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October 18, 2012
Paul Gipe

British NGOs Propose Precedent-Setting Feed-in Tariffs for Energy Efficiency


 

In a precedent-setting move, WWF-UK and Green Alliance have urged the conservative British government to use feed-in tariffs to spur greater energy conservation and efficiency as part of its upcoming Energy Market Reform.

The joint press release by WWF-UK (known as the World Wildlife Fund in North America) and Green Alliance, a British environmental think tank, used the publication of a new report to recommend that the ruling coalition include feed-in tariffs for energy efficiency, what it is calling "EE FiTs", in the energy bill that will be introduced this fall.

In a sign that the two non-governmental organizations (NGOs) may have some influence on the policy debate, British trade publication Energy & Environmental Magazine is reporting that Conservative MP Tim Yeo, the Chair of the House of Commons Select Committee on Energy and Climate Change, has voiced qualified support of the effort. The magazine quotes Yeo as saying the NGO's have made "a very strong case" at an energy policy debate where the report was launched.

Yeo is also president of the Renewable Energy Association, a trade group representing British renewable heat, power, and transport industry.

 

From Theory to Practice

Academics have discussed the possibility of using feed-in tariffs for energy conservation and energy efficiency for some time. As recently as April 2012, an American NGO, the Regulatory Assistance Project, issued a report, Energy Efficiency Feed-in-Tariffs: Key Policy and Design Considerations, detailing how it could be done.

However, the British NGOs' proposal is the first serious attempt at incorporating such a policy in current political discourse. Thus, the move is significant not only in Britain, but also worldwide.

The NGO's note that the time is propitious to do so. The conservative government will soon introduce legislation eliminating Britain's Renewable Portfolio Standard, the Renewables Obligation, and substituting a system of feed-in tariffs in its stead.

Apparently British NGOs and Conservative Party policy makers alike have no ideological aversion to the term "feed-in tariff". There has been no widespread attempt at "rebranding" feed-in tariffs since the coalition of the Conservative and Liberal Democratic parties were elected. Both the current program and the draft program liberally use the term feed-in tariff, abandoning the previous Labour government's awkward "Cash Back" terminology.

The Green Alliance has no small measure of clout. Previously it pushed Britain for a sustainable heat policy and early last year the British government launched a renewable heat initiative that included feed-in tariffs, the first of its kind worldwide.

 

Reform to Aid Nuclear

The so-called "reform" of the energy market is the Conservative Party's thinly veiled attempt to shoe-horn nuclear power into the prevailing theory of "liberalized" markets.

Unlike the existing British feed-in tariff program for microgenerators or feed-in tariff programs on the continent, the proposed British system will use "contracts for difference" (CfD) to pay for nuclear and other "low-carbon" technologies such as Carbon Capture and Storage (CCS) and renewables.

Akin to the flawed Spanish system, generators will be paid a "strike price" under the proposal. If the strike price is higher than the wholesale price, the government is obligated to make up the difference.

 

Efficiency Cheaper

WWF-UK and Green Alliance argue in their report, "Creating a market for electricity savings: Paying for energy efficiency through the Energy Bill", that "negawatts" of energy efficiency and conservation would cost a fraction of supply-side measures, including that from renewables.

Green Alliance's "The Power of Negawatts", a companion summary of the main report, makes the case for negawatts as opposed to "low carbon" power, the British term for renewables, nuclear, and CCS. An equivalent expression in North American usage is "clean" power.

As elsewhere, the case for energy efficiency in Britain is compelling.

 

Estimated Costs for Wind High, Nuclear Low

The reports are not without minor glitches. For one, the authors make their case for energy efficiency by erroneously overstating the costs of wind energy and understating the costs of nuclear power.

The report and the summary label the cost of wind energy at £0.083/kWh ($0.12 USD/kWh), and that for new nuclear of only £0.096/kWh ($0.14 USD/kWh) based on a study of costs of low carbon technologies.

To their credit, the authors add in a footnote that the costs of new nuclear in Great Britain now appear to be closer to £0.16/kWh ($0.23 USD/kWh) than that reported in the text. Yet, it is the body of the report and the graphics that most will see. Only policy wonks will read the fine print. And there's no footnote explaining that wind is cheaper on the continent than it is in Britain.

Some industry analysts have criticized Britain's Renewable Obligation for paying more for wind energy than necessary and it is understandable that the NGOs may have relied on the existing quota system to estimate the future costs of wind.

Despite some of the windiest sites in Europe, Britain pays more for wind energy than nearly any other European country. One recent study estimated that the cost of wind energy on land in Britain averages €0.108/kWh ($0.135 USD/kWh).

For contrast, wind on land in Germany is paid €0.089/kWh ($0.11 USD/kWh) for the first five years and this falls to as little as €0.049/kWh ($0.06 USD/kWh) in subsequent years of a 20-year contract. In France wind is paid even less, €0.082/kWh ($0.10 USD/kWh) for the first 10 years of a 15-year contract and this falls to as little as €0.028/kWh ($0.035 USD/kWh) in subsequent years.

Because of the greater wind resource, wind energy on land in Britain should cost less than that in Germany and France.

 

Inaccurate Terminology

Confusion about the costs of wind energy is not the only oversight in the report. Like many new to feed-in tariff policy, the NGOs get some details wrong, going so far as to misspell "degression" (it has an "e" not an "i"). More glaring, the authors confuse a FIT payment with a "subsidy" and call the guaranteed payment (the FIT) a "guaranteed return" by mistake.

They are not the first to get it wrong and they certainly won't be the last. Just this week Jeremey Leggett, the founder of Solarcentury, one of Britain's largest solar companies, and someone who should know better, mislabeled feed-in tariffs in the New York Times.

Feed-in tariffs are simply a payment for generation. If the House of Commons wants a certain amount of certain kinds of renewables and determines the price that should be paid for them, that's the "strike price" or the rate per kilowatt-hour". The Commons, in this case, is sitting as Britain's ultimate utility rate regulator. This is no different than if OfGem (the Office of Gas and Electricity Markets) determined the price that should be paid for electricity from a new coal or nuclear plant.

There is extensive literature on the term "subsidy" particularly within the European Union, of which Britain is a part.

 

In the most famous example, the European Court of Justice ruled in the PreussenElektra case challenging Germany's original feed-in tariff, the Stromeinspeisungsgesetz, that the policy did not constitute state aid, in other words, was not a subsidy. The ruling has since been upheld in a similar challenge to Austria's feed-in tariff.

North American analyst Toby Couture weighed in on the issue in early 2010 by taking on sloppy editing at the Economist in one of his "analytical briefs". Couture has written extensively about feed-in tariffs and was the principal author of a major report for the US National Renewable Energy Laboratory on the policy.

Successful feed-in tariffs, including Britain's own microgenerator tariff, collect any surcharge or overcost from ratepayers, not taxpayers.

If the strike price is above the wholesale cost of generation, then under the British government's current proposal of CfD, the difference must be made up by the government. The government can do this through a tax levy or by passing the cost along to consumers in their utility bills. Paying the difference between the strike price and the wholesale price through tax revenues would be, by definition, a subsidy.

Similarly, classical feed-in tariffs only guarantee a payment, the FIT rate. They don't guarantee a rate of return or a profit. The FIT rate is designed to produce a profit if all goes as planned, but the FIT payment never "guarantees" a profit. If the project doesn't work as planned, they still only receive the FIT rate. The owner or operator bears all the risk.

In this, feed-in tariffs differ from the rate of return regulated utilities are guaranteed on their invested capital. Projects under feed-in tariffs are only paid the tariff.

It is this distinction between guaranteeing a rate of return on invested capital, and the risk of financial failure from a fixed tariff that has caused the British government and the nuclear industry such consternation. If they don't reach a strike price that is high enough to warrant the exceptional risks associated with a nuclear project, no one will finance the new plants. If they do, then the government runs the risk of revealing what new nuclear actually costs, inflaming the energy debate and possibly derailing their plans for nuclear.

On the other hand, if the government set's the rates too low it will have to make up the difference somehow, for example, by obscuring some costs through government action. If it does so, then the government may run afoul of European Union restrictions on state aid, that is, subsidies.

 

Groundbreaking Report

Nevertheless, the report debunks a number of popular myths about feed-in tariffs that are often used to delay implementation of the policy or to avoid it altogether. For example, the Green Alliance takes head on the ever-present concern about getting the FIT price wrong. Simple answer, it's not as difficult as it looks.

Altogether, the report by WWF-UK and the Green Alliance, the political support they've mustered, and their timing could have a profound effect on energy policy in countries around the globe.

 

Selected Excerpts

 

"The draft bill and its associated documents are fundamentally flawed by the lack of consideration given to demand side measures, which are potentially the cheapest methods of decarbonising our electricity system. We recommend an amendment to the draft bill to provide the secretary of state with powers to introduce a feed-in tariff for energy efficiency, if this cannot be achieved through existing legislation."

"We conclude that an efficiency feed-in tariff is the best policy for the UK because it employs competition to deliver efficiency."

"A FiT would provide a predictable payment for each negawatt (a unit of electricity saved). This simple revenue stream would allow new market entrants to focus on how best to save electricity, driving innovation in businesses to find the best ways to cut electricity use."

"An electricity efficiency FiT works without major structural change to the market and could easily be introduced alongside the new FiTs for low carbon supply. It fills policy gaps, targets all electricity users, and would complement other existing policies, such as product standards."

In announcing its report, the Green Alliance noted that "A FiT would provide a predictable payment for each negawatt (a unit of electricity saved). This simple revenue stream would allow new market entrants to focus on how best to save electricity, driving innovation in businesses to find the best ways to cut electricity use."

"The Energy Bill is a one-off opportunity to save money and energy. We've analysed the options and concluded that an electricity efficiency feed-in tariff (or FiT) is the simplest and best way to reduce electricity demand by 40 per cent by 2030", the equivalent of 155 TWh in energy savings.

 

EU EE Directive Open to FITs as Well

In a related development, on 4 October 2012, the European Council endorsed the European Union's Energy Efficiency Directive. The European Parliament had voted earlier in favor on of the directive on 11 September 2012.

The EU directive is open to using feed-in tariffs for energy efficiency among several policy options.

 

More on FITs and Energy Efficiency

Feed-in Tariffs for Energy Efficiency and Conservation (Energy Saving)


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