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Feed-in Tariffs--The Economic Case

November 23, 2004
Paul Gipe

Answers to common questions about Renewable Energy Tariffs and Bidding (RFPs)


 

Question:

An RFP process is more competitive and more efficient - it serves consumers better because it results in cheaper power than Standard Offer Contracts.

Answer:

While this may appear intuitively true in light of economic orthodoxy, there are a number of European economists who beg to differ. Three of these were at our Forum on Renewable Energy Tariffs. We're sorry that more members or the renewables community couldn't attend.

1. Most evidence indicates that bidding systems are less competitive than Renewable Tariffs because only a few players can participate. There need to be many players for a true market to function and true competition to exist. Competition at the manufacturer level is more intense and technological development more rapid in Renewable Energy Tariffs systems than in bidding systems.

2. Bidding results in cheaper power only when the projects are actually built and operating. While much has been made of the low prices from Britain's NFFO (Non-Fossil Fuel Obligation), the reality is that less than half of the contracts were ever fulfilled. In some years, no wind projects were built at all. It's tough to produce cheap electricity if you have nothing to produce it with.

3. Even if projects are actually built under bidding systems there are still economic benefits that derive from wind development other than mere price per kWh. Bidding systems rarely take these other benefits into account.

4. Bidding systems even at their most complex and bureaucratic are still not transparent. This is in part because some bidders may be valuing products or benefits that don't yet exist but may in the future. Depending upon the degree of risk or speculation they can withstand, the bidders may bet on future revenues from values that don't yet have a price. Thus the "price" bid is not the true price for the project.

Question:

Standard Offer Contracts do not guarantee that domestic manufacturing will develop - a stable and functioning market does.

Answer:

To the contrary, typically there is no manufacturing in jurisdictions that use bidding systems. Most manufacturers exist in countries where stable domestic markets were created by Renewable Energy Tariffs.

Britain's NFFO (bidding) system destroyed Britain's wind turbine industry. (See my book Wind Energy Comes of Age, 1995.) No country that has used bidding exclusively has developed a vibrant and sustainable manufacturing sector.

Until recently in Denmark, and certainly in Germany and Spain, the record of countries that have used Renewable Energy Tariffs is unequaled. Major manufacturers, including GE (Salzbergen), are largely based in countries with Renewable Energy Tariffs.

If we want Canadian manufacturing of wind turbines we can choose the Quebec route, or we can create a dynamic market that will allow a number of manufacturers to flourish--not just one.

Question:

Standard Offer Contracts do not simplify the process for the power purchaser - they must continue to do all the same due diligence as before.

Answer:

There's no simpler system than Renewable Energy Tariffs. A farmer walks into the LDC or Hydro One, says he wants to install 2-10 MW of wind on his land and walks out with a contract, assuming of course there's a three-phase line nearby. It's then the farmers responsibility to line up financing. It's done all the time in Minnesota and Germany.

Question:

Bidding fosters faster technological development than Renewable Energy Tariffs.

Answer:

Renewable Energy Tariffs, by their transparent nature, create a more level playing field than bidding because not all bidders are created equal. Some are more equal than others (shades of Animal Farm). Renewable Tariffs enable participation by innovative small and medium-size businesses. This fosterd speedier technological advances in manufacturing and stimulates system integrators or project developers to improve methods for building quality projects and developing sustainable businesses, rather than just doing the minimum to make the bid.

Question:

Impossible to identify the "appropriate price" for a Standard Offer Contract that encourages development of quality assets but discourages development of poor projects.

Answer:

1. Is the question should we only install wind turbines in Huron and Bruce Counties? If so, we should point out that we seek the rapid and extensive development of wind energy--and not just in Bruce and Huron counties or on the coast of Cape Breton for that matter.

2. It's our position that wind needs to be developed in a number of ways: in wind farms for one, but also in distributed applications with ownership in the community. We believe the latter is essential for the broadest possible acceptance of the technology. And it will be necessary to have the broadest possible acceptance if we're to realize wind's fullest potential in Ontario: not just a few hundreds of megawatts, but thousands of megawatts. (See the David Suzuki Foundation's report "Smart Generation" for the potential of Southern Ontario.)

3. Renewables advocates should not discourage development of wind projects with "poor" wind resources. Advocates should discourage "poor" projects, but my definition of what constitutes "poor" is far different than simple price per kWh. "Poor" in my calculus are "economically efficient" projects that skimp on environmental controls, and push social and environmental costs onto the community whether they be wind farms whose massed arrays intimidate an Ontario public unfamiliar with the technology or a single-turbine project where improving "economic efficiency" requires installing a cell phone tower on the nacelle.

4. It is not difficult to calculate the prices needed to make projects of various sizes with various wind resources viable. It's been done before in Germany, France, Spain, Portugal and so on. We are certainly capable of doing it here. In fact one academic has published a paper on possible prices for PV in Ontario. French economist Bernard Chabot at ADEME has offered to help us derive prices in the Ontario context. If there's sufficient interest OSEA could sponsor a workshop with M. Chabot in Toronto.

5. If prices are set too high and there is a flood of projects (I don't know how this would constitute a problem, this is after all objective of renewables advocates), the price can be dialed back during a periodic review of the program.

6. It's far more important not to set the price too low because this produces the situation we have to day: nothing is being built. Thus, we should err on the high side, not the low side. Ontario is in a predicament. If we are too build thousands of megawatts of capacity--quickly--we need to insure healthy profits even in those areas with "poor" wind resources.

7. Some renewables advocates deliberately avoid the topic of photovoltaics because they want to avoid frightening the government. The question really is not how difficult it is to calculate the prices needed, this can be done. The question is does the political will exist to implement them. That's a decision for Ontario's political leaders to make. We should provide them with what we think works best and they then decide if they can live with it. We should not make that decision for them. They will tell us what they can and cannot do.

There is an extensive literature on this topic. We've posted a number of articles from noted academics about Renewable Energy Tariffs on our web site at www.ontario-sea.org. We also have the entire library on a CD-ROM for those on a dial-up connection. Just contact OSEA and we'll mail a copy.

It's probably more useful for renwable energy advocates to focus on how to design a smoothly functioning Renewable Energy Tariff mechanism and to determine the prices needed to push profitable development than to stray into an arcane academic debate on what constitutes "markets" or "competition".

To conclude, bidding is no way to create a dynamic market.


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