Feed-in Tariff versus Marginal Incentive

The world owes the German solar program a huge Danke, no question. Germany’s feed-in tariff has been the foundation upon which the solar industry’s current success was built. But does that mean that we should try and replicate the feed-in model in the United States?

The answer is nein — or at least, not necessarily — and here’s why. First, let’s take a look at costs. With a feed-in tariff, 100% of a system’s production is fed into the grid and purchased by mandate by a utility. California has chosen a different model, where most of the value of a solar system comes from avoided utility payments, and an incentive is paid to close the cost gap to the retail price of power — and that means the cost of the program is much smaller. With the California Solar Initiative, we’ll spend ~$3 billion and get ~3 gigawatts (GW). With the German model, using German incentive amounts, we’d need about 10 times that amount to get the same 3 GW. It’s really, really expensive.

A second point is exit strategy. With the California model, as soon as solar gets to grid parity, the incentive program goes away — and since we’ve done the work to establish interconnection standards and net metering and solar-friendly tariffs, the market continues. It leads to a self-sustaining industry. With the feed-in tariff model, there is never a point where solar can wean itself from a government program.

The above discussion concerns distributed generation. But what about central station generation — that is, selling into wholesale markets? To get to where we need to be — where the majority of our electricity comes from renewables — we are going to need some pretty careful planning as to the time and place of delivery of our renewables, and similar attention must be paid to getting the right mix of non-renewables to make the whole system run efficiently. A feed-in tariff is too blunt an instrument to simultaneously:

  1. Incentivize all the things that need to be valued (ability to deliver on peak, capacity, storage, etc);

  2. Result in downward pressure on prices for diverse technologies (who’s going to sell at 5 cents/kWh if the feed-in tariff is 10 cents?); and

  3. Deliver an efficient, highly managed resource portfolio of renewables — and the right mix of non-renewable dispatchable resources to complement.

The simplicity of a feed-in tariff is appealing and effective for jumpstarting an industry in its infancy, but at high levels of market penetration a feed-in tariff will inevitably result in paying too much for electricity of lower value (e.g. off-peak wind) and not offering enough to develop less mature resources that have additional value to offer (e.g. tidal, solar with storage).

Given the current lack of commercialized storage options, we are going to need a broad range of resources — wind, solar, tidal, wave, geothermal, etc — used in a highly managed way, and I don’t see how a feed-in tariff gets us there.

There is nothing particularly magical about a feed-in tariff as a policy model. The main driver in supercharging markets is the amount of money thrown at it, not the structure of the policy instrument. If you want to replicate Germany’s growth, don’t get caught up in replicating their model. Replicate their budget.

Adam Browning is co-founder and Executive Director of Vote Solar, a non-profit organization working to bring solar energy into the mainstream.

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