Feed Laws

Feed-in Tariffs--The Economic Case

October 7, 2008
Paul Gipe

IEA: Feed-in Tariffs More Effective and Cheaper than Quotas for Renewable Energy


The International Energy Agency (IEA) has never been known as a hot bed of progressive thought--it has long been dismissive of renewable energy for example--or accurate oil price forecasts for that matter. It has been consistently wrong on both for years if not decades. But who says you can't teach an old dog new tricks.

The IEA began building up its renewable energy expertise several years ago and it's beginning to show fruit. While couched in the language and world view that critics have come to expect, a new IEA report is surprising for what it says about renewable energy policy mechanisms.

Simply put, the IEA concludes that feed-in tariffs are both more effective at developing renewable energy as well as less costly to consumers than quota systems (known as Renewable Portfolio Standards in North America).

The full report is at DeployingRenewables2008.pdf, but the summary report (IEA Summary: Deploying Renewables, p. 17 and p. 19) is sufficiently revealing to mark a breakthrough in the thinking at IEA. Here are some brief excerpts from the sections on wind and solar PV.


Wind on Land

"A minimum level of remuneration appears necessary to encourage wind power deployment. Until 2005, none of the countries that provide overall levels of remuneration below USD 0.07/kWh witnessed significant deployment effectiveness."

The actual price here is less important than the message: If a program doesn't pay enough, there isn't any development. Many programs try to develop wind energy on the cheap, then administrators wonder why there is no progress on the ground.

The report goes on . . .

"The group of countries with the highest effectiveness (Germany, Spain, Denmark and, more recently, Portugal) used feed-in tariffs (FITs) to encourage wind power deployment. Their success in deploying onshore wind stems from high investment stability guaranteed by the long term FITs, an appropriate framework with low administrative and regulatory barriers, and relatively favourable grid access conditions. In 2005, the average remuneration levels in these countries (USD 0.09-0.11/kWh) were lower than those in countries applying quota obligation systems with tradable green certificates (TGCs) (USD 0.13-0.17/kWh).

"Beyond some minimum threshold level, higher remuneration levels do not necessarily lead to greater levels of policy effectiveness. The highest levels of remuneration on a per-unit generated basis for wind among the countries studied are seen in Italy, Belgium, and the United Kingdom, which have all implemented quota obligation systems with TGCs. Yet none of these countries scored high levels of deployment effectiveness. This is likely related to the existence of high non-economic barriers as well as to intrinsic problems with the design of tradable green certificate systems in these countries, which cause higher investor risk premiums."

This too is a clear message: feed-in tariffs are more effective and cost $0.04/kWh to $0.06/kWh less than quota systems using tradable credits. These findings mirror those of Ernst & Young in a comparison between the cost of wind programs in Great Britain and Germany.


Solar PV

" . . Feed-in tariffs (complemented by the easy availability of soft loans and fair grid access) have been very effective in Germany, albeit at a high cost (USD 0.65/kWh). In recent years, the level of the German FIT for solar PV has decreased to some extent, and an element of degression has been introduced. The German parliament has approved proposals for acceleration of degression rates for stand-alone installations from 5% per year in 2008 to 10% per year in 2010 and 9% from 2011 onwards. This creates incentives to reduce costs, and hence move down the learning curve."

Interestingly, IEA notes the high cost of Germany's solar PV program to consumers, but doesn't note the cost of solar PV to both consumers and taxpayers in the discussion on US policies in the paragraph that follows the description of Germany's program. As Vote Solar has prominently noted on several occasions, some of the costs of solar PV "incentives" in the US are buried behind the meter and some are shifted from the consumer to the taxpayer. By doing so, the costs of solar PV programs in the US are not readily apparent, being hidden from view.

It may have been simply easier for IEA to report on the cost of the German program because it is transparent, and for the IEA not to report on the costs of US programs because the programs are not transparent. To understand the program costs in the US would require a much more extensive analysis than IEA invested in evaluating Germany's program. Still, these are remarkable conclusions from a bastion of the Washington Consensus.

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