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Feed-in Tariffs--The Economic Case

December 18, 2006
Paul Gipe

Britain's Stern Report Says Feed Laws Work Best for Renewable Energy


 

The report by Britain's Sir Nicholas Stern on the economics of climate change asserts that electricity feed laws, like those in Germany, France, and Spain, have produced larger deployments of renewable energy at lower costs than Quota models, such as the UK's Renewable Obligation and the Renewable Portfolio Standards used in North America.

This is the most senior endorsement yet by the British establishment that feed laws may make sense in Britain if the Blair government is serious about addressing climate change.

The citation from page 366 follows.

"The deployment mechanisms described in Box 16.6 can be characterised as price or quantity support, with some tradable approaches containing elements of both. The costs of these policies are generally passed directly on to consumers though some are financed from general taxation. When quantity deployment instruments are not tradable, the policymaker should consider whether there are sufficient incentives to strive for cost reductions and whether the supplier can profit from passing an excessive cost burden onto the consumer. If the level of a price deployment instrument is too low no deployment will occur, while if it is too high large volumes of deployment will occur with financial rewards for which are essentially government created rents. With tradable quantity instruments, the market is left to determine the price, usually with tradable certificates between firms. This does lead to price uncertainty. If the quantity is too high, bottlenecks may lead to a high cost. If the quantity is too low, there may not be sufficient economies of scale to reduce the cost.

Both sets of instruments have proved effective but existing experience favours price-based support mechanisms. Comparisons between deployment support through tradable quotas and feed-in tariff price support suggest that feed-in mechanisms achieve larger deployment at lower costs.(57) [Emphasis added.] Central to this is the assurance of long-term price guarantees. The German scheme, as described in Box 16.7 below, provides legally guaranteed revenue streams for up to twenty years if the technology remains functional. Whilst recognising the importance of planning regimes for both PV and wind, the levels of deployment are much greater in the German scheme and the prices are lower than comparable tradable support mechanisms (though greater deployment increases the total cost in terms of the premium paid by consumers). Contrary to criticisms of the feed-in tariff, analysis suggests that competition is greater than in the UK Renewable Obligation Certificate scheme. These benefits are logical as the technologies are already prone to considerable price uncertainties and the price uncertainty of tradable deployment support mechanisms amplifies this. Uncertainty discourages investment and increases the cost of capital as the risks associated with the uncertain rewards require greater rewards."

57. Butler and Neuhoff (2005); EC (2005); Ragwitz, and Huber (2005); Fouquet et al (2005)

 

STERN REVIEW: The Economics of Climate Change, Chapter 16: Accelerating technological innovation, http://www.hm-treasury.gov.uk/media/9A3/57/Ch_16_accelerating_technological_innovation.pdf, ISBN number: 0-521-70080-9, page 366, 2006.


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