Feed-in-Tariffs
by: Paul Kando
Maine's new Feed-in Tariff (FiT) bill (LD-1085), will soon be the subject of public hearings in Augusta. It is designed to encourage small (up to 500 kW) distributed renewable electric power generation that utilize solar radiation, methane from organic wastes, biomass, tidal power and wind energy. It will encourage Maine-based manufacturing, especially in economically underprivileged areas of the state. In anticipation, here is a brief analysis of FiTs around the world.
Wikipedia
FiTs are laws that improve the investment climate for renewable energy technologies, typically by three key provisions: (1) guaranteed grid access, (2) long-term contracts to purchase the electricity produced, and (3) a purchase price based on the cost of generation. Wind power, for example, will command a lower per-kWh price than costlier solar photovoltaic (PV) or tidal power. The idea is to offer cost-based price certainty under long-term contracts to help finance renewable energy systems. FiTs often also include "tariff degression": above retail at the start, the tariff paid under new contracts is gradually reduced to the retail rate as the number of adopters increases.
Eligible renewable electricity generators can include home owners, businesses, farmers, private investors and public entities. The tariff they are paid may differ, to enable various technologies to be profitably developed. This may mean different tariffs for projects in different locations (e.g. rooftop vs. ground-mounted PV), of different sizes (residential vs. commercial scale), and sometimes they also depend on the geographic region. Typically FiTs aim to guarantee a minimum rate of return on investment, ranging from 5-10%. Since generators are paid by the kWh, there is a strong incentive to maximize overall output and efficiency. An inefficient system will produce less electricity and thus lower earnings.
FiT laws have been enacted in over 50 countries and numerous smaller jurisdictions. In 2008 the European Commission referred to "well-adapted FiT regimes" as "generally the most effective support mechanisms for promoting renewable electricity". This conclusion is also supported by, among others, the International Energy Agency, the European Federation for Renewable Energy, and Deutsche Bank.
FiTs have affected the consumer price of electricity in various ways. In some cases they have led to a small annual increase, in other cases to reduction. Theoretically a FiT involves a temporary increase in electric rates for a long term benefit. Increases occur because electricity generated from renewable energy sources is typically more expensive than electricity generated from conventional sources. Cost increases of approximately €4 ($5.12) per month per household have been recorded in Germany (largely because major players in the industrial sector have been exempted). However, a number of analyses have shown that such price increases are soon offset by the price-dampening effect large amounts of lower cost renewable energy (such as wind and solar power) have on spot market prices. Indeed, price reductions have been experienced in Spain, Denmark, and Germany.
FiTs have been associated with spectacular growth in solar and wind power in Germany, Spain, Denmark and Italy. Increases in solar's market share have resulted in the closing of German gas and coal-fired generating plants. The FiT-driven success of PV has resulted in a 40% drop in German peak electricity prices, resulting in savings between 520 and 840 million euros ($666 million to $1.1 billion) for rate payers and the creation of over 380,000 new jobs. These facts highlight a stark contrast between the public good and corporate interests. Savings for consumers have been accompanied by reductions in the profit margins of big electric power companies, causing them to lobby the German government against the FiT policy, and bringing about a major cut in 2012. Energy utilities have since lobbied for the abolition, or against the introduction, of feed-in tariffs in other parts of the world. Maine is no exception.
Wind and solar technology costs have decreased dramatically since the 1960s and 1970s, as the technologies have become widespread, manufacturing processes have improved, innovations have been incorporated, and gains have been harnessed from economies of scale. The rapid deployment of renewable energy aided by FiTs has helped reduce technology costs further, accelerating the pace at which renewable energy technologies become cost-competitive with grid provided electricity. In certain jurisdictions, wind power, landfill gas, and certain forms of biomass generation already cost less per-kWh than grid-provided electricity. Grid parity has already been achieved in some FiT jurisdictions. German landfill gas systems generate electricity at a lower cost than the average spot market price.
Wind and solar technology costs have decreased dramatically since the 1960s and 1970s, as the technologies have become widespread, manufacturing processes have improved, innovations have been incorporated, and gains have been harnessed from economies of scale. The rapid deployment of renewable energy aided by FiTs has helped reduce technology costs further, accelerating the pace at which renewable energy technologies become cost-competitive with grid provided electricity. In certain jurisdictions, wind power, landfill gas, and certain forms of biomass generation already cost less per-kWh than grid-provided electricity. Grid parity has already been achieved in some FiT jurisdictions. German landfill gas systems generate electricity at a lower cost than the average spot market price.