“Feed-in tariffs (FITs) are the most widely used renewable energy policy in the world” says a massive report by a team of researchers at the National Renewable Energy Laboratory (NREL).
At 144 pages, the report–A Policymaker’s Guide to Feed-in Tariff Policy Design–is certainly the longest report any US government agency has ever published on feed-in tariffs, the policy known for the dramatic growth of renewable energy in Europe during the past decade. The report’s internal governmental and external peer review alone took more than a year.
While an extensive analysis of feed-in tariff policies around the globe, the report focuses on how these polices can be used in the US. Importantly, the report offers American policy makers a guide to the best practices worldwide and what are the advantages and disadvantages of each design element.
The report provides a comprehensive overview of policy options and highlights for Americans some key elements that make policies successful, specifically
- Long-term policy stability,
- Payments based on the cost of generation,
- Differentiating tariffs by technology, size, location, and resource intensity
- Guaranteed access to the grid,
- Eligibility to all end users and project developers, including some utilities, and a
- “Must take” provisions for the electricity generated.
The authors, Toby Couture, Karlynn Cory, Claire Kreycik, and Emily Williams, take the time to delve into the origin of several key provisions in landmark feed-in tariff programs, such as Germany’s Renewable Energy Sources Act.
One design feature often overlooked in North America is differentiating tariffs by resource intensity. This feature has been used successfully in both Germany and France and is now used in Switzerland as well. Few understand why it was included.
The NREL report contains probably one of the most extensive discourses on resource differentiation currently found in English. The report goes to the German source documents to explain why resource differentiated tariffs are necessary: “. . . to avoid payment of compensation rates that are higher than what is required for a cost-effective operation”. As NREL concludes, “this resource-adjusted payment scheme is intended to bound project returns to approximate those targeted by FIT policy administrators, a feature that could help reduce the potential for overpayment in high-quality resource areas.”
The report also emphasizes the positive investment environment that aggressive feed-in tariffs provide. “Well-designed feed-in tariffs can help reduce [investment] risk, which can also help reduced the overall cost of RE development,” says the report. It goes on to note that the stability of feed-in tariffs makes it more likely that “traditionally risk-averse investors” will provide debt financing, making more capital available for renewable energy development. The latter is increasingly important in the US as the market for tax-advantaged investments has shrunken dramatically since the collapse of the housing bubble.
The NREL report also destroys many of the myths surrounding feed-in tariffs. One myth, for example, is that FIT policies discourage competition. On the contrary, says NREL, the scramble for market share under feed-in tariff polices in Germany, France, and Spain has driven increased private sector research and development, spurring innovation and technological cost reductions.
NREL’s observations on Spanish solar photovoltaic (PV) tariffs and the government’s reaction will be particularly useful to policy makers in the US where feed-in tariff critics are quick to raise the Spanish PV boogeyman.
“One of the lessons of the Spanish experience is that sudden and unpredictable changes due to frequent bureaucratic interventions are likely to undermine investor confidence and lead to a flight of capital – experience suggests that it is better to design FIT policies with a long-term perspective in mind and to ensure that policy adjustments occur incrementally rather than reactively (Deutsche Bank 2009). Additionally, policymakers should give consideration to the scale of deployment desired – the Spanish case demonstrates that aggressive tariffs combined with a good resource and inadequate oversight can create an explosive policy combination. Care should be given to the design of FIT policy caps (or other cost containment mechanisms), particularly for costlier resources. On the positive side, Spain’s experience demonstrates that FIT policies can yield significant RE deployment quickly and effectively and can, therefore, be useful to meet aggressive RE targets.”
NREL defines a successful feed-in tariff program as a group of policies that “encourage, rapid, sustained, and widespread renewable energy development” and there’s no better example than in continental Europe. Feed-in tariffs, says NREL, have resulted in the deployment of 15,000 MW of solar PV, and 55,000 MW of wind power from 2000 to 2009 in the European Union.
For comparison, there were some 25,000 MW of wind in the US at the end of 2009 and only 1,250 MW of solar PV.
According to NREL, feed-in tariffs are responsible for 75% of all solar PV and 45% of all wind development worldwide.