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IEA: Feed-in Tariff Not a Subsidy, But Tax Credits Are

The International Energy Agency (IEA) has declared that feed-in tariffs are the principal driving force in the worldwide development of solar photovoltaics (solar PV). While possibly stating the obvious, it’s always good to see official confirmation of one’s own observations.

IEA’s Trends in Photovoltaic Applications 2013 covers the year 2012 and its report contains a number of gems on what works and what doesn’t that will likely be lost on most industry reviewers. One of those gems is how IEA uses the term “subsidy” in its report — they don’t use it to describe feed-in tariffs, for example.

FITs Not Subsidies

The IEA’s remarkable distinction between subsidies and feed-in tariffs in its report is potentially of far more significance than how much of the world solar PV market is the result of feed-in tariffs.

For background it’s important to note that the IEA is not known as a bastion of progressive political thought. Only a few years ago it was accused of manipulating data on the status of the world’s supply of oil — its mission after all is to accurately assess how much oil is out there — under pressure from the US government to minimize concern about future oil shortages.

Moreover, the question whether feed-in tariffs are subsidies is more than a mere argument over semantics among academics. In the world of politics, competing economic theories duke it out for dominance. For the past three decades, one camp — neoliberalism — has dominated. A central tenet of neoliberalism is that subsidies “distort the market” and are, therefore, bad and must be avoided. Thus, in the English-speaking world, “subsidies” have a negative connotation.

There is no better illustration of the importance of this distinction than the heated 30 October 2013 debate in Britain’s House of Commons between Green MP Caroline Lucas and the Conservative Party’s Energy Minister Michael Fallon on the Coalition Government’s nuclear deal with EdF (Electricté de France). Lucas accused the Tories of giving EdF a subsidy through its Contracts for Difference (CfD). Lucas was attempting to hoist the anti-subsidy Tories on their own petard by arguing that the CfD deal with EdF was a subsidy. Fallon’s rejoinder was that the CfD was a not a subsidy but a “market mechanism.”

Some have characterized CfDs as a bastardized form of feed-in tariffs designed by the Coalition government to fit within their view of neoliberal ideology while granting their favored companies (utilities) and technologies (nuclear and carbon sequestration) as much “support” as possible.

The political world is topsy-turvy when the Greens charge that something is a subsidy — and therefore is bad — and the Conservatives argue that no this is not a subsidy and is therefore good.

Which brings us back to the term “feed-in tariff” and whether it is a subsidy or not. (I will write more on this unwieldy topic in the months ahead.) For some inexplicable reason, British writers of different political persuasions often intermingle the terms “subsidy” and “feed-in tariffs” indiscriminately as though they are one and the same. They are not.

The IEA report is written in British English, or more correctly now, EuroEnglish.So it comes as something of a surprise to see the IEA make just this distinction when writing about Japan’s rapid development of solar PV. The IEA specifically notes that Japan moved from a “subsidy programme” to a “feed-in tariff programme,” making a clear distinction between the two.

This isn’t simply an editing error, because the IEA makes this distinction elsewhere in the report. For example, IEA again makes the same distinction in discussing Taiwan. At one time, the IEA notes, Taiwan used both a capital subsidy — and a feed-in tariff to develop solar PV.

Again, when discussing Austria, IEA points out that the country uses a mix of feed-in tariffs and “investment grants.” (Investment grants are otherwise known as capital subsidies.)

Tax Credits a Subsidy

Unlike feed-in tariffs, IEA clearly places tax credits in the subsidy category. “Tax credits can be considered in the same way as direct subsidies since they allow reducing the upfront PV investment, says the IEA report. The IEA then warns that tax credits highly depend on the government budgets, and are highly sensitive to the political environment . . .” That’s an understatement, of course, and they make specific reference to the fight in the US for the wind tax credits in 2012.

Net-metering Insignificant

Net-metering has found some limited success in the Netherlands, Denmark, and the U.S., says the IEA. Nevertheless, net-metering programs account for a paltry 2 percent of the solar PV market worldwide in 2012.

Where it is used, net-metering is seldom the sole mechanism driving investments in solar PV. For example, in Belgium says the IEA, one could argue that 500 MW of solar PV had been installed through net-metering, but they warn that net-metering was not the main economic driver there. They could have easily substituted the U.S., where net-metering is only effective when coupled with hefty federal — and sometimes state — subsidies.

Net-metering only works where the retail price of electricity is higher than the cost of solar-generated electricity, such as in Denmark. In much of North America, the retail cost of electricity remains below the cost of solar — even after the dramatic drop in the price of solar during the past decade.

Feed-in Tariffs Dominant

“In summary,” says IEA, FiT remains the most popular support scheme for all sizes of grid-tied PV systems; from small household rooftops applications to large utility scale PV systems.”

Feed-in tariffs produced 61 percent of all solar PV capacity installed in 2012 and accounted for nearly 72 percent of all solar PV installed worldwide.

In 2013, Italy’s feed-in tariff driven solar PV development will generate nearly 7 percent of consumption — a world record, says IEA.

While the IEA cautions that the markets for solar PV are changing, it’s clear that feed-in tariffs are the mechanism for developing solar PV that has proven the most popular and the most successful worldwide — by far.

Lead image: Solar panels via Shutterstock

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