The Irony of U.S. and UK Renewable Policies

When Georg Schuerer was looking for a retirement investment, he chose solar energy: “It gave me an 8.8% return last year. What bank offers that?”

Germany, a country with moderate wind and solar potential, has nevertheless become a global leader in not only renewable energy generation, but also industry. This success is greatly attributed to the Renewable Energy Act (REA), which established a renewable energy feed-in tariff (FIT) that set a price schedule for renewable electricity.

The secret to the REA? It unleashed the collective might of small investors. In contrast, the United States and the United Kingdom still leave investments in power production up to conglomerates.

The predominant mechanism in both the U.S. and the UK for promoting renewable energy is a quota system known in the U.S. as a Renewable Portfolio Standard (RPS) and in the UK as Renewable Obligations (RO). Under a quota system, the government mandates that power supply companies generate a specified amount of electricity from renewables.

As an entry in Wikipedia puts it, “The underlying theory is that competition in this market place will drive down the costs of supplying renewable electricity and thus minimize the costs to the consumer of meeting renewable energy targets.” Basically, the most efficient projects are implemented; the least efficient ones are rejected.

The American Wind Energy Association (AWEA) applauds this approach, which “[limits] the role of government to certifying credits, monitoring compliance, and imposing penalties if necessary.” As another entry in Wikipedia would have us believe, the quota system is closer to the market economy than the more “bureaucratic” FITs.

Furthermore, the inefficiency of FITs is not held to be limited to bureaucracy; opponents claim that FITs pick winners. By guaranteeing a return on certain renewables, critics charge that the government in effect commits to financing inefficient technologies. Or, to quote Wikipedia once again, FITs are seen as “an extreme form of net-metering.”

This derogatory language overlooks a significant similarity between quota systems and FITs-they both intervene in the market. While quota systems set the RE capacity required and leave the price up to market, FITs set the price and leave capacity to the market. FITs are not an “extreme” form of net-metering; in fact, it is not met metering at all.

Even in the case of a single solar installation atop a family home, two separate meters are used (one measures generation; the other, consumption), and compensation for power fed to the grid has nothing to do with the retail power rate.

It turns out that, far from “picking winners,” FITs make each source equally profitable. In Germany, wind investors fare no worse than solar investors. The price paid is calculated for each by dividing the generator price by the probable output in kilowatt hours (kWh) plus a slight profit margin. Thus, the least is paid for wind and the most for solar, with biomass, etc. in-between.

Compare that to quota systems, which only reward the currently most efficient technology (wind at the moment). In other words, quota systems boost the energy source that needs the least help. So while a score of U.S. states have an RPS and 41 have net-metering, only 7 specify a target for solar within the RPS. This means that solar, which cannot currently compete, must—so wind wins. In other words, the U.S. and UK pick the winner.

Ironically though, even the most efficient renewable sources are limited by the quota system. At the beginning of 2006, AWEA said the U.S. had a goal of 3,000 MW of new wind power capacity for 2006, but in fact only some 2400 MW was installed that year. Why the shortfall? It turns out that planners realized they were in no hurry when the Production Tax Credit (PTC) was extended. Compare that to German system, which reduces compensation on January 1, putting planners under pressure to connect to the grid by Dec 31 or face a reduction in compensation.

And there is a further irony in the U.S. system: it uses caps—generally a mechanism to decrease something, such as carbon emissions—to increase renewables. Why limit RE expansion by setting a cap? In quota systems, projects slow down as the target approaches; planners wonder whether their project will go online soon enough. In 2005, Germany blew past its 2010 target for wind for 2010 and has not looked back since.

FITs create incentives to move fast by means of price degression, with the goal being not a particular percentage of energy supply, but to make renewables competitive quickly. For example, in Germany around Euro 40 cents/kWh is paid for solar electric, several times the retail rate. Compensation, however, drops forty percent in the ten years from 2004 to 2013.

Far from being bureaucratic, FITs hand everything over to the market. Want to install PV or your roof or invest in a local wind turbine? Go to the shop down the street and buy your panels, or talk to the local wind energy office or bank about investing. There is no bidding, no monitoring, no penalties, nor is there any approval/refusal as in Britain, where the British Wind Energy Association lists statistics according to “submitted, refused, approved.”

No wonder the EU Commission concluded in 2005 that FITs “are in general cheaper and more effective than … quota systems”. Other policy-neutral bodies, such as the International Solar Energy Society, have also officially stated the obvious: “To date, feed-in policies have achieved the greatest market penetrations of renewable energy, produced the most cost-effective renewable energy, established local industries, built domestic markets, created work places, and attracted small and big private investors as well as bankers.”

Finally, is it not ironic that deregulation, which Californian environmentalists said would allow green power producers to compete with central power plants, failed miserably in the U.S. but is part of the secret to the rise of renewables on the European continent? Germany’s Renewable Energy Act helped stimulate competition. Can a country that does not have competition on its grid justifiably tell one that does that it is less market-oriented?

Germany has won the debate in practice, but the U.S. and the UK are sticking firmly to their disproved economic theories, which state that German policy cannot bring down prices. “The German subsidy for solar energy,” the March 15, 2007 Economist article “What price carbon? recently stated, “has diverted the world’s solar cell production to sun-free Germany, thus raising the price in sunny countries where it might be usefully employed.”

But the Economist is simply wrong about Germany raising prices. As Photon Consulting pointed out in a study released in April, solar energy is set to fall below the retail power rate in sunny areas as early as 2010. So when solar becomes competitive, solar cell production capacity will be set up in Germany, not the UK or the U.S.

Craig Morris is the author of “Energy switch: proven solutions for renewable future”  and can be reached at Co-author Nathan Hawkins is a law student from the U.S. currently researching energy policy in Germany.

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