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Published on June 4th, 2013 | by Guest Contributor

21

Feed-in Tariff: A Policy Tool Encouraging Deployment Of Renewable Electricity Technologies

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June 4th, 2013 by
 

This post first appeared on the US Energy Information Administration Site

fitmap

Recent developments in Virginia put a spotlight on feed-in tariffs (FITs), which are a policy mechanism used to encourage deployment of renewable electricity technologies. FITs are used to a limited extent around the United States, but they are more common internationally. A FIT program typically guarantees that customers who own a FIT-eligible renewable electricity generation facility, such as a roof-top solar photovoltaic system, will receive a set price from their utility for all of the electricity they generate and provide to the grid.

Historically, FITs have been associated with a German model in which the government mandates that utilities enter into long-term contracts with generators at specified rates, typically well above the retail price of electricity. In the United States, where FITs are comparatively new, FITs or similarly structured programs are mandated to varying degrees in a limited number of states. However, a different model has also emerged in which utilities independently establish a utility-level FIT, either voluntarily or in response to state or local government mandates.

In a recent example, Dominion Virginia Power’s voluntary FIT for residential and commercial solar photovoltaic (PV) generators was approved by the Virginia State Corporation Commission in March 2013. Participants will receive 15 cents/kilowatthour (kWh) for a contract term of five years for all PV-generated electricity provided to the grid, and will continue to pay the retail rate for all electricity that they consume. Virginia’s average 2012 retail electricity price was 10.5 cents/kWh for residential customers and 7.8 cents/kWh for commercial customers.

Comparison with other policy tools

Other types of policies encouraging development of new renewable capacity that are more commonly used in the United States include:

A FIT is a performance-based incentive rather than an investment-based incentive, and in that respect is more similar to production tax credits and the renewable energy credits of an RPS market than to investment tax credits or other investment subsidies. In the United States, FITs are typically used in combination with one or more of these other incentives.

FITs are most similar to the federal Qualifying Facility (QF) incentives available in the United States since the late 1970s, although the QF contracts were limited to paying avoided cost rates based on the utility’s cost-of-generation rather than the above-utility-cost rates typical of a FIT. FIT programs are also similar to net metering programs but differ significantly in one key aspect: the power generated by a utility customer’s system is compensated at the rate set by the FIT rather than the retail electricity rate. This generation is treated independently from the customer’s own electricity use, which is billed at the utility’s regular retail rates. In a net metering program, a utility customer is effectively paid the retail rate for any generation that is fed back into the grid.

Variations on feed-in tariff policies

In general, feed-in tariff rates that lead to significant additional renewable energy investment are set above the retail cost of electricity. The premium level may depend on the underlying program motivation and goals: FIT programs associated with more ambitious goals (e.g., an explicit capacity target, or a certain level of renewable energy credits to meet an RPS obligation, or to support a domestic renewable energy industry) may need to set the rate well in excess of the existing retail price. In a recent example, in 2012 Japan implemented a new FIT with particularly high PV tariff rates (more than 40 cents/kWh) as part of its post-Fukushima policy.

However, without additional controls, generous FIT levels can lead to more investment than intended. One illustration is the Spanish experience, in which the government significantly reduced the tariff a year after its start, and suspended the FIT altogether in 2012, to contain costs to the government and other utility customers.

Feed-in tariffs vary widely in execution. EIA is now publishing a new table on the variety of feed-in tariffs used in the United States. Typically, feed-in tariffs will specify:

Eligible technologies—FITs in the United States generally include solar PV, but may include other renewable technologies. Other countries’ FITs, particularly the German and Danish programs where the policy was tested and developed, initially focused on supporting wind. In U.S. states with an RPS, the FIT-eligible technologies generally overlap or coincide with RPS-eligible technologies: for example, the FIT set by the Los Angeles Department of Water and Power applies to all technologies eligible for the California RPS. The FIT set by Florida’s Gainesville Regional Utilities, the first U.S. municipal utility to institute a FIT, applies only to solar PV generators.

Rate and contract terms—Excluding some experimental programs, most U.S. contracts are long term (10-20 years). This assures project owners of a stable long term revenue stream. Utilities often set rates that depend on project size (smaller projects tend to receive higher rates) and technology (solar PV tends to receive higher rates than other technologies). Rates can also depend on the overall program goal or size limits (e.g., tariffs that decrease as capacity approaches the program ceiling), and utilities or states may revise their tariffs in cases of over- or under-subscription. The City of Palo Alto Utilities CLEAN program initially set its uniform tariff rate for PV based on the utility’s avoided cost of providing electricity; however, after low customer interest as a result of the minimal premium, the utility has since raised the tariff rate by more than 15% while reducing the program size.

System size and sector restrictions—Most U.S. FIT programs have a maximum size for individual projects and may limit participation to certain sectors, like residential customers. The new Dominion Virginia Power Solar Purchase Program, for example, applies only to residential systems up to 20 kilowatts (kW) and commercial systems up to 50 kW in size, while Hawaii’s FIT, which applies to all of Hawaii’s investor-owned utilities, has a maximum system size ranging from 2,700 kW to 5,000 kW, depending on the island.

Program size limitations—Most U.S. programs designate a cumulative ceiling, set either annually or at the program level, capping the amount of capacity that can take advantage of the tariff. This is an important cost containment mechanism for FIT programs.

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  • wattleberry

    FITs are necessary as the only way to ensure full utilisation of the investment, of course. However, I think the UK experience, where installation prices seem to remain disappointingly high, may show that if the rate is maintained at too generous a level it can eventually have negative results. Bearing in mind that the primary purpose of this technology is to make its benefits available to consumers, every promotion I’ve seen concentrates on its investment ‘return’ for the expenditure. The negative aspects of this are how secure that return will be, notwithstanding the promises of politicians, and the resentment of customers at the artificially high tariffs forced on them over time.
    Therefore, to retain credibility surely they should not be over-generous. They cannot be guaranteed at a given rate indefinitely; in fact the return should not exceed the diminishing market rate. In other words, we all need to participate in the risk and reward process safe in the knowledge that, come what may, we will end up with free power with proper competition and respectability retained.

    • Bob_Wallace

      Clearly there are FiT programs that could have been better designed. And sometimes things happen like the incredible drop in solar panel prices which can mess up an otherwise well designed program.

      FiTs do need to be continued “indefinitely”, or at least to the end of their contract when entered into. If someone was an early installer of solar and based their decision on a given return for 10, 20, whatever years then they deserve to receive that rate. They did their part, they made the up front investment.

      What is probably needed are time and volume limits on FiT offers. Make the first “75%” of the volume open to first come/first serve and then lottery off the last 25% if applications turn up in mass all of a sudden. The old FiT rate can certainly be extended if things are going slowly. And a new, lower FiT rate can be set if activity is high and costs dropping.

      The US federal subsidy system for solar has one good feature. It is continually indexed to the cost of installed solar. It’s 30% of whatever the cost is. But it lacks the “I can make a few bucks” feature of a FiT.

      If someone calculates that they cannot only save money but make a little by installing solar you’re going to get more installations. And then if they can make even more money by getting installation for a lower price. That is motivation to drive down costs.

      • wattleberry

        Indexation is a component missing from the UK scheme and that, combined with no upper limit to deter opportunist commercial interests followed by a notice of halving the rate,has done little to foster enthusiasm. This crude approach is all too typical of state behaviour, in the UK at least.
        As usual, the most effective schemes are likely to come from an enlightened private sector once it has embraced the concept of home generation by remaining involved in the 24 hour management of supply, obviating the additional expensive further investment in storage by homeowners reluctant to take this further step, and the sale of all equipment needed for generation and, where required, such storage.
        That may even interest Republicans!

        • Bob_Wallace

          Private enterprise is unlikely to primarily design solutions for the common good. They will look out after their interests first.

          If we want solutions for the common good then we have to form governments to design and implement those solutions.

          As soon as we design and implement a solution private enterprise will start looking for ways to exploit that solution for their personal gain.

          As rats find holes we have to adjust our solutions and nail tin over the rat hole. And that just puts the rats to work looking for new holes….

          • wattleberry

            Even so, haven’t those rats created the technology we have today? Governments don’t know the difference between a hammer and a screwdriver.

          • Bob_Wallace

            I seem to remember our government sending people to the Moon.

          • wattleberry

            You’re going to need a few more examples to make a good case for the public sector I fear. Also, some administrations are more enterprising than others……

          • Bob_Wallace

            Not things to be particularly proud of, but the government developed the nuclear bomb and nuclear power.

            The government built our major dams.

            The government built our interstate highway system.

            The government built most of our airports.

          • wattleberry

            Are you sure the government did those things-or did it mostly farm them out to the private sector? I’m just airing the possibility that the vested interests may decide the old vests are beyond repair.

          • Bob_Wallace

            Come on. The government got the job done. That disproves your “Governments don’t know the difference between a hammer and a screwdriver.” claim.

          • wattleberry

            I don’t think so. One thing’s for sure; these arguments will continue until overtaken by events.

          • Bob_Wallace

            Sure they will.

            As long as you define away things that don’t fit your model.

    • Peter Gray

      As an economist, the FiT makes perfect sense as a way to accelerate solar and wind energy development, and the basic structures I’ve read about sound about right. I don’t know what you mean by “the primary purpose of this technology is to make its benefits available to consumers,” but to me the basis of the transaction is exactly to provide a return on investment, which is not and will not be provided by the private market.

      The FiT at the time of the transaction should be based on current installed PV cost, financed over 20 years, or more generously, 10 years. The FiT should provide a reasonable return on investment, say 10%, and it MUST stay at that rate, by contract, for the initially stated term, regardless of any future drops in PV cost.

      Each year, the FiT should be adjusted, presumably downward, to a new (average) current installed-PV cost. But that should apply only to new installations, not existing ones. I haven’t seen much discussion of what happens at the end of the contract term, but to me it makes sense to apply the then-current FiT rate, year by year, to old installations. So in addition to the quasi-guaranteed ROI for the first contract term, PV system owners can expect a continued stream of “pure profit” for as long as their systems work.
      By keying the FiT rate to current PV costs, an incentive is maintained for suppliers to reduce costs – the difference is pocketed by system owners, as it should be. If the installation rate is “too high” in the sense of somehow stressing the utilities, the ROI could easily be adjusted downward, say to 5% for a while.
      Re higher costs to other consumers, it’s their choice to forego receiving the PV profits, and if results cited on this site about Germany are accurate, ratepayers there, with the world’s highest per-capita PV installations, paid less than 5% higher electricity rates during the past 20 years. That’s a trivial increase, e.g. $0.006/kwh for a typical U.S. resident. If people complain about that, let’s put it in perspective with the rate increases they get when their utility finances a nuclear plant. The only difference is in who owns the plants.
      Of course, as wind and solar take over larger shares of the total market, we do need to recognize that power from these sources typically has lower value than that of “switchable” sources, regardless of the fact that solar output tends to roughly follow demand. As others have noted, renewables could become the new “baseload” resource, with fossil fuels relegated to peaking, to an extent that will depend on availability of economical storage. This will require a new understanding of what baseload means, but that’s already evolving.

      • Bob_Wallace

        Informative and well written. Thanks for posting it Peter.

        RE: German rate payers paying an additional “$0.006/kWh”, Germany’s retail rates are quite high. Might be good to use the cost to Germans.

        On the other hand, solar on the grid reduced the wholesale cost of electricity in Germany by about 5 billion euros in 2012. That increase to subsidize solar is paying off by lowering the cost of electricity overall. (It’s not clear if those savings are being passed on to retail customers.)

        • Peter Gray

          I meant that a 5% premium would be equivalent to $0.006/kwh in the U.S., not that Germans are paying that much. But you’re probably right that it would be good to convert the increase Germans are paying to USD terms. The question is whether higher rates tend to be in percentage or some kind of constant terms. The actual increases for non-solar consumers should depend on utility outlays to those who own PV, minus savings on other plants.

      • Bob_Wallace

        ” I haven’t seen much discussion of what happens at the end of the contract term, but to me it makes sense to apply the then-current FiT rate, year by year, to old installations.”

        If the FiT is set up for 20 years/whatever cost recovery the system should be paid off when the ’20 year’ contract is finished.

        From then on the owner is getting their electricity at near zero prices.

        • Peter Gray

          Yes, exactly. A good FiT, so to speak, would on average just cover a 20-year mortgage to pay off full install costs, plus a small return on the investment, plus even smaller amounts for insurance and maintenance. After the N-year term, the panels would provide free income to the owner at whatever rate the utility is required to pay from then on. If the term were 10 years, that’s more generous because the free income kicks in earlier. In that case the profit premium of the FiT might be reduced, even to zero, but most people probably wouldn’t want to wait 10 years to see a positive ROI, esp. with some uncertainty about whether power output really will cover the investment.

      • wattleberry

        Thanks for your reply. My view was simply that the government sponsored FITs are being offered to consumers for their benefit, recognising of course the stimulus to the solar industry but not at the cost of inflated prices to everyone resulting from over-generosity effectively subsidising excessive margins. It is to be hoped that the misgivings expressed as to whether political administration will achieve this are no longer justified and I would greatly welcome any contribution on the part of the politicians, particularly in the UK, to reassure me. Because, given the increasing pace of development, these schemes will need to be reviewed more and more frequently. to ensure product cost reductions are seen to be reflected in consumer/investor prices.
        I’m not holding my breath, but I did at least note that one scheme is prohibiting exploitation by non-genuine consumers.

        • Peter Gray

          I don’t mean to be pedantic, but my economist side sees a lot of your words and phrases as emotional triggers with little or no value. What do you mean by “offered to consumers for their benefit”? Maybe I’m missing something, but I know of no purpose for FiTs other than to accelerate the development and deployment of non-fossil energy, in a relatively efficient way utilizing market forces. This should make everyone better off in the long run, but “benefitting consumers” along the way is just a byproduct.

          “Inflated prices,” “over-generosity,” “subsidising excessive margins”… What do these mean? Nothing of practical substance. If a FiT is set higher, we can expect more rapid solar adoption, with all the societal costs and benefits that might entail. Set the rate lower; adoption will be slower. In case that’s hard to understand in theory, we need only look at the German experience for proof.
          No need to make it a lot more complicated than that, with frequent review or ensuring cost reductions show up in prices, or any such micro-meddling. Set a clear, contracted price, and let people do as they will. Just stand back. The whole scheme is a way of solving market failure, but this aspect, with incentives and buyers and sellers, is where markets really DO work.

          Not sure either, what you mean about “prohibiting exploitation by non-genuine consumers,” but it sounds like the solution to a non-problem, if by consumers you mean solar system owners and by genuine you mean average homeowners. Who cares whether they’re “genuine”? If the problem is too-rapid PV adoption (likely from the POV of coal and nuclear generators), instead of banning certain classes of system owners, or having lotteries or other such nonsense, the solution is simple: dial down the FiT and reduce the ROI. That will reduce retail power rates at the same time, and more efficiently than by trying to block certain people from “exploiting” the system.

          You’re onto something about feckless politicians, but the problem is just as much with their constituents. As many others have noted, all these schemes amount to workarounds for the near-total worldwide failure to have the sense and the political guts to impose fossil carbon taxes. If we taxed the bad stuff, there would be no need for FiTs and RINs and RECs; and the good stuff would mostly take care of itself.

          • wattleberry

            Thanks for your further comments. I don’t think there is anything I can add.

  • Ian Arnell

    Love hearing things like this. I really hope it catches on. The technology is there now, we just need to start using it more

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