London While highly successful in the short term, feed-in tariffs risk creating false and unsustainable markets vulnerable to speculators if they are not properly applied, warns Dr Petri Konttinen
As many national governments look to stimulate investment in renewable energy, cut carbon footprints and identify ways to protect the security of energy supplies, feed-in tariffs have become a major policy issue.
By enabling utility companies to offer premium rates for renewable electricity, feed-in tariffs are incredibly useful and have provided a framework to help develop a new power industry that would have struggled to attract investment in an unregulated market. However, while they have had a very positive impact, feed-in tariffs have also created false and unsustainable markets in some countries and as such I believe a new approach is warranted.
Dubbed by the European Commission in 2008 as potentially ‘the most efficient and effective support scheme for promoting renewable electricity’, feed-in tariff policies have now been enacted in 63 countries around the world. These renewable programmes stimulate market growth by giving investors clarity on pricing as well as returns from generating renewable energy from buildings. This in turn leads to the benefits of mass production and the development of more advanced and cheaper technologies. But investment in renewables needs to be sustainable if we are to build a resilient long-term alternative energy industry. Feed-in tariffs therefore need to be managed to limit drastic market movements.
However, too many countries have implemented feed-in tariffs in a piecemeal way and have adopted levels of subsidy that have been unrealistically high, resulting in huge profits for investors and the creation of conditions in which speculators have rushed to build renewables infrastructure purely for the short-term returns.
This false market creates a supply bubble that cannot be maintained once the tariffs are removed. And therefore completely negates the aim of the tariffs, which is to help the emerging industry to advance to a scale where it can compete with traditional power generation infrastructure in an open and unregulated environment.
If left unchanged, poorly implemented feed-in tariffs have the potential to deter other countries from embracing a fundamentally sound programme or, worse yet, endanger the industry as a whole.
The most prominent recent example of feed-in tariffs causing a false market has been seen in Germany, where the relatively high level of tariffs encouraged energy ‘prospectors’ to rush into the market, taking advantage of short-term profits. This forced the government into a drastic reduction in tariff rates to prevent a market bubble from developing into a major problem.
Feed-in tariffs were introduced in Germany in 1999, offering index-linked payments of 51 euro cents for every KWh of electricity produced. The popular programme was met with a whirlwind uptake. By 2005, renewables already accounted for 10% of electricity in Germany, 70% of which was supported by feed-in tafiffs. Today, Germany’s solar industry turns over an impressive €10 billion each year and employs more than 60,000 people.
But such a surge is far from sustainable. The bubble in Germany stemmed from the government doubling the rate at which the feed-in tariff decreases year-on-year (by between 5% to 10% depending on the size of the installation) just over a year ago. Reductions in the cost of raw materials and the ensuing over-supply of solar panels contributed to a 25%–30% reduction in the price of building a solar farm, but with no equivalent reduction in the feed-in tariff, the market suddenly promised huge returns for anyone opening a solar farm before the end of last year.
The result was a proliferation of solar farms and the need for immediate government action to help preserve the long-term prosperity of the world’s largest market for solar photovoltaic installations. In March 2010, the German government was forced to make a reduction in feed-in tariffs of around 16% – a move that has been fiercely opposed by the industry.
And the German example is far from the first time a supply bubble has been caused by feed-in tariffs. In 2008 an over generous Spanish programme also sparked an abnormally high response from investors, while a complex and expensive application process meant that only professional investors were able to partake. Part of the issue in Spain was that the government based its feed-in tariff rates on the German model, but investors quickly realised that a solar energy park in Spain offered far greater profits for the feed-in tariff as longer hours of sunlight made the panels far more productive. In response, the Spanish government was quick to implement a cap, resulting in the collapse of the Spanish solar market.
In the UK, the renewable industry is bracing itself for a deluge in sales following the April launch of feed-in tariffs. Dubbed the ‘Clean Energy Cashback Scheme’ and also modelled on the German market, the scheme will offer households, communities and businesses an above-market rate for a 20-year period. Like the German programme, the UK’s scheme will be degressive, encouraging early adoption.
However, final UK tariff rates were actually agreed at 15% higher than expected, although many critics still argue that the 5%–8% returns (compared to the 10% returns offered in Germany) will be insufficiently high for mass take-up. This further highlights the fine line between providing rates that are high enough to incentivise investment without attracting short-term speculators.
To address this, I believe it is vital that further steps are taken to establish a new, more responsive legislative framework that can protect against extremes in the market and preserve the long-term development of global renewable energy markets (rather than the renewables sector becoming a vogue investment opportunity for prospectors keen to capitalise on unrealistically high feed-in tariffs).
Achieving this means agreeing to a strategy for feed-in tariffs at an international level that reflects the fact that many of the investors in these power generation technologies operate on a multi-national basis. This also reflects the fact that what represents an appropriate feed-in tariff in one country may be entirely inappropriate in another, as varying natural conditions (for example the hours of sunlight, the amount of wind and such like) will have a significant impact on the level of energy as well as the corresponding profit generated by renewable power generation projects in different geographies.
As a solar energy consultant, I am a staunch advocate of feed-in tariffs in principal. With the correct implementation, they have the potential to empower households, communities and businesses to produce clean energy whilst being rewarded for it. But without more responsive regulation, markets can crash and countries that may once have followed suit by adopting these tariffs may be detered. If the triggers to re-evaluate feed-in tariffs continue to be on a reactive basis instead of proactive, the feast or famine tendencies will continue.
The solution lies in a more premeditated approach to feed-in tariffs and agreement on how we support and develop a sustainable solar energy industry across Europe and around the world. Governments need to work together with the renewable industry to create a framework that uses real-time indicators to predetermine its actions. Closer monitoring of indicators such as the number of people investing in renewable energy infrastructure, purchase and installation costs, supply and demand, and the amount of energy feeding into the system will enable governments and industry experts to keep a closer tab on market movements, whilst preparing for and managing market volatility.
In addition, while re-evaluating or implementing a new feed-in tariff, all possible market change scenarios (even seemingly impossible scenarios) and their effects on the feed-in tariff costs should be analysed and, where necessary, pro-active triggers should come into action if certain thresholds are passed. These could include total system costs, annual cumulative number of installations, or other issues regarded vital in each country. This will help to prevent the need for drastic steps to be taken to adjust to the huge market shifts that have already had a profoundly negative effect on the industry.
Recent news indicates the French are planning to increase building-integrated photovoltaic (BIPV) tariffs, perhaps suggesting that the biggest onslaught is yet to come. But how many markets must collapse before more purposeful regulations are introduced to prevent this?
We know from experience that renewable tariffs have the potential to drive massive increases in the uptake of microgeneration, but ensuring this demand is sustainable is a challenge that governments must address together. For many, renewable energy is the future, but with our efforts to drive growth comes the potential to stifle it through false markets and creating unsustainable growth and this must be addressed as a priority.
Dr Petri Konttinen is senior solar energy consultant at Luvata