Feed-in rates: a hard sell 3

I really feel for the renewable energy activists in the U.S. who are trying to get the most successful policy in the world, feed-in tariffs (FITs), implemented.

The problem in the U.S. is, ironically, that so many U.S. renewables advocates actually oppose the idea (because it wasn’t theirs), and even now that everyone seems to have accepted the empirical evidence that FITs simply are the most successful, one major challenge remains: getting advocates of renewables in the U.S. to understand what FITs are.

This article, for instance, about a new proposal in California is a terrible assessment. No layperson who reads it will have a good understanding of what FITs are when they are finished with the article:

... utilities would rank bids by price and accept all of the
cheapest proposals that their budgets allow. The auction would be repeated twice
a year, with the eventual goal of bringing an additional 1,000 megawatts of
solar capacity online.

In other words, this system, described as “somewhat reminiscent of feed-in tariffs,” is in fact very much like the bidding processes common in current Renewable Portfolio Standards used in the U.S. FITs differ crucially on two accounts:

• the price is specified in the law, not set by utilities (who may not want the competition from distributed power anyway)
• and under FITs, utilities do not get to decide (twice a year, for example) when meddlesome little competitors can set up their systems; rather, if you want wind, a solar roof, or whatever, you get it—utilities cannot refuse grid connection

Under the California proposal, your proposal can apparently be rejected, in which case I suppose you don’t get to put solar on your roof, and your community may not get to put those two wind turbines up on the hill outside of town even though the community itself came up with the investments. Instead, economics of scale will mean that giant investors, who can install some giant project in the middle of nowhere at a fraction of a cent cheaper per kilowatt-hour than your local community systems would be, will get most, if not all, of the pie. Power production then remains to domain of monopoly utilities (though U.S. policy is strangely held to be market-driven), whereas FITs democratize power production.

From my cursory reading, I do not see that the California proposal has anything to prevent this concentration of renewable power, but feel free to post a comment if I have missed something. As California solar advocate Adam Browning points out, “mid-size solar and other renewable energy technologies of 1 to 10 MW” are the focus of this new proposal. FITs do not, however, focus on midsize systems; in fact, their main selling point is that they ramp up everything, including small, distributed rooftop systems that you, dear reader, can own yourself—after all, there is no dearth of large projects and project proposals in the U.S. But the tiny German state of Baden-Württemberg had some 25% more solar electric installed than all of the U.S. at the end of 2008.

Mind you, I have no problem with people thinking about other ways of doing things, and it is always possible that someone will come up with a better way than FITs. What I do mind is a misrepresentation of the facts. Our blogger is totally off the mark when he writes about the alleged main drawback of FITs (in which prices are set by the policy, i.e. by policy-makers, not utilities):

Picking prices is hard. Too low, and the incentive won’t work. Too
high, and consumers overpay. Also, because different rates apply to different
technologies, certain industries can become unfairly
advantaged.

Browning agrees: “The difficulty with this approach is finding the right price.” Somehow, even solar advocates, who must realize that we would already have renewables if utilities were genuinely interested in them, believe that the same utilities can price renewables better than policymakers. Of course, utilities are going to price things with an eye on their bottom line, not yours, so if you are interested in a solar roof, do you want the price you get for the solar power you generate to be dictated by the people who see you as a competitor?

Furthermore, the idea that applying different rates to different technologies produces an “unfair advantage” is patent nonsense. If anything, applying a single price to all renewables—the common approach in U.S. policy and apparently what would happen under the legislation proposed above—means that wind competes with solar, geothermal, biomass, and other fringe technologies like ocean power. Since wind is the cheapest, wind almost always wins the contract. Part of the magic of FITs is therefore that the same rate of return is calculated for each type of system, which produces (roughly) while level playing field for all technologies—an investment in wind power will probably not be more profitable than an investment in solar, etc. Will the California proposal do that?

Nonetheless, we hear that pricing is hard. Somehow, the spectacular market crash of solar (but not of wind, and therefore not of FITs!) in Spain completely overshadows the roughly 50 success stories in the same number of other countries. Actually, it isn’t that hard to get prices right at all. Here’s the formula:

total system cost / expected kWh + 6-7 percent profit
margin

You then build in a review to take account of changes in system cost (the expected kWh depends primarily on weather conditions, not market conditions). Since prices can be expected to drop anyway for emerging technologies, you can also include an automatic reduction (say, x percent lower rates each year) to be on the safe side.

So why do we not have such things in California already? Because they work, and they will cut into the profit margins and planning processes of U.S. utilities, which are accustomed to acting as monopolies. And unlike Germany, the U.S. does not have a government strong enough to stand up to the business world and say, “these are the rules, and our citizens want renewables”

Naturally, U.S. renewables advocates are proud of the compromises they have reached with the very utilities who have failed to implement renewables up to now. As Browning himself puts it:

We’ve spent a year on this docket, and will spend a lot of time
going over the details of the proposed program to guide our suggestions for
further development…

So there we have it: the proposed legislation is Browning’s baby, in part. Again, if his policy is more successful than proper FITs, I’m sure all of FIT countries will be happy to copy what California does. But for the time being, I would simply like for folks in California to refrain from calling this proposal an FIT, which it ain’t, for the reasons I describe above.

Browing’s wording shows one thing: those of us in the FIT camp seem to have won an important battle, for no one can dismiss FITs as a policy success. (Browning has never supported, and probably never even properly understood, FITs.) Now, we must make sure that the policy design behind the acronym FIT is not misrepresented. Otherwise, proposals that are not FITs will benefit from the hype around FITs without actually producing the desired outcome.

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