Is the Unthinkable Possible: Feed-in Tariffs for Coal and Nuclear?

Paul Gipe, Contributor
October 30, 2012 | 6 Comments

Environmentalists have long advocated feed-in tariffs as a public policy mechanism to spur massive development of renewable energy. However, as a policy mechanism, feed-in tariffs are technology neutral. They can be used to pay for fossil-fired generation as well as nuclear power.

Some opponents of nuclear power have gone so far as to call for feed-in tariffs for nuclear. They reason that if the nuclear industry had to publicly reveal their fully-burdened costs, politicians would choose cheaper and less risky renewable energy rather than face the wrath of their constituents.

This will soon be put to the test.

Within days the coalition government of Britain will introduce its so-called Electricity Market Reform (EMR) bill. The proposal will usher in a new era of feed-in tariffs for power generation, including tariffs for new nuclear plants.

Meanwhile the conservative state of Indiana has introduced--without much fanfare--a one-off feed-in tariff for synthetic gas.

Transparency Questioned

One of the attributes of a well-designed feed-in tariff for renewables is transparency. Typically, the tariffs are set in a public process either through legislation or a regulatory proceeding. The tariffs are then posted publicly for all to see. Then it's a simple matter to compare the costs among various technologies.

With renewables this is often straightforward. Most jurisdictions use feed laws as the principal mechanism for meeting renewable policy objectives. They don't need to lard on subsidies from taxpayers to make a well-designed program work.

Under ideal conditions, politicians, consumers, and the public can see exactly what is being paid to all players with a feed-in tariff. The challenge, of course, is that all the costs are accounted for in the tariff and are not hidden through tax credits, grants, or other forms of direct and indirect subsidy.

While feed-in tariffs for renewables may be transparent, the same may not be the case for nuclear or coal gasification. There's a justified wariness that the tariffs for nuclear and coal gasification may not reflect reality. Or, at least the tariffs for nuclear and coal gasification may not be directly comparable to those for renewables.

First of all, accurate tariffs are those that result in plants being built and then operated. It makes no sense to compare a posted tariff that doesn't result in any new capacity or that is insufficient to operate the plant once it is built to tariffs that work. For example, a tariff that results in solar photovoltaics (solar PV) being installed on residential rooftops can't be compared to a solar tariff, as in Palo Alto, California, that doesn't result in any new capacity. The Palo Alto tariff for solar PV was too low to get the job done.

This simple requirement is easily met by short lead time technologies such as wind, solar PV, and biogas. But what about technologies, such as nuclear and coal gasification, where it may take a decade to bring a plant online?

Nuclear plants in particular have seldom been brought online at the estimated cost or within the time allotted. The tariff negotiated today may not reflect reality five years after the start of construction.

Half or three-quarters of a nuclear plant is still not a nuclear plant. With nuclear, and probably with coal gasification as well, it is all or nothing. Historically, there are cases where partially-built nuclear plants have been converted to fossil fuels.

Obviously a nuclear tariff that resulted in the start of construction in this case is not an accurate reflection of the "cost of generation plus a reasonable profit" if the plant is never operated as a nuclear plant.

The same problem of course holds for other high capital cost plants such as Integrated Gasification Combined Cycle plants using coal.

Indiana FIT for Coal Gasification

The Midwestern state of Indiana is in the heart of the Illinois coal basin and generates more than 90% of its electricity with coal.

As the province of Ontario closes its coal-fired power plants, Indiana is embarking on a program to use more coal through a feed-in tariff. Coal may no longer be king in Indiana, but it is still a very powerful prince.

During an earlier gas boom, Indiana was also one of the country's largest producers of natural gas. Much of the state heats with natural gas.

Now, the mud is flying in the state as the natural gas industry slugs it out with the powerful coal lobby.

While renewables advocates enjoy watching the fossil-fuel industry go at each others throats in this case, there's an important precedent that's been set — and it's been set in on of the more conservative states in the country.

The precedent is that a regulatory authority, in this case the Indiana Utility Regulatory Commission (IURC), determined a need and a price for synthetic gas. The IURC determined a need for a demonstration coal gasification project, approved a negotiated price for the gas produced, required gas utilities in the state to take the gas, and will spread the cost of the gas across all gas consumers in the state.

The program has all the elements of an effective feed law. There is a long-term contract. There is a fixed price. And costs are spread over all consumers of the commodity. In this case the commodity is gas, whereas it had been electricity in most jurisdictions up until now.

Whether this was done in an open, transparent, and public process without political interference will be determined by the courts.

The IURC's decision was made on the watch of Republican Governor Mitch Daniels, a one-time presidential aspirant. Under his direction the Indiana Finance Authority signed a 30-year contract with Indiana Gasification to purchase the synthetic gas at a fixed price of $6.60 per million British thermal units (mmBtu).

Unlike feed-in tariffs for renewable energy which are typically open to all comers, Indiana's coal gasification tariff is one off. The deal was not offered to all takers. The contract is with only one supplier, Indiana Gasification. Critics were quick to note that Mark Lubbers is the project leader for the parent company of Indiana Gasification. Lubbers was a former political director for Governor Daniels.

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6 Comments

Gerry Wootton
November 1, 2012

One problem tith FiT is that the 't' stands for tariff, which in the mind of the mark 1 unwashed voter sounds suspiciously like a tax. On the other hand, 'tax free loan' seems innocuous. The problem with 'reasonable' price is that it is very easy to ignore externalities. The 'cost of insurance argument' above is just one instance. The cost to the economy of locking up huge amounts of capital in projects that will only become productive in 10 or 20 years is also huge - alot of that cost comes back to the taxpayer in ways that they don't even suspect. The cost of these projects when they fail is even bigger.
Other externalities seem to be rather easily waved off. We know that acid rain and ozone are bad and, in fact, emissions are taxed, the problem being that the rates are way below the economic cost and, in most cases, the taxing is capped given mega scale polluters a 0 marginal cost of emissions. But when it comes to toxic emissions, even those with direct harm to humans, no one even wants to put a price on it. Everything has a price, even a human life, but since that's a thing too awful to contemplate, a fair price is never assigned so the default price is 0. Environmental impacts seem too soft a concept to assign a hard cost: for example, what is the cost of 5,000,000 dead loons? what is the value of a mountain? It appears that in general we are happy to assign a 0 cost to the former and a negative cost to the latter. This allows polluters to continue by arguing that to do otherwise would have a cost - and truly it would as compared to the $0 currently assigned. One study pegged the healthcare cost of conventional coal at 17.8 c/kWh.
So even though FiTs have a semblance of transparency, there's always going to be a large number of detractors who don't know 'why the cost is so high': after all, many of them vote for candidates that promise to sacrifice their health for someone else's economic gain.

lawrence elliott
November 1, 2012

In a country where a person such as a Romney can receive more than two votes,his and his wife's, it should not come as a surprise that feed in tariffs like this are contemplated for nuclear and coal without riots in the streets. One CEO in the auto industry recently described Romney as 'living in an alternate universe'. The USA as a whole increasingly seems to be taking up residence in the same space. What's next? Tax credits for malarial mosquito breeder farms.

DUNCAN JIM
November 1, 2012

The process for reigning in retail utility costs is simply decoupling of price from profit. Rather than a REP business model designed around selling as many kWh as possible, estimate the cost of wholesale electric power necessary to meet demand, include overhead, maintenance a reasonable profit, projected demand growth and divide by the estimated retail kWh sales.There is the retail unit cost.
If estimates are off and costs are higher than anticipated, the following years rates rise accordingly. And the inverse is true if costs are below projections.
This is the basis on which municipal & coop utilities are operated. It removes the greed factor so dear to the black hearts of the investor owned utilities.
Solarguy

Bastiaan Spanjaard
November 1, 2012

Dear Paul,

Thanks for your in-depth review of these FITs - they will certainly be interesting to watch!

In Germany, the recent boom-bust cycle of the solar industry was exacerbated by the the fact that FITs react too slowly to market price changes. The slow reaction of FITs is tied to them being a policy instead of a market price and is therefore hard to avoid.

Do you think this will be relevant to Indiana or the UK? Do the policies have a way to address this or is there a reason they do not?

Kurt Grossman
October 31, 2012

Do we need Feed In Tariffs for cereal, milk, and patio furniture? Wouldn't it be better to incent the utilities to cut costs and reduce pollution? The utilities have a form of monopoly that is regulated but there is NO incentive to lower the cost of energy. What if we told these 'greedy capitalists' (pardon the sarcasm) if you reduce your operating costs we will allow you to make a little more 'profit'; if you decrease your emissions and decrease your operating costs we will allow you to make more 'profit' and if you generate more electricity with renewable energy, lower your costs, and decrease your emissions you can make even more 'profit.' Much like litigation: the Plaintiff and the Defendant both lose and the legal system reaps the benefit. If you make the solution "Win - Lose" then the winners will always be the ones who have the power (plants). We will always be fighting a losing battle because the utilities own the wires and the substations.

Karl-Friedrich Lenz
October 31, 2012

(Cross-posted from Lenz Blog)

There are different opinions about the cost of renewable energy. Some people still try to say solar is too expensive.

But one thing is clear. All the figures are open for anyone to see. Everybody knows exactly how much is paid over the feed-in tariff to get solar energy deployed.

In contrast, the classic model of financing was: Add up whatever cost the utility had for their equipment, then add on some profit, and then fix electricity prices (requiring approval by a regulator) at a level resulting in that profit.

What exactly is the difference to the feed-in tariffs for solar energy?

For one, the feed-in tariffs are reduced all the time, since costs go down. Those costs go down as a consequence of the feed-in tariffs, but they go down. A lot.

In contrast, the costs of fossil fuel or nuclear have not gone down.

Next, the costs were never disclosed in the same way to the consumer the feed-in tariff does. Electricity bills don't have a "fossil fuel cost surcharge" or a "new nuclear plant cost surcharge". The utility just adds up all the costs in the model, without a need to disclose them to the costumer.

These are silent surcharges.

Arguably, the classic model of financing is rather similar to a feed-in tariff. The regulator looks at actual costs and sets the price.

If so, setting a feed-in tariff for nuclear energy, as the United Kingdom may do according to Gipe's article, would not be ever so different to what was done when most of the existing nuclear plants were built under monopoly structures.

The most important difference would be that the feed-in tariff would make the assumptions about costs transparent. That would be progress.

So yes, maybe it would be a good idea to have feed-in tariffs for all forms of electricity generation (except for countries where nuclear is illegal altogether, which would of course not have a feed-in tariff for nuclear energy).

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Paul Gipe

Paul Gipe has written extensively about renewable energy for both the popular and trade press. He has also lectured widely on wind energy and how to minimize its impact on the environment and the communities of which it is a part. For his...