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

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

The feed-in tariff, or FIT, has proven to be a powerful tool to create managed economic incentives that yield meaningful results in system deployments, job creation, cost reduction and market development — yet many policy makers, especially in the U.S., continue to rely upon renewable portfolio standards, investment tax credits, low interest loan guarantees and other mechanisms to reduce fossil fuel dependency. The solar industry in the U.S. should take pride in achieving recent legislative and funding victories, but also must recognize the powerful role that FITs can bring to rational and responsible energy policy.

Simply speaking, a capless FIT offers any producer of solar power a pre-determined rate for any kWh of electricity produced, regardless of the own consumption. If this rate is guaranteed for e.g. 20 years, and set in order to allow a decent return on investment for the owner of the system, it mobilizes powerful market forces towards rapid implementation of growing amounts of solar energy.

The German Solar Miracle

FITs are the highly-effective policy engine behind the German solar miracle. Recognizing that return-on-investment is the principle barrier to wider market penetration for renewable energy alternatives (not lowering up-front costs), German policy makers required utilities to pay a rate of between €0.32/kWh and €0.43/kWh for solar electricity from newly installed PV systems. The German FIT program authorizes the utilities to pass on this extra cost, spread equally, to all electricity consumers through their electricity bill. In this way, the feed-in program works through market incentives independent of government budgets and subsidies.

In Germany, the share of renewable energy on the electricity supply grew from 5% in 1998 to 15% in 2008. The monthly extra cost per household due to the feed-in rates for solar electricity is in the average only €3 in 2008. The result is that every electricity consumer contributes to the restructuring of the national electricity supply network. Equally important, by assuring a rate of return over a sufficient period, the German FIT has proven to be an excellent accelerator for private financing. To encourage cost reduction and the eventual elimination of tariffs, the feed-in rate in Germany is reduced each year by 5% (increased to 8 -10 % starting 2009), but only for newly-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 on investment in their PV system, while exerting price pressure on the industry to continuously reduce costs to remain in the market.

A remarkable feature of a FIT is the built-in sunset clause: With the annual degression of the feed-in rate offered to new customers this rate will in only a few years dip below the rate of household electricity, and later compete with conventional power. Thus, the financial burden on today’s rate payers remains limited, and it provides the basis for more stable energy prices in the future, based on a larger fraction of secure, domestically produced electricity.

Spain’s FIT

FITs have been implemented throughout the world with enormously successful results. In Spain’s widely reported experience, nearly 3 GW in 2008 of solar power projects were deployed last year after generous tariffs were adopted. The result was that Spain briefly became the largest solar power market on the world, adding more than 45% of the world’s new installations and three times more than analysts expected. Today, in response to the impact on utility rate payers, Spain has capped its FIT at 500 MW, an amount still larger than all newly installed systems the in the U.S. last year. While Spain’s FIT is often cited as what not to do in solar policy, and this is partly true, the case clearly demonstrates the effectiveness of FITs to quickly establish a viable solar market.

Part of the confusion and controversy surrounding feed-in tariff is the wide variety of incentive schemes proposed and implemented across the world. In addition to the German example, classic tariffs or premium pricing schemes can be used; FITs can be technology targeted or neutral; capped or uncapped; generation cost based or value based.

FITs Enacted in ROW

FITs have been enacted with varying degrees of success in Australia, Brazil, Greece, Portugal, Korea, Singapore, and in some states in the U.S. South Korea adopted feed-in tariffs for solar PV in 2006 that distinguishes between systems >30kWp and systems <30kWp. Feed-in rates are quite generous, but necessary when considering the countries’ low solar irradiance profile. The result has been that South Korea’s solar demand now rivals Japan’s as Asia’s largest market (the country has set a goal of installing 1,300MWp by 2012).

By using relatively simple market incentives implemented through regulated utility monopolies, feed-in tariffs have proven effective at overcoming thorny downstream barriers such as financing, market education, distribution and sales, installation support, permitting and zoning fears and environmental regulations. Energy investors with resources, experience and entrepreneurial zeal can quickly make markets when they understand the risk and have confidence in reasonable rates of return.

Policy makers can target residential, commercial and power generation solar markets for development and choose tariff rates or caps to achieve the level of solar penetration desired. Successful fossil fuel reduction — with ancillary beneFITs of job creation, peak management, stable fuel supplies, and more — can be achieved more efficiently, more accurately and more cost effectively than any other policy instrument. In addition, the considerable cost of red tape that is necessary to administrate complicated support schemes like the ones we got used to in the U.S. to prevent fraud can almost be completely eliminated, as the PV system operator will take care to have the system run in the optimum way in order to ensure its profitability.

Reliance on Subsidies

So, why the reliance on tax credits, loans, subsidies and solar energy standards in the U.S. and China, to name two countries, to achieve desired policy outcomes? For one, tax credits have been the traditional incentive instruments in the United States for a variety of worthy goals such as home ownership, R&D, education and more. It is an instrument that is familiar and politically 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 hard or soft mandates on utilities and electrical power providers to establish renewable energy production targets. The American Clean Energy and Security Act of 2009, as passed by the U.S. House of Representatives in June, relies upon the Renewable Portfolio Standards (RPS) to place an obligation on electricity supply companies to produce a specified fraction of their electricity from renewable energy sources. A majority of U.S. states also use RPS policies to achieve favorable renewable energy outcomes. Advocates of RPS mechanisms claim they will result in competition, efficiency and innovation that will deliver renewable energy at the lowest possible cost.

Barriers to FITs

The barriers to FITs in the United States are also related to the state and local control over electric utilities and the widely decentralized structure of the electrical generation and distribution system. The U.S. is a labyrinth of 3,100 public utilities, 2,100 non-utility power producers and a not-so-smart transmission system. Despite the complexity, movement is underway to use FITs as an instrument of state, local and national energy policy. In May, Vermont joined California as the only states to pass feed-in tariffs for renewable energy. Several other states, including Michigan, Minnesota, New York, Indiana, and Wisconsin are considering FITs.

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

In Florida, the Gainesville Regional Utilities adopted a feed-in tariff with a rate of $0.32 per kilowatt-hour guaranteed for the next 20 years. The program is modeled closely after European systems and reached its self-imposed cap of 4 MW in minutes after accepting applications. In comparison, the U.S. Department of Energy took over three years to award the first loan guarantee for solar after the Energy Policy Act passage in 2005.

Perhaps similar to the problems in using European benchmarks in the current U.S. healthcare debate, FITs are still seen by some as some strange, exotic policy not applicable to the U.S. market. Some observers have even claimed that that the type of incentives does not matter, just the amount. One solar lobbyist even said about Germany, "They've been handing out bags of money and calling it a feed-in tariff. People think that they want a feed-in tariff, but what they really want is those bags of money.”

“A lot of the charm of the feed-in tariff is solid, take-it-to-the-bank security and confidence for the investing community," said U.S. Representative Jay Inslee (D-Wash), a sponsor of legislation that would establish a nationwide FIT. His bill was introduced in Congress last year and would use FITs to incent small projects up to 20 MW and help streamline grid interconnections.

An analysis by the National Renewable Energy Laboratory (NREL) also confirmed that countries with feed-in tariffs have cheaper renewable electricity than those with renewable energy credits, the mechanism behind RPS. The tariff system is less risky, and investors are willing to accept lower profits for long-term stability, according to the report.

"We deal with data and the evidence is very clear," said Toby Couture, a researcher with the NREL in a report by the Sarasota Herald-Tribune (March 22, 2009). "Feed-in tariffs have consistently proven to be cheaper for consumers. That's the bottom line."

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

Despite their proven effectiveness and ability to work in conjunction with RPS policies, national, state and regional FIT legislation has been a grass roots affair, not supported by national environmental or renewable energy associations. Rhone Resch of the Solar Energy Industries Association said in January, “What you are also going to see is a focus by industry to create feed-in tariffs at the state level. Creating these programs at the state level will provide a laboratory that shows the federal government how this kind of incentive program stimulates the market. So we are probably a couple years away from a major push on feed-in tariffs at the federal level.”

Call them what you will, but feed-in tariffs or performance-based incentives need to be seriously considered by every country and every policy maker in the world looking to expand the contribution of solar energy. They will be required to reach meaningful national climate goals and achieve significant job creation and economic stimulus. Elimination or marginalization of FITs by many policy makers in the U.S. cannot be a healthy sign for optimal legislation in the future. While near-term legislative action needs to focus on winnable, achievable victories, long-term success will require effective instruments grounded in solid economics.