The previously discussed finance mechanisms tend to hide the costs of building renewable generators by concealing the actual cost per unit of electricity and costs for the ratepayers or taxpayers as a whole. In an era when so much is hanging on energy policy, it makes more sense to consider policies that do not pull punches when it comes to costs and benefits.
Renewable Energy Payments
A more transparent approach to spurring the market for renewable energy technologies are Renewable Energy Payments, a.k.a. feed-in tariffs. REPs name and guarantee a feasible price for renewable power from supported technologies under a variety of conditions related to the size and siting of the generator. A successful REP system supports a variety of technologies and prices electricity to allow plant developers to recover their investment plus a reasonable profit. Another way to put it is that an REP system constitutes an open-ended power purchase agreement for 10 or 20 years that allows plant builders to receive financing at favorable rates because of the investment's security, due to the guaranteed wholesale power price.
In successive generations of plants, some REP systems are designed to reduce the level of the tariff to encourage the industry to become more efficient. Some REP systems have a built in inflation factor to adjust the level of the initial tariff to reflect changes in the value of money. REPs are typically paid for via a supplemental charge attached to all power sales in the electricity system, pooled among the widest set of power users.
REP systems have been successfully applied in Germany and Spain and have recently been introduced in Ontario, France, and Italy. Since the inauguration of their current REP system in 2000, the Germans, for instance, have more than doubled the fraction of electricity attributable to renewable energy from 7 percent to over 14 percent. Estimates are that German power users will pay on average a maximum of 2.80 euros ($4.11) per account per month in 2015 when the effect of their REP law will be at its projected maximum, so the REP tariffs do not contribute much to overall power costs to consumers. If it were considered more politically acceptable to pay for the surplus power payments attributable to the REP tariffs in part through tax revenues rather than through electric rates, such a system could be designed.
An REP system starts out at "cost plus reasonable profit," but to counteract inefficiency in the renewable energy industry needs to "degress" the tariff levels for successive generations of plants or introduce market elements into pricing. The German tariff steps down in successive new generations of plants and recently the solar rooftop tariff was reduced a higher-than-usual 9 percent for 2009 installations while there was higher allowance made for offshore wind to encourage that industry; both moves generated their share of controversy, which is almost inevitable in such an environment. In Spain, in addition to a premium for clean energy there is a market option which encourages renewable generators to heed the needs of the electricity market through demand-based incentives.
Direct government investment
Though less likely to be applied in the U.S. in the current political climate -- where the levying and spending of tax monies is considered to be an imposition rather than payment for public services -- the federal government itself can, as was the case with the Hoover and Bonneville dams, commission renewable generators in situations where risk or payback is too uncertain for private companies.
An effective REP law, however, might make government's involvement in direct power generation limited to the development of research reactors or in commissioning renewable generators for use by government facilities. A commitment to run government installations largely or entirely on renewable energy could provide a test bed for an all-renewable grid for the broader society.
Though potentially rife with inefficiencies, issuing bonds may be one method for governments to finance new infrastructure. While government bonds are the equivalent of a credit card for the government, the total financed portion of the new infrastructure is stated in the bond. Bond issue may be a necessary evil in building key pieces of infrastructure that are not amenable to a performance-based standard like an REP.
Rebates
Small renewable generators, largely rooftop solar PV arrays, can also receive a rebate directly from a power company or state agency based on a formula that reduces the upfront cost to buyers of purchasing and installing this equipment. These incentives require the ready availability of funds either from government coffers or from the utility company itself and would present cash flow problems for these entities if applied to larger generators, as large rebate payments would need to be paid in very large chunks to co-finance the new power plants.
Building a national grid
As is currently the case with the building of long-distance transmission, the federal government will need to take a leading role in building new transmission lines to connect load centers with areas which are most favorable for renewable energy development. The main renewable energy areas that require new transmission are: the Great Plains, the intermontane regions of the Rocky Mountains, offshore on the Great Lakes and Pacific and Atlantic Coasts for wind development; desert and semi-arid areas of the West and Southwest for solar thermal and large-scale concentrating solar PV; geothermal wells and centers of electric demand.
Large states with substantial renewable resources, California and Texas have started planning for zones where transmission lines can be built as renewable generators are built in that zone. As transmission can take many years to build, these lines will bring renewable energy to market as soon as work on generators are commissioned and ready to generate electricity.
Next: Conclusion! Paying the piper.
‘Heretic’ battles straw man
Comments
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Sean Casten Posted 5:41 am
17 Sep 2008
If your goal is to deploy renewables, there's no question that feed-in tariffs work. But is that really the goal? Shouldn't we be instead focused on figuring out how to deploy the cleanest possible power at the lowest-possible cost? Feed-in tariffs, are deeply flawed policy in my opinion, because the confuse the ends for the means.
There are significant eligibility problems with any renewable incentive, as evidenced by the fact that every jurisdiction has a different definition of renewability. Does hydro count? Biomass? Municipal waste? Waste heat? Those are hard political questions, but they are innate to any regulatory model that stipulates technologies (means) and remains silent on goals (ends). Much better to do the latter.
But even setting those issues aside, there is the larger problem with setting rates designed to ensure profits. Solar PV is way more expensive than wind on a $/kW and $/kWh basis. A feed-in tariff pays a lot more money to solar PV as a result. I can see no logic for it being good policy to pay PV more just because it's expensive. (And even if we think that there is a portfolio logic for having a mix of solar and wind, the same logic would apply to solar PV and concentrated solar, or to two different wind technologies with differential costs.)
Many of the problems in our current electric system result from the fact that we pay utilities based on their capital investment and thus give them no incentive to pursue cheaper capital or reduce their fuel. A feed-in tariff simply repeats this mistake in another sector of the economy.
A much better approach is to define the goal (say, zero-carbon electricity), then stipulate a fixed price for any technology that passes that test, including all appropriate externalities and then get out of the way to let capital allocate rationally.
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Michael Hoexter Posted 4:45 pm
17 Sep 2008
Your approach to this is a recipe for nothing significant happening in this area. The full piece of which this is a serialization is a argument for investing more and paying more for energy to build a clean energy infrastructure. I don't want to repeat the whole argument here but in a nutshell, the market-biases that you find here in the US and in Britain, which insist that demand will dictate to supply what a good should cost, don't work in the area of energy, and in particular, the new clean energy infrastructure that we need.
The reason, especially in the are of renewable energy, is that one needs a lot of "stuff", raw materials to capture the relatively diffuse renewable energy flow. Also electric generators are supposed to last 20 to 50 years, so have to have a build quality that costs money. We will achieve SOME efficiencies with lowered finance costs and economies of scale as well as technical innovation but with not nearly the speed that we as consumers have become used in the area of other "miniaturizable" technologies like electronics and biotechnology.
Those countries that follow your philosophy, Sean, like the US and Britain, lag in the area of building new infrastructure and in particular in the area of renewable energy.
I've written a critique of Google's RE<C in which I suggest that they (and you) are "making the perfect the enemy of the good".
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Sean Casten Posted 12:01 am
18 Sep 2008
Let's run the numbers: Figure a wind turbine costs $1500/kW, runs 20% of the year and investors require a 20 year, 13% return on their invested capital. That implies that - per a feed-in tariff - they need to receive $122/MWh for power produced from the wind turbine. (Note that this is upstream of the transmission & distribution network, so this competes with wholesale power prices, not retail. I'm also ignoring operating costs to keep the math simple.)
There isn't really good data on wholesale power prices, but average US retail rates today are about $90/MWh. Let's conservatively assume this includes $20/MWh for transmission and distribution (this is really too low, but increasing it only makes the subsequent point all the stronger.) That means that the "clean premium" being paid for wind in this case is $122 - 70, or $52/MWh. Since the US grid averages 0.6 metric tons of CO2 per MWh and the wind turbine produces none, this implies that we are paying the wind turbine owner $52/0.6 or $86/ton of carbon abated.
Now let's repeat the same math, but with a photovoltaic array. This system costs more - let's call it $6500/kW - and runs less often, at something like 15% capacity factor in the US. But we'll hold everything else constant: same capital recovery requirements, same grid carbon impacts, same wholesale price comparison and ignore operating costs. Per the same math, the PV array requires a payment of $704/MWh, implying a $634/MWh premium over retail rates and therefore a whopping $1057/ton credit for CO2 reduction.
So what is the logic that says that the PV owner gets 1057 / 86 = 12x as much credit per ton of CO2 reduction than the wind turbine? Just because they're expensive? That's inane!
But the problem here is not economic - it's environmental. No society has infinite resources. As a result - in the simple example above - every dollar we put towards solar is only generating 1/12th of the CO2 reduction as a dollar put towards wind. No matter where one lies on the pro-environment/pro-economy continuum, that's an irresponsible use of capital. Personalize the decision: if you had $10,000 to invest in CO2 reduction, would you rather reduce 116 tons or 9 tons of CO2? I don't think that's a hard decision - and it shouldn't be any harder for a government than an individual.
I will concede that CO2 isn't the only motivation behind renewable policy, but the math holds on any other metric as well that sets the payment based on capex rather than benefit. A vastly better approach is one that says that any clean technology gets an equivalent payment per unit of cleanliness. In this two-technology example, that would generate 12 times the CO2 reduction as the feed-in tariff model. Moreover, it creates a much stronger incentive for the high-cost developer to lower their costs.
Bottom line is that I don't suggest we insist on cheap, but rather that we insist on the maximum environmental benefit per dollar of investment. Renewables per se are not the goal. So articulate the goal, reward it and then let capital flow appropriately.
To your final point, neither the UK nor Britain has ever taken this approach. Countries like Germany and Japan have chosen to massively subsidize renewables and not surprisingly have a lot more deployment. And if that was the goal, then I'd buy the feed in tariff argument. But that's simply a path and - as noted above - neither an economically nor environmentally responsible one. Good policy rewards goals.
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Jon Rynn Posted 3:10 am
18 Sep 2008
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Sean Casten Posted 3:26 am
18 Sep 2008
None of these calculations though are strictly comparative to the costs of an investor based system. (Indeed, if cost of money was all that mattered, we'd concluded that the current model is optimal, since their money is cheaper than mine. Of course a part of the reason their money is cheap is because they operate under a system wherein they face no consequences for being fiscally irresponsible which... engenders fiscal irresponsibility.)
The point I'm making is simply that if someone's going to cough up the $ for a solar panel, wind turbine, coal plant or any other generation technology, they are going to expect to get their money back, at a premium over time... for the same reason that you expect to get interest on your savings account. After all, if this wasn't the case, the world would already be awash in solar panels.
Societally, we can come at that question one of two ways. One, what is the best use of our scarce funds. We can model all sorts of scenarios, assume that we will devote enough $ to solve our environmental problems and then compare the effective return from those various paths. Alternatively, we can assume that all investors get the same return on their capital and ask how much we are therefore paying per unit of benefit. Algebraically, the one can be reformulated as the other. But in all cases, you cannot assume that capital is free.
This is not unique to renewables, of course. Indeed, Ontario has just completed an integrated system plan that we have been criticizing in part because they assumed that non-utility investments will have to earn sufficiently competitive returns on capital to attract private money (on the order of 15%) while utility investments in nuclear power - with taxpayer money - will only have to return 4%. Our criticism of that analysis is that they are implicitly assuming that it is in the public's interest to subsidize nuclear power by accepting below market returns on their money, but then assuming that other technologies will only proceed if they can attract capital.
Make sense?
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Sean Casten Posted 3:44 am
18 Sep 2008
If you invest $P in a savings account for n years at r% interest, then at the end of the period you will have $[P x (1+n)^r].
Nothing very fancy here. If you put $100 in a savings account earning 3% interest, you'll have $103 after one year and $106.09 after two years. (Note that it increases slightly faster than $3/year because in year 2, you earning interest on the $103 as compared to earning it only on $100 during the prior year. This is why Einstein famously said that the greatest of all human inventions is compound interest.)
This is the formula upon which almost all modern finance is built, and isn't very complicated. However, there's nothing that says that your only option is to invest money today and take it all out n years from now. The much more common form of investment - at least in the energy realm - is one in which I put up $P today so that I can earn (or save) $A per year for the next n years. Unlike a bank interest payment, $A doesn't necessarily compound over time, but I can still run the math the same way, but manipulate the algebra a bit to solve for "r". (e.g., If I pay $1000 today in exchange for a $200 per year payment over the next 10 years, what is the implied interest rate I am earning on my money). This is the rate of return. (In this case, that works out to a 15% return - easy to solve on excel, although a bit difficult to walk through on a blog post.)
Thus, when I say that an investment has to earn a 13%, 20 year return, I am simply saying that for every $1000 someone puts up, they are going to expect to get $142.35/year back. That means that they don't actually get all their money back for 7 years (1000/142). And since there is always the possibility that the investment craps out before that point, one shouldn't take the 13% as guaranteed, but rather as a way to compensate the investor for the risk that they might not get their money back.
Taking all this to a $6500/kW, 15% capacity factor PV panel, this means that a 13% "cost of capital" requires an annuity of $142.35 x 6.5 = $925.30 per year, per kilowatt of output. Since a kilowatt of output generates (8760 x 15%) = 1314 kWh per year, that means that the cost of electricity required to earn a 13% return is $925.30/1314, or 70 cents/kWh.
Boring stuff, but hopefully helpful.
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Jon Rynn Posted 4:10 am
18 Sep 2008
Let me get to an even more basic idea -- where does that compound interest come from? This has been vexing economists since at least Ricardo, and was quite a topic of conversation among economists for at least 100 years after.
In my mind, interest comes from productivity increases, mostly technological, and mostly, although not totally, from manufacturing. According to research I did with the late Seymour Meman, trying to use data going back over 100 years, manufacturing productivity increased about 3.1% per year -- basically, society's interest rate.
If society was not increasing it's wealth -- that is, it's output of goods and services, not it's increase in money -- there would be no return on capital, for society as a whole. Maybe someone would be making a return somewhere, but it would be a zero-sum game, someone else would be losing. The only way that people can get return on capital in a society without that happening is for economic growth to occur.
Now, as has been discussed here before, if you just chew up more forests or mine more stuff, you could also get economic growth, but eventually your society will collapse, because you'll use everything up. So the only sustainable path to growth is through technological innovation -- or say, putting in a cogeneration plant were not was there before.
But therein lies the problem. We have some huge ecological/economic problems coming down the road -- peak oil, global warming -- which the markets can't handle. Hell, the markets can't even handle unbridled trading of mortgages. In fact, the markets seem to be these very high-octane engines, and if you don't point them/constrain them in the right way, they'll just rip everything up in their path.
But then, we have Ontario giving nukes an unfair advantage, and the U.S. Congress giving ethanol an unfair advantage. Great, both markets and governments are screwing up. And as you point out, we only have so much capital. That's why we need to have a national conversation about how that capital is going to be used, even if we start to get into things like planning, or at least feed-in tariffs. Because we have to understand how we are going to create a society that can have any returns.
I'm not saying that that would be easy, but at the very least, people in the US, in particular, should understand or at least be exposed to the cornucopia of policies that have been used, some quite successfully, around the world. Because if Americans stay stuck in the market-centric world view, I fear for the country, and it would be ridiculous to miss out on all of the information and experiments that are taking place all around the world.
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Sean Casten Posted 4:42 am
18 Sep 2008
What would you do with your money in that case? The answer isn't complicated - you just change banks once/year, eliminating the paper trail. Thus, $100 in bank A in year 1 turns into $103... which I then take out and deposit in bank B who gives me $106.90, at which point I take it out and move again.
Which gets to the answer to your question. Compound interest exists because a dollar is a dollar is a dollar. Whether it arrived on my doorstep in the form of an interest payment or a payroll check doesn't matter to me, nor to my bank. All are eligible for interest.
And interest in turn comes from growth in economic activity, through that magical mishmash of technological advance, population growth, resource exhaustion, etc. Some of those drivers are sustainable and some are not, but compound interest per se isn't the problem. (Indeed, even if we solved population growth and had a fully susatinable energy footprint, we'd still have technological advance, as Smart Dude B invents a better solar panel than Smart Dude A, creating wealth that didn't previously exist.) We'd also still have non-technological innovation. And so we'd still have compound interest... albeit perhaps at a different rate.
A final note: markets don't create compound interest. People do. All a market describes is our collective action.
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Jon Rynn Posted 5:05 am
18 Sep 2008
So why are people insisting on 13 or 15% returns? I would guess that, in the past 8 years or so, it's because of the real estate bubble, where you could get those returns because they were fictional. And before that, it was the dot com bubble, some more fiction.
How many more projects could you do if people were expecting 5% returns? By the way, this is killing off the manufacturing sector, because as I stated previously, you get "only" around 3% increases there -- except, those are real.
I understand the concept of compound interest -- substitute a population of rabbits for a bank account, let's even talk fibonacci series -- but the problem is that, when you have unregulated bubbles going, it doesn't just mean you lose the money from the bubble, even worse, you lose the opportunity cost of the things that should have been invested in.
So now we've lost lots of time, and the only way to catch up, fast, unfortunately, is to use the government to just build the right stuff -- assuming the public is smart enough to push the government to build the right stuff.
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Sean Casten Posted 5:14 am
18 Sep 2008
In today's market, investments in energy assets that are not guaranteed by the government and rate payer demand returns north of 15%. Those that are guaranteed by the government demand returns of 8 - 10%. No use crying about it - it is what it is. And in the grand scheme of things, not a bad thing since it means that there are lots of good investment opportunities out there. The Japanese, by contrast have had massively depressed lending costs for years, causing a massive economic stall. (Remember when the Asian threat wasn't China? Seems like eons ago, don't it?)
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Biodiversivist Posted 5:16 am
18 Sep 2008
I can only think of three reasons a consumer would want PV on their roof
Don't know that it will cost them.
Want low carbon energy regardless of higher cost.
Want them as a status display.
Why they want them matters less than if they want them and if their use reduces CO2 emissions, all the better.
If low cost PV panels finally arrive and their use becomes ubiquitous, the utilities will have to find ways to accommodate them. Consumers would be in the driver's seat. Imagine a state where all citizens agreed in mass to conserve electricity in every way they could. The power companies would suddenly find themselves burning millions of dollars of coal for nothing with no income to pay for it with. Their first effort would be to get politicians to make consumers pay higher rates but if the politicians could be made to hold steady, the utility would eventually find a way to deal.
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Jon Rynn Posted 5:27 am
18 Sep 2008
Return on capital is not a monetary phenomenon, ultimately, it's a material phenomenon. I'm not arguing that businesses should change the way they analyze opportunities. I'm arguing that people should understand that the wealth of nations, as Adam Smith described it, are the goods and services produced by a country's population, which may or may not have much to do with the money supply
And by capital I mean material capital, mostly machinery, not finance capital, all of which is ultimately based on material wealth (remember Midas?). Part of the particular interest rate of a particular country in a particular point in time has to do with supply and demand of money, an idea which is the basis of how interest rates are taught in schools. But as far as the society is concerned as a whole, that's not what interest, or return on capital, is all about.
I'd rather have the Japanese "stall" then what is going on today, a manufacturing system savaged by a financial system that is driving itself over the cliff (and much of the Japanese problem was a real estate bubble as well). Unlike the Great Depression, we don't have the world's best manufacturing system to rely on once we fix the financial mess. On top of that, we have to deal with global warming and peak oil, and now you're telling me, nothing can get built unless it's more than a 15% return on investment!
I'm not blaming you, thank you for your insight, which is invaluable, in understanding the morass that we've gotten ourselves into. But it still indicates to me, more than ever, that eventually the government is going to have to step in and clear up the mess.
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Jon Rynn Posted 5:37 am
18 Sep 2008
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Biodiversivist Posted 5:50 am
18 Sep 2008
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Russ Posted 6:00 am
18 Sep 2008
That brings up a question I have. Let's say for the sake of argument that the doomer scenario did come true, and the grid was down for the forseeable future. And let's say someone with a home off-grid PV system had all the requisite knowhow.
In that case, how maintainable would the system be (i.e., without easy access to spare parts etc.)?
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Sean Casten Posted 6:07 am
18 Sep 2008
The markets are what the markets are. If we put a price on carbon that is going to cause decarbonization, it will have to deliver competitive economics. So to some degree, that simply helps us figure out where GHG prices need to be.
There are more carbon reduction technologies than are dreamt of in your philosophies, Horatio. (Or mine, for that matter.) Just because the high-profile renewables are expensive doesn't mean that there aren't other more cost-effective paths.
Together, that means that the beauty of a structure that caps carbon and then lets markets decide how to best allocate capital to serve that cap is that (a) the price will rise to the point which is necessary to meet the reductions and deliver the appropriate level of return to investors and (b) technologies will rise up to meet the need that are more cost-effective than anything we've thought of yet. They always do.
And my beef with a feed-in tariff is that it actually prevents both things from happening.
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Jon Rynn Posted 6:08 am
18 Sep 2008
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Jon Rynn Posted 6:16 am
18 Sep 2008
Second, we don't know what will happen with cap-and-trade. That's part of the problem, although I'm not an expert on it by any means. And I must say, anything besides cap-and-dividend or cap-and-auction is going to have a very, very hard time flying now, what with Wall Street imploding from their hyper-trading regime.
So, I like to stick with the technologies we have now, hoping there will be better ones in the future. Because remember, letting global warming proceed, or not moving off of oil, is going to destroy the economy. That's a lot of risk to include into market-based schemes for solving these problems.
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Sean Casten Posted 6:43 am
18 Sep 2008
The stuff that we do with recycled energy has the potential to lower GHG emissions by 20% in the US. Not only is it not even included in any of Socolow's famous wedges, but it is also almost certainly cheaper than the wedges he has. Which isn't meant to knock Socolow, but rather to raise the question: how much else is out there that we haven't thought of? I am at least willing to concede that there's someone else out there at least as smart as me! : )
Prior to regulatory reform, we always underestimate how quickly we can respond. Here's my fun fact of the week: In 1992, the US Energy Policy Act opened up markets to competitive electricity and... nothing happened. Why? Because even though you could build a generator, you couldn't get the power to market. And so, 4 years later, FERC passed order 888 which mandated non-discriminatory access to the transmission system. It was contested and quibbled over for 2 years after that, but was finally official in 1998. Damn near immediately, we saw a flood of power plant construction, and between 1998 and 2004, we added 200 GW of gas-fired generation, or 20% of the entire US generation fleet. That's something like $200 billion deployed bolstering the grid with private money in a blink of an eye.
Don't get me wrong - I'm not suggesting that all was peaches & cream with those generators. But those numbers are absolutely staggering for what they say both about the pace with which our economy can respond when markets are opened up and how long we'd been basically driving with the brake on. (Indeed, one wonders how reliable our grid would be today if those generators hadn't been built.)
I mention this point not for any environmental reason, but simply because once we have a price for carbon emissions and a cap on same markets will respond quickly and in surprising ways. I don't mean to sound pollyanna-ish, but at the same time would caution against concluding that we can't get there just because some combination of PV/wind/nuke/CCS don't seem to be able to pencil economically.
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Jon Rynn Posted 7:07 am
18 Sep 2008
If I ran the zoo, I'd simply mandate that any process above a certain btu that emits heat has to have cogeneration, and you choose who you want to do that...and then you say, if you want to put up a new power plant, it has to be solar or wind or geothermal. period. for instance.
Sure, if you can unplug certain hairballs in the energy system, which would allow private firms to do the right thing, go for it. But the energy companies' response to expensive oil seems to be drill,drill,drill, and the natural gas industry wants to convert cars to natural gas. These people don't seem to be able to innovate, a lot of them, unless they have no choice.
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Biodiversivist Posted 8:06 am
18 Sep 2008
I don't know that it matters where you borrow money from, but borrowing money to buy panels makes them that much more expensive.
Russ
Storage is the problem. With net metering you can spin your meter backwards when the sun shines hard and your power use is low. It is analogous to using the grid as a battery, although it is an imperfect analogy.
If the grid goes down, you can't draw from it so you really don't have much in the way of independence. A small stack of batteries can serve as emergency power, but that can be true with or without solar. Homes use a lot of electricity. Trying to store enough in your basement with batteries is really expensive and prone to maintenance issues.
In the end, it all comes down to biodiversity. Poison Darts--Protecting the biodiversity of our world
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Jon Rynn Posted 8:24 am
18 Sep 2008
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Michael Hoexter Posted 12:25 pm
18 Sep 2008
Sean,
Way back when at the beginning of this string of comments you were suggesting that renewables were not NECESSARILY a cost effective means of reducing CO2 emissions, therefore a feed in tariff system is not necessarily the quickest route to carbon emission reductions.
Most commentators agree that the quickest and most cost effective route to reducing carbon emissions short of rapid economic contraction is aggressive energy efficiency. I would add that an aggressive program of feed in tariffs (more aggressive than existing systems which do not effect power costs much), that includes some of the more expensive energy sources, if it contributes substantially to energy costs will spur energy efficiency investment. The higher power costs get, the more investment you will see in energy efficiency both incentivized and without incentives.
Also, in your comment, you overlook that the more advanced tariff systems are meant to reduce the tariff amount in successive generations of plants and spur the renewable industry to become more efficient. This is occuring now in Germany with some protest from the PV industry but will favor those panel manufacturers that have lower costs.
So, while someone of your orientation would favor a carbon tax or cap and trade system, I believe those systems are not, alone, capable of getting us to a mostly renewable or carbon-emissions free energy system. At some point, people will be choosing a technology or set of technologies for a number of different reasons that are not based purely on the calculus you or others have proposed as being the most important.
Right now, as I have outlined earlier in this series, we are faced with "choosing horses" with regard to how we generate electricity or supply energy. That choice involves a number of factors that are based on assumptions and not a single dollars/tons CO2 avoided figure. Infrastructure investment takes such a long time to actually arrive at that figure that it must be based on surmises about future price trajectories, forecasts about the availability of primary energy and also notions of the public good. This is why engineering firms consult with utilities and with regulators to make sure that contracts to build these massive pieces of equipment are priced within reason.
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Sean Casten Posted 10:52 pm
18 Sep 2008
Thus, while any list of benefits I might articulate could be incomplete, a feed-in tariff provides revenue based only on capital costs and only to those technologies that are fortunate enough to be included in the list of favored technologies. Unless we believe that expensive renewables deserve more subsidy than inexpensive renewables - or inexpensive other things - that sends a bad policy signal.
And yes, I get the declining tariff idea. But to my way of thinking, that just provides a route to get to a more responsible policy over a longer period of time. We're in no disagreement that we've got to move quickly on a whole host of ecological issues. But with the need to run a 100 meter dash as quick as possible, we need to get our varsity to the track and time the races. Feed-in tariffs - even with downward ratchets - are simply agreeing to untimed races with differential incentives for different athletes and a vague promise that over the next 5 years, we'll gradually start selecting for time. To my way of thinking, that's irresponsible, putting off a decision on significant action.
There is a larger issue here that is manifest in renewable policies in general (and, for that matter, most other energy policies). We have a reason why we want renewable energy, from carbon to water to job creation - but none of us are smart enough to know the best route to those goals. This, in a nutshell, is why every jurisdiction has a slightly different definition of renewable energy. It's also why renewable legislation is consistently under pressure from other groups who look at the list of goals and ask (reasonably) why their technology, which also meets those goals isn't also included in the list of favored tech. But to raise those questions is to instigate a friendly-fire battle between "dark" and "light" greens, as the one seeks to defend their turf from the other... and the browns win. First because we spend our time sniping at each other, and second because the structure of those regs - which almost universally provide the biggest incentives to the least economic technologies - "proves" what the browns have been saying all along. Namely, that green tech isn't ready for prime time, and we can't afford to listen to the hippies.
Bottom line is that feed-in tariffs - or more broadly, any energy regulation that (a) confuses paths for goals and (b) provides differential incentives based on project economics rather than societal benefit - are both environmentally and economically irresponsible.
Sorry for the rant, but I've been too deep in too many of these battles in state & federal legislatures, and watched the organization of the browns consistently take advantage of the disorganization and economic naivete of the greens. We've got to get beyond this.
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amazingdrx Posted 11:21 pm
18 Sep 2008
Maybe 5 to 10 cents per kwh in a direct monthly check. Get the money to write the checks by cancelling subsidies and tax breaks for fossil fuel, nuclear power, and fuel farming. That way it isn't a tax increasing or a deficit increasing option.
With this plan the free market really is restored. Government regulation can verify the kwhs and money exchange and that the kwh are actually GHG-free and actually saved with conservation devices.
With conservation have a running average to compare each year's effect of the conservation system. The subsidy would then go towards zero over say 10 years. only further conservation investment would extend it.
The whole plan could be phased out as total conversion is attained in 20 years or so. the subsidy per kwh gradually, incrementally reduced over decades. Until a really fair, free energy market was produced.
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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Jon Rynn Posted 1:17 am
19 Sep 2008
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Colin Wright Posted 3:31 am
19 Sep 2008
But I'm wondering if a "pure" market system is up to the task of "designing" a complex, distributed, mostly renewable continental system all by itself. I think we agree that there are no silver bullets, and that at some point wind, solar, geothermal, CHP, etc. will be part of the mix. We will need to balance wind and solar generation to smooth out fluctuations, etc. Could a "market-first" system, with a layer of regulation, manage this infrastructure? Or is it a prescription for chaos?
What I have in mind is more of an electrical grid designed by the best engineering minds we have (National Academies, etc.). They might say put out bids for, say, x MW of wind energy from a particular location. They would be "picking winners", but only ones that more or less maximize "economic efficiencies" (perhaps matching your calculation above comparing wind and solar).
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Sean Casten Posted 4:12 am
19 Sep 2008
(e.g., I may argue against green policies because I am convinced that they will raise energy costs and hurt the poor. You may argue that that viewpoint is based on an incomplete knowledge of how green policies impact energy costs. Alternatively, one may argue that feed-in tariffs are morally necessary to get green energy on board for environmental reasons, to which one can argue that such a perception is based on an incomplete knowledge of all the paths to achieve our ends. All those arguments on both sides can be held by people for purely moral reasons, without skin in the game.)
Without getting into greens & browns, we can broadly characterize the status quo as a brown path, and so it's not so much that those advocates are trying to hold us down as much as that rising up requires working together. And to a significant degree, the green community does not do so - in part because of moral differences, and in part because of economic interests that encourage them not to do so. For example, suppose that Really Expensive Green Technology X gets a subsidy that it doesn't deserve on it's merits. Employees of REGTXCo. are not only going to block any attempt to argue on the merits, but will do so swathed in a nice green coat. It's those friendly fire battles that stand massively in the way of progress. And which I have scars on my back from...
One example: we fought against an electric rate in MA that would have charged any non-utility power source for the power they were no longer buying from the grid, effectively killing project economics. Our coalition was a mix of all shades of green. And the utility ultimately got the rate by agreeing to exempt solar from the payment. Their press release when they were done highlighted the fact that they had passed a rate designed to encourage solar. The rest of us in the green community got left by the wayside and - for completely understandable reasons - no one in the solar community stood up and opposed either the modified rate or the greenwashing. But as the old saying goes, either we stand together or we fall.
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Sean Casten Posted 5:12 am
19 Sep 2008
As to the more metaphysical question of whether markets can design the ideal complex system, the answer is probably not - but nothing else can either. If there's a perfectly enlightened, perfectly benign, perfectly omnipotent dictator, you can do it without markets. If not... well, pick your poison.
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Jon Rynn Posted 5:14 am
19 Sep 2008
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Jon Rynn Posted 5:16 am
19 Sep 2008
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amazingdrx Posted 1:38 pm
19 Sep 2008
Any free marketeers want ti recant now? Where's Jason on the economic meltdown? Hilarious!!
http://amazngdrx.blogharbor.com/blog John Schneider, Northern Wisconsin
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