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August 16, 2011
Paul Gipe

Ernst & Young Find Fixed Feed-in Tariffs Attractive


 

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. See Ernst & Young Find Feed-in Tariffs Cheaper Than Trading System.

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.


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