity• Enough incentive to encourage investment
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Key Differences Between US and EU
• 1. FITs in the US have not been based on cost of production
• 2. US FITs have contained various caps like on project or program size
• 3. US FITs have not fully differntiated tariffs based on technology
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Gainesville, Florida – There is hope!
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Conclusion• We already know FITs work!▫ FITs have created rapid growth in renewable
energy generation in Europe▫ Create more jobs, deliver more renewable energy,
and all at a lower cost than other market incentives.
• Feed-in tariffs do not involve government spending, but only the political will to implement them