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

Paul Gipe, Contributor
October 30, 2012 | 6 Comments

The project is huge. The plant in southern Indiana will cost $3.5 billion and gas from the plant could account for 17% of Indiana's supply. Thus, the stakes are high for both the coal and natural gas industries.

Not surprisingly for a state in coal country, Indiana has no effective renewable energy policy or renewable energy targets. There are only two token "voluntary" feed-in tariff programs in the entire state and one of those programs is being dismantled. Proposals for renewable energy feed-in tariffs in the state legislature have never made it out of committee.

Criticism of the Indiana Gasification deal mirror criticism of feed-in tariffs elsewhere: interference in the so-called "market" and the "price is too high."

When the deal was struck, gas was trading as high as $13 per mmBtu and many expected that it could go even higher.

Since then the world has changed. Industrial consumption of gas has fallen dramatically in North America as manufacturers closed their doors or cut back production. Meanwhile the shale gas bubble began inflating as the huge number of wells begun during the run-up in prices started coming online. The net result has been the collapse of gas prices to as low as $3 per mmBtu since 2008.

Fixed Prices vs "The Market"

Renewables — and nuclear for that matter — are long-lived high capital cost projects. They produce electricity at stable prices for decades. Their initial prices may be higher than competing sources or existing "heritage" plants, such as long-amortized hydro plants. However, those fixed price contracts begin to look like a good deal to consumers as the price of generation from volatile sources, such as fossil fuels, continue their inexorable increase. At some point, the cost of generation from fossil fuels on the spot market will exceed that from the fixed-price contracts. When that will occur is open to heated and politically charged debate.

Most journalists — business and energy writers alike — don't understand how markets work or specifically how markets for gas and electricity work. In the electricity market, most of the generation is produced under fixed-price contracts (Power Purchase Agreements or PPAs) or the plants are in the rate base of regulated utilities. Only a portion of generation is sold on the "spot market."

Criticism of the Indiana Gasification deal by the natural gas industry point to the current spot market price and argue that the Indiana Gasification contract was a bad deal. It's cheaper, they say, to buy the gas on the spot market than through a long-term, fixed-price contract.

To support their case, critics of the Indiana Gasification deal can site numerous reports, articles, and even the presidential candidates that say the U.S. has a "100-year supply of natural gas."

While geologists may beg to differ, this is the prevalent discourse in North America, and very few journalists know enough about the oil and gas industry to question such assertions.

Of course the same argument applies to renewables — and nuclear. North America is awash in natural gas. There's no need to worry. Our future is secure. We can all sit back and enjoy our game boys and iPads while we let the fossil fuel industry manage our future.

For those who don't follow the industry, U.S. natural gas production is no longer increasing as the industry has switched their drilling rigs to more profitable oil. Developers of unconventional natural gas, such as ExxonMobil, are complaining that they are "losing their shirts" in the shale gas boom. Translation: North Americans can expect tighter supply and higher prices for gas soon.

Full Cost Accounting?

Environmental opponents have a more extensive critique of Indiana's gasification deal.

As with other forms of fossil fuel, some portion of the "cost" of the gasification plant will be shifted "externally" to the environment in the form of air, water, and land pollution.

Indiana is infamous for its lax regulations and its "business friendly" atmosphere (an American euphemism for limiting environmental concerns). For example, it was the mining abuses in the coal fields of southern Indiana that contributed to the national movement to regulate surface coal mining in the late 1970s.

Consequently, the "tariff" or price for gas purchased from the gasification plant will not be fully transparent because the costs of pollution are not fully internalized and will be shifted to the public instead —but those are not all the costs that will be hidden in the gas tariff.

The developer of the Indiana gasification project has applied for a $2.5 billion U.S. Department of Energy (DOE) loan guarantee, according to the Sierra Club, a national environmental group. This is the same DOE loan program of Solyndra solar fame.

In the run up to the U.S. presidential election, fossil fuel and nuclear lobbyists have been attacking renewables in the U.S. because of the subsidized DOE loan program. However, these very same industries are busy trying to grab as many of the loans for themselves as possible. Some of the heat around the Solyndra scandal may not be so much about the "interference in the market" caused by the federal subsidies as incumbent industries fearing competition from renewables for the limited subsidies available.

American's have almost become immune to such irony, particularly during a presidential election that will cost $2 billion by the time it is over.

Indiana Gasification's reach for federal subsidies is not a lone outlier of the coal industry. Hydrogen Energy California is seeking nearly half a billion in a direct grant from DOE for a 300-MW Integrated Gasification Combined Cycle plant. If awarded, the grant will account for nearly 10% of the $5 billion project in the southern San Joaquin Valley, a region with some of the worst air pollution in the nation.

To summarize, the Indiana Gasification tariff may not be an accurate reflection of the true costs of the project.

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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...