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Ernst & Young find fixed feed-in tariffs attractive

Paul Gipe

The British arm of giant financial consultant Ernst & Young's 2011 issue of its "Renewable energy country attractiveness indices" concludes that fixed feed-in tariffs (FiTs) are preferable to premium-based FiTs as well as bidding systems.

Like other staid investment advisors such as Deutsche Bank, Ernst & Young have said repeatedly that feed-in tariffs bring on more renewable capacity at lower costs than other policies.

In the latest issue of their much watched report on renewable energy policies, Ernst & Young gives a clear "thumbs up" to FiTs.

"One of the benefits of FiT mechanisms is that, as illustrated in previous issues of the CAI [Country Attractiveness Indices], they tend to provide less costly renewable energy per kWh generated, due to their lower risk profile and greater certainty. They are easier to understand by both investors and finance providers and tend to attract a greater plurality of market participation (from local communities and businesses as well specialist developers, investment funds and utilities) than more complex market-based mechanisms (such as green certificates - GC). As a consequence, well-designed FiTs have usually led to greater capacity growth, subject to planning and grid availability, and a more conducive environment - where there are appropriate skills to encourage local manufacture."

In contrast, says Ernst & Young, bidding systems and Renewable Portfolio Standards "due to their higher risk, and higher cost of capital, have on the whole been less effective in terms of capacity build and much more expensive to the consumer/tax payer per kWh produced - although not in terms of cost per head of population, due to much lower levels of capacity deployment. The paradox of some market mechanisms is that their low overall cost in terms of absolute levels of support is a function of their relative failure - not necessarily the characteristic required if increased carbon targets are to be met."

European countries with stable feed-in tariff policies have delivered more renewable energy growth than the Renewable Portfolio Standard, called the Renewable Obligation, in Britain.

Further, feed-in tariffs "allow greater local participation and greater engagement, in an admittedly more renewables-friendly permit process" says Ernst & Young.

In its entirety, the report can be seen as a veiled warning to Britain's ruling conservative coalition which is considering a system of feed-in tariffs for large-scale projects based on a premium above the wholesale cost. Critics have noted that the move is aimed primarily at aiding nuclear power, which is stymied in Britain as it is elsewhere. Ernst & Young is saying between the lines, "don't go there".

Fixed feed-in tariffs, like those used in Germany, Ontario, Switzerland and a host of jurisdictions around the world, "has advantages over premium FiTs which, as seen in Spain, can become very expensive without a cap, if fossil fuel prices and wholesale electricity prices rise. This puts up the overall cost of renewable electricity to an economy and loses the critical hedging benefits that fixed tariffs provide, which also avoid a double subsidy if carbon trading or taxes are applied to the energy economy as a whole ."

They also note that fixed feed-in tariffs are more easily and quickly adjusted to lower technology prices than premium-based systems and cite Germany as an example. Germany now has some of the lowest-cost solar photovoltaic systems in the world.

What's left unsaid by Ernst & Young is that premium-based systems could award windfall profits to nuclear plant operators who build reactors based on a premium that is sufficient at the start of construction to attract investment. Then, as wholesale prices rise during the decade of construction, the operators make a killing at the expense of the ratepayer. Premium-based feed-in tariffs for nuclear power, as proposed in Britain would act as a "reverse" hedge, paying more for nuclear as fossil-fuel prices rise.

Deutsche Bank examines German PV FiTs

Deutsche Bank has issued a report examining how to design feed-in tariffs for solar photovoltaics (solar PV) that ensure rapid development while minimizing cost to ratepayers.

Titled The German Feed-in Tariff for PV: Managing Volume Success with Price Response, the Deutsche Bank report describes how to use price to control the volume of solar and limit its cost-a topic of continuing concern as solar generation grows rapidly.

Two of the world's leading experts on feed-in tariff design, Wilson Rickerson and David Jacobs of Meister Consultants, contributed to the 36-page report for Deutsche Bank's Climate Change Advisers.

The report compares the explosive pace at which solar PV can be developed--and its resulting cost--to other renewable technologies, especially wind energy. The principle example used is Germany.

Deutsche Bank, a largely German Bank, gives German renewable energy and climate policy high marks and rates Germany's feed-in tariffs as "Best-in-Class" for their success during the past decade.

Of major industrial nations, Germany has one of the world's highest concentrations of wind turbines, solar systems, and biogas power plants. The German program pays substantially less for solar PV generation than policies in the US, yet Germany installed seven times more capacity than the US in 2010.

The report goes so far to say explicitly that Germany's solar PV tariffs will remain a key contributor to driving solar PV prices down toward competitiveness with on-peak fossil-fired generation. Germany will remain the world's largest market for solar PV through the decade, says Deutsche Bank, and the country's feed-in tariffs will eventually drive prices down to grid parity.

The German Government is targeting annual installation of 3,500 MW of solar PV per year and by 2020 expects a total of nearly 52,000 MW will be installed. According to Germany's Renewable Energy Action Plan, solar PV will generate 41 TWh of electricity per year for as much as 7% of 2020 consumption.

Wind energy, says Deutsche Bank, will contribute 100 TWh or nearly half of the 217 TWh of renewable generation expected by 2020. Solar PV will deliver nearly 20%.

Because policymakers want to limit the cost of solar PV development in absolute terms but also relative to other renewables, Deutsche Bank's report examines the role of program caps, and various triggers to reduce solar PV tariffs. The report is the most detailed discussion yet on how to design solar PV tariffs to maintain rapid growth while limiting program costs to ratepayers.

There are three possible triggers, says Deutsche Bank, for reducing solar PV tariffs:

  • Time-based,
  • Capacity- or generation-based, and
  • Cost-based.

Deutsche Bank comes down on the side of time-based revisions, such as is used Ontario and Germany. Time-based triggers are more transparent and create the investment certainty for investors that Deutsche Bank values in well-designed programs.

Capacity-based or generation-based triggers, as is used in the California Solar Initiative, are less transparent, says Deutsche Bank, because participants can't always anticipate when the trigger will be reached.

Cost-based triggers are the least transparent because investors can't monitor progress. Program costs, or actual generation, can only be monitored after the fact.
Deutsche Bank goes on to explain the various options for adjusting the tariff once a trigger is reached.

The report concludes that increased renewable generation is--counter-intuitively--driving down the cost of electricity. Policymakers often erroneously believe that as more and more renewables are added to the system, the total cost of electricity increases. Experience with the Merit-Order-Effect, says Deutsche Bank, shows that large amounts of renewable generation actually drive down wholesale costs of electricity. The implication is that the addition of the currently more costly solar PV generation has a positive effect on power markets by putting downward pressure on prices.

Along with previous Deutsche Bank analysis, the report on how to manage large volumes of solar PV with price is essential reading for renewable energy advocates and policymakers worldwide.

This feed-in tariff news update is partially supported by An Environmental Trust and David Blittersdorf in cooperation with the Institute for Local Self-Reliance. The views expressed are those of Paul Gipe and are not necessarily those of the sponsors.

Paul Gipe
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