I just read a very interesting interview with Miguel Mendonça (World Future Council Research Manager) on feed-in tariffs. He was interviewed by Xavier Lemaire who is responsible for the Sustainable Energy Regulation Network (SERN) at REEEP.
Miguel Mendoça is the author of “Feed-in Tariffs – accelerating the deployment of renewable energy”. He has co written a new book on decarbonising the global economy entitled: “A Renewable World — Energy, Ecology, Equality” (with Herbert Girardet), and another book on renewable energy policy entitled “Powering the Green Economy: The Handbook” (with David Jacobs and Benjamin K. Soya cool).
Below you can find the transcript of the interview in English (it is also available as pdf in French on the SERN website).
1) Briefly what is a feed-in tariff?
A feed-in tariff is a support scheme for promoting the use of renewable energy; you can also call it a fixed price incentive wherein a fixed tariff is granted for each kilowatt hour of renewable energy that is fed into the grid. You will design the feed-in tariff according to which technologies you wish to promote and which ones you have available, and it is also a product of how much interest there is in establishing a domestic industry, how much job creation you want to fuel and considerations of that sort. In essence, it is a type of support scheme to accelerate the deployment of renewable energies.
2) More than 40 countries have adopted the feed-in tariff or a kind of feed-in tariff. Why is it so successful?
I think because it’s simple: anybody can get involved in it; it is not funded from any national budget, in general. So the system can’t be cut if a new Government comes in, or there is a recession or major pressure on public finances. You know the tariffs are guaranteed in law and the rate of return is so good that they present a very compelling business case for investors. They can see exactly how much money they will receive per kilowatt hour for 20 years. Therefore, this provides a secure, legally guaranteed investment case to any potential investors. It could be a business, it could be a school, it could be a homeowner. This is the point: anybody can get involved and because it is very administratively simple, the system itself is very cost effective. You only get paid for the energy that you actually generate. Some other systems will give you the grants to cover the up-front capital cost of say a solar system, or there would be general grants for microgeneration, but that doesn’t guarantee that you would even install it. That allows you to buy the equipment, but it is a very different thing from saying: “instead of me giving you money for buying this stuff, I will pay you for every kWh you generate”. That means that you have to find the best equipment that you can and make sure it is set up properly; you have to take care of all the details to make sure that your system is the most efficient, in terms of both the technology and the way that it is set up.
Therefore it builds in a kind of quality control to the system in a way that for example a grant system cannot do. It is better than net metering because that only pays you the same rate effectively as brown electricity, you don’t get any extra, and it doesn’t take into account all the benefits of renewable energy. In itself, net metering is a fairly mean way for utilities and Governments to say that they are doing something, but it is not very effective. Net metering just allows you to run your meter backwards. So, it has a very limited sort of effect — although it could be combined with a FIT. So I think there are many different reasons why it [the feed-in-tariff] is popular, but generally it’s because it has proved that it can deliver – at the lowest cost – the fastest deployment of renewables. If you are really serious about renewables and you are not worried about vested interest or locking off the market for just big generators, then that’s what you go for. More countries have that system than any other.
3) You said it is a guaranteed law. Does it mean that an investor can be sure that it will be guaranteed… because a tariff can be revised, you see what I mean?
Yes, but the tariff that you get from day one is what you would get in year 20. If you build this year, you get, for example, 5 percent more than you would if you installed the equipment and started generating next year. The digression rate is just a percentage reduction each year, to prompt technological development, and to take account of it. But not everyone uses tariff digression. People like to invent their own ways of doing things for whatever reason, but in general you have this digression rate each year which encourages people to do things faster.
4) Ok, what about Spain… and Germany?
Well, it was really about the market just getting too hot […]. It was almost a victim of its own success. The new directive of 2009 obliges Spain to increase the share of renewables [to 20%] but this [the old feed-in tariff] would have ended up as a 45% share of the Spanish power market […]. In no more than 11 years, Spain would already have produced almost half of its power of renewable energy sources — and that would have cost a lot of money very quickly.
For Germany, they have a major revision every 4 years, but a tariff revision every 2 years as I understand it […]. The whole purpose [of a feed-in tariff] is to drive down costs and as they are being successful; they need to reflect that. If wind power is becoming a lot cheaper, then you want to give less money, unless they want to grow the sector, like off-shore wind and on-shore wind, then they raise the tariffs in Germany to encourage those sectors. Now of course that is going to cost more money but what they get is to create more jobs, they get more foreign direct investments because Germany is so geared up that a lot of people just go and set up in Germany. They have all the expertise; they have the guaranteed domestic market through the feed-in tariff. They have Government support in lots of different ways and in the end they know they are safe. It is a safe investment so you know [you can] go to Germany and do it […]. A lot of people are losing out to Germany and Spain, and increasingly Portugal and France, because they are not getting on board quickly enough.
A lot of people believe that with sunny conditions at certain places, [solar] will achieve grid parity by, some people say 2011, 2012, 2015, but we say comfortably by 2015 […] solar electricity generation will be equal to generating from coal or nuclear in terms of cost. At that stage, you don’t necessarily need feed-in tariffs anymore and suddenly all the prices start to come down… energy prices start to drop and wind is almost comparable… in some places it is cheaper than coal fired generation and certainly if you remove the subsidies to the coal industry you will find that wind is already cheaper in many countries. So, the purpose is not simply to prop-up the renewable industry, but to get it to the point where propping-up is no longer necessary and some countries are doing that faster than others.
5) So back to the question for developing countries: is it useful to adopt a feed-in tariff now or just to wait 5 years and to get finally solar or wind at a very low cost?
Well, it is a very good question and I think it all comes down to how it could be funded. If you could find a relatively painless way of funding it then I would say it is a good thing because people develop the technical and administrative experience necessary to begin to integrate renewable energy into the grid. This is something that you cannot learn overnight, that’s my sense… I am not into the technical side of things so much, but evidently [things] take time to develop and you need the expertise, you need structures in place institutionally, you need people who know what they are doing and how to make this happen. So, in 5 years, yes, the technology might be cheap but [without a feed-in tariff] there is no development of skills, there is no capacity building in that country when it comes to dealing with renewable energy. It seems to me it would be prudent to begin to develop that and to say this is what we want to do; we are going to develop our capacity to be able to do it more effectively over time and things are going to be cheaper and in a way, you are setting out a vision for the country […]. You can say: “Ok this is the budget that we have and we can really invite renewable developments up to this point.” If you are an investor, it would make you nervous because you want to be sure that if you are going to start to get a foothold in a country, you are not going to arrive and set out your installation and then find that after one year of operation [there is] no more money and no one can afford your electrons because they are too expensive. On the other hand it is useful to say: “Ok this way you can’t go over budget”, but to investors, I don’t think they like to hear anything about limitations on receiving remittance from their investments.
6) Is it possible to design a very bad feed-in tariff?
There are a number of issues; a low tariff level is the first: where you just don’t offer enough to make it worthwhile. You could have a rate that is too low, or you could set one rate for all technologies, or you could have a ridiculously high tariff level that then gets no political support. You could have a flat rate tariff; you can just say we are going to pay x per kilowatt hour and every technology gets the same. Well that’s ridiculous, and evidently doesn’t work. Of course, Germany has really developed its tariffs to always try to strike a balance between an attractive rate for investors and an attractive rate for rate payers. If you split the cost between everybody’s electricity bills then obviously the lower those extra costs are, the happier they [consumers] would be, but the investors would be happier the more money they get paid, so you have got to find a balance. This means that you need to have an advanced feed-in tariff design where you differentiate by technology, by location, even by time of day, and then of course you can have the premium feed-in tariff design, which is different from a set tariff, so you have a sort of price corridor. You get paid the market price for electricity on that day plus or minus. If the market price is too low, you will get a top-up to make sure that you will always receive a basic amount that makes it worth doing. However, on days where the market is doing well, it could pay you the maximum but you will not get anymore through the feed-in tariff because the market itself is giving such a good rate that you actually don’t need any extra money. In other words, it creates this price corridor, a ceiling and a floor, to make sure that you always get a minimum. This is to avoid overpayment. It is another way of trying to control the cost in the system, and make it more market-friendly.
As far as bad tariff design, there are many other difficulties. There are also exemptions from purchase obligations being placed on utilities to buy the energy. You have to be able to sell it. If you can’t, there is no guarantee of any sort and it is more or less worthless. You could have problems with the financing mechanism as we have mentioned before and you could make it part of the national budget. This is something that was considered briefly in Britain as they are currently designing a feed-in system. You could also have a poor method of calculating the tariff itself or you could base it on avoided cost, which is the cost that would result from building the same amount of generation through a coal fired power station for example. Basically if you deviate from good practice – i.e. by […] making sure that the generation costs are paid plus a reasonable profit and some of the other sort of fundamentals – if you deviate from any of these fundamentals, you can say it is badly design and it really isn’t going to work.
There is also the net versus gross feed-in tariff issue. A gross feed-in tariff means you get paid for all the energy that you produce. With a net feed-in tariff, you only get paid for the amount that you generate above the amount that you consume. If you generate 50 kilowatts then you want to get paid for that. If you used 40 kilowatts then [under a net feed-in tariff] you only get paid for 10 kilowatts and that’s obviously only 20% of what you have produced and of what you should get paid for. This is a major issue in Australia at the moment where a lot of Governments are saying we are going to have a feed-in tariff and then it turns out it is a net tariff and it is almost meaningless.
7) In conclusion: feed-in tariffs
Some governments avoid it strongly, and I think all this is political. You have a lot of people who don’t want renewables to happen or they don’t want feed-in tariffs to happen, and if this is the case, it is usually because they want a different system that doesn’t challenge their standing in the market. People want to monopolise the market, they want to grab [as] much market share as they possibly can. When you have feed-in tariffs, those monopolies get broken up because anybody’s house could be a power station. Anybody could be a tiny energy company, or you can have a community wind farm for example. It might be 10 or 20 megawatts or something like that, and each time, the conventional energy industry and the local utilities are driven crazy because they want people to be customers, they want people to pay them, they don’t have to pay customers. There can be tremendous opposition, for obvious reasons […].
There are a lot of different issues… Sometimes if that country produces a lot of coal, uranium or gas, they don’t want to see this huge spread of renewable energy, or they might say it is still too expensive. They say: “a feed-in tariff is too expensive.., we can do it in 5 years…” But in the end it’s just down to greed and short-termism and I think it is up to intelligent, caring people to try to reverse that and take advantage of what is proven to be the best mechanism for delivering renewable energy quickly and cheaply. However, I think it [the energy sector] is still dominated by a tiny number of the more powerful interests and it seems to be very difficult to really get it right. It shouldn’t be difficult; I mean you can see the logic of the feed-in tariff. It really works, it gets everybody involved. We have seen what it has done already and we have seen this can be more efficient than any other policy and can get us to where we need to go the fastest. Having said that, we can see all of these vested interests fighting against it relentlessly and then we are back to square one.
In general, one could also point out that there are renewable energy targets out there… that there are carbon reduction targets and in the end this can mean life or death for us all. Even our civilisation, our production systems, our vulnerable food systems, our ecological systems, our transport systems, our trading systems, our political and economic systems will all be broken. They can’t withstand all of the systemic shocks that climate chaos will bring. So it is not just about energy security and preventing future conflicts over oil resources like we have seen in the Middle East, because we are obviously going to reach the peak of oil. One has to ask why Saudi Arabia and the United Arab Emirates and other Middle Eastern nations are all suddenly getting so hot on renewable energy.
All these things are intertwined. In the end, if we have any kind of integrity and conscience and intelligence and rationality, all we can do is to take these policies that work and move to them as quickly as we can, as democratically as we can, learn from the successes and failures of others and just get it right. The job is to get it right.., to get energy right. I think we are running out of excuses for getting it wrong.
Interview done by Xavier Lemaire, SERN, 15th June 2009