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Feed-in Tariffs--The Economic Case

April 15, 2012

Interview of Paul Gipe by Sandy LeonVest on RECs or Renewable Energy Certificates


 

Sandy: Since RECs vary in price and do not usually cover the costs of building generation (over and above wholesale or retail power prices in the US) plus a reasonable profit, doesn't that makes them a little dicey to use as a means for project developers and home or business owners to install renewable energy generation?

Paul: Yes, very perceptive. That's the heart of it. RECs/ROCs/Green Certificates--whatever you want to call the things--are the result of economic theory gone amok and can't be used to develop distributed generation without a lot of others things being added to make them work. In essence you'd be a fool, or a "too big to fail" concern to take the risk of building a project based on RECs. Why do you think the wind industry in the US is so determined to keep their subsidies.

Sandy: Aren't RECs a far less incentivizing means to stimulate investment in renewable energy than feed-in tariffs, since FITs are priced at a "cost of capital plus reasonable profit?"

Paul: Yes, clearly so. However, neither RECs or FITs are "incentives". RECs are a theory of how to place a "value" on intangibles such as the clean air value of renewables. That's not an incentive but a way to pay what the gods of the market determine are the worth of renewables. FITs are not incentives either. They are another, fairer way to pay for what renewables "cost", not necessarily their "value". You could fairly pay less than their value if the costs are less than their value. This is lost on most people.

Sandy: What other problems, if any, do you see with market-based mechanisms like RECs?

Paul: FITs are also a market mechanism. Don't be fooled by calls to the gods of neoliberalism that FITs are unholy and not worthy of the label "market mechanism". In FITs we determine the price and the market determines the volume. That's a market mechanism and that's what scares the pants off the conventional folks. If we set the price right, the market goes bonkers trying to build huge amounts of renewables. Of course, that's what I want. What's the biggest complaint about FITs? They build too much capacity! That's the kind of problem we've been wanting to have for decades.

Sandy: Won't the US continue to lag behind other nations in the deployment of renewable energy until we stop settling for market schemes and Wall Street solutions ... Isn't the potential for scam and corruption too great to risk right now, when the need for real renewable power -- ideally generated at or close to the point of use -- is so urgent?

Paul: Sandy, are you an economist? We need you in Washington or New York. You get this at a fundamental level. One of the reasons I oppose RECs and all their variations is that they are non-transparent and continue the old-boys club developing, owning, and controlling power generation just as before. They just change the names--and sometimes they don't even bother doing that.

Here in Scotland, Scottish Power develops giant wind farms (all beautiful by the way) through Britain's complex REC/ROC system. Despite its name Scottish Power is not Scottish, its Spanish. It's owned by Iberdrola, one of the largest wind developers in the world.

As an aside, see John Farrell's excellent analysis of why RECs are wrong.

Sandy: It just seems as if there's no political (or common) will here in the US to make the kinds of changes we need ... Few policies -- with the exception of a few states -- that increase investment in renewable energy many-fold. The one policy that has shown the way is the feed in tariff, yet there's no organized FIT movement or urgency of any kind -- at least not that I've noticed. Paul: A fair charge. As I say repeatedly, there's a progression of thought needed.

We decide we want renewables.
We decide we will pay for them. We decide to open the market to new players and make the system accessible to all the people not just a few.
Then we chose which system best gets us to there.
FITs.


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