Background to Standard Offer Contracts or Advanced Renewable Tariffs

March 9, 2006

Ver. 03

Overview

Advanced Renewable Tariffs, or Standard Offer Contracts as they are known in Ontario, are the single most successful mechanism for stimulating the rapid development of renewable energy. Surveys by economists of renewable energy development worldwide have found that Advanced Renewable Tariffs result in more generating capacity installed more quickly than any other mechanism. They are the ideal means for the province to meet its renewable energy target.

These contracts are simple, transparent, and egalitarian, offering to farmers, first nations, co-operatives, and others a straight-forward means to commercializing wind, low-impact hydro, biomass, and solar photovoltaics. The contracts guarantee the right to connect a wind turbine, a small hydro plant, photovoltaic panels, or a biomass generator to the grid and guarantee the owner that they will be paid for every kilowatt-hour of electricity produced.

Advanced Renewable Tariffs differ from net metering by specifying a price paid for all generation delivered to the grid. Unlike net metering which is limited to generators less than 500 kW in Ontario, Advanced Renewable Tariffs are typically paid to all generators regardless of size. The Ontario Sustainable Energy Association (OSEA) suggested limiting Advanced Renewable Tariffs in Ontario to a maximum of 10 MW until the province becomes more familiar with the mechanism.

These policies also result in more dynamic markets with more manufacturers and more suppliers than other strategies. Advanced Renewable Tariffs are in use by several European countries, including Germany, Spain, France, Portugal, and others. As a result of Advanced Renewable Tariffs, Germany is the world's leading developer of wind energy and solar power systems. Spain is the world's second largest developer of wind energy.

Comparison of Different Policy Mechanisms

Renewable Tariffs have proven to be the world's most successful mechanism for stimulating investment in renewable energy. Renewable Tariffs have resulted in more installed renewable generating capacity and more robust competition among manufacturers and installers and have stimulated more renewable technology development than any other policy mechanism.

This can be illustrated by a comparison between the USA and continental Europe. The USA and continental Europe have equivalent populations and market economies of similar size. Total installed wind-generating capacity in the USA at the end of 2005 stood at about 9,000 MW. Less 1,000 MW installed in the early 1980s under an early Renewable Tariff program, there are 8,000 MW operating today. The majority of this capacity has been installed under various tendering systems, with the remainder under Renewable Portfolio Standards. In contrast, continental Europe (Germany, Spain, Denmark, and France) has installed approximately 32,000 MW under Renewable Tariffs or four times the amount installed in the USA. Most wind turbines and nearly all wind turbine designs are of continental European origin.

The situation with solar photovoltaics (PV) is more mixed. Japan has been successful with capital subsidies, whereas Germany has been equally successful with Renewable Tariffs. Currently the growth rate of Germany's photovoltaic industry exceeds that of Japan. Both dominate the world market. German manufacturers of PVs now compete with Japanese manufacturers.

Both Quota systems (Requests for Proposals and Renewable Portfolio Standards) and Renewable Tariff (Minimum Price) systems can be made to work effectively. Both can produce growth in the targeted renewable technology when properly designed. However, Quota systems favor large, vertically integrated generators and multinational electric utilities, and are more difficult to design and implement than Price systems. Only Renewable Tariffs have a consistent record of offering equitable opportunity to all willing participants and rapid rates of growth.

European Wind and PV Market and Renewable Tariffs

There are 15 EU countries that use Renewable Tariffs. Altogether Denmark (3,100 MW), Spain (10,250 MW), and Germany (18,300 MW) operate nearly 32,000 MW of wind generation capacity and nearly all of this has been installed under Renewable Tariffs of one form or another.

How can continental Europeans be so successful? How can Europeans have installed so much generating capacity that the Danes produce 20% of their electricity with wind turbines, the Germans 10% with wind, solar, hydro, and biomass plants, and the Spaniards 6% with wind turbines?

The answer is surprisingly simple: they pay for it. They pay for renewables by setting a price per kilowatt-hour (kWh) for wind, solar PV, hydro, and biomass. They set a price high enough to ensure that they get the kind of renewables they want in the amount they need. The results speak for themselves.

Importantly, successful European renewable programs do not use taxpayer subsidies. Electricity consumers pay for the program. Those who use more electricity than the average, pay more for renewable generation than others.

Europe's success is not limited to wind energy. The growth of PV in Germany has been truly remarkable. Within a few years Germany has become a world leader in the PV industry. Currently the major markets for PV are

• Germany (500 MW/yr),
• Japan (350 MW/yr), and
• USA (80 MW/yr), mostly in California.

The California PV market, about one-half of the total US market, is driven by capital subsidies from the California buy-down or rebate program. The rebates are not particularly lucrative and the program is dependent on the size of the "early adopters" market. Growth is modest by German standards and costs are high. Despite constant reduction in the rebate by the legislature, PV systems are 10-20% more expensive in California than in Germany.

This cost differential flies in the face of conventional wisdom that it is more costly to do business in Germany than in the United States and that Germany's premium tariff for PV should lead to more costly installations. That the opposite is true is another example that the competition in Germany among equipment suppliers and installers is fierce. The Renewable Tariff for PV puts the premium in the pocket of the purchaser (the homeowner or farmer) and not in the pocket of the installer. The installers must compete among each other for the purchaser's business. The purchaser, who only receives payment from the PV tariff for actual generation, wants to spend as little up front as possible. This tension between drives costs down.

In contrast, California's rebate program puts the subsidy in the pocket of the installer. The purchaser is less concerned about the payment for generation (net metering) as the are in maximizing their subsidy payment. As a result, there's pressure to keep installed costs high rather than pressure to push them down.

Germany followed a traditional subsidy route for PVs until the expiration of the 100,000 solar roofs program in 1999. It was in part to prevent a collapse in the PV market that Germany's Renewable Energy Sources Act was passed in 2000 with substantial tariffs for PV. Tariffs for PV were again raised in 2004.

German PV tariffs have been remarkably successful. At the end of 2005, Germany surpassed Japan as the world's largest PV market.

For a sense of the size of the solar PV market in Germany consider that

• 70,000 new systems were installed in 2005,
• 600 MW of new systems were installed in 2005,
• Germans installed $4 billion CAD of solar systems in 2005,
• A total of 1,400 MW were operating by year-end 2005, and
• Costs have dropped 25% since 1999.

German farmers alone installed 200 MW of PV in 2005, typically 30 kW systems on barn rooftops. This is worth a minimum of $1.6 billion.

Germany now operates some 1,500 MW of solar generation, more than all the renewable energy contracts awarded in Ontario to date, and more than twice all the wind turbines currently operating in Canada.

The scale of the German achievement is truly staggering. There are

• 200,000 PV installations,
• 2,000 biomass plants,
• 550 MW of farm biogas,
• 6,000 hydro plants,
• 18,000 wind turbines, and Altogether 225,000 new renewable installations operating in Germany.

Today renewables in Germany provide

• About 10% of supply (55 TWh/yr),
• 45,000 direct and indirect jobs in wind energy,
• 30,000 jobs in the PV industry, and
• Overall 150,000 jobs in renewable energy.

Once unthinkable in the North American context, the concept of Renewable Tariffs is beginning to catch on. In 2005 Minnesota passed its C-BED (Community-Based Energy Development) proposal, Washington State signed it's solar PV program into law that could pay as much as $0.54 USD/kWh ($0.64 CAD/kWh) for electricity produced by panels built in the state. California even launched a modest PV tariff of $0.419 USD/kWh ($0.67 CAD/kWh) in 2005 as well. In Canada, Prince Edward Island has introduced a fixed Renewable Tariff of $0.0775 CAD/kWh.

And the list of those using Renewable Tariffs is continuing to grow as more countries, and more states and provinces weigh the advantages of what Europeans prosaically call Electricity Feed Laws.

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