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March 5, 2013
Paul Gipe

The Feed-in Tariff Handbook--a Review


Powering the Green Economy: The Feed-in Tariff Handbook is a book that has been out for some time and though I’ve thoroughly marked up my copy I’ve never got around to posting a proper review. So it’s time to correct my oversight.

The book joins Miguel Mendonça’s previous book Feed-in Tariffs and the more recently issued The Evolution of Feed in Tariffs in Germany Spain and France  by David Jacobs in the growing library of technical papers and books on what makes good—and bad—feed-in tariff (FIT) policy.

The Feed-in Tariff Handbook was directed by Miguel Mendonça for the World Future Council during a period when he was particularly prolific. In The Feed-in Tariff Handbook, Mendonça was joined by two academics specializing in renewable energy policy: Benjamin Sovacool and David Jacobs.

Mendonça is to be credited with arranging the powerful endorsements that begin the book. Not only did he get Hans-Josef Fell, one of the fathers of feed-in tariffs in Germany to write a forward, but he also got Mike Ahearn.

For those unfamiliar with the solar photovoltaic (solar PV) industry, Ahearn is something of a legend. He is the founder of  and the principal force behind First Solar, the now giant manufacturer of thin-film panels. And for those unfamiliar with the politics of the solar PV industry in North America and its attitude toward feed-in tariffs, lets simply say getting Ahearn to write a forward was a major coup. Many influential leaders of the solar industry in the US and Canada have opposed and in many cases still oppose the introduction of feed-in tariffs. For this reason, Ahearn’s endorsement carries weight—and what an endorsement it is.

“. . . The feed-in tariff has greatly accelerated the progress of First Solar and other solar companies in readying photovoltaics for mass market adoption. . . This success would have been impossible without the introduction of the feed-in tariff in Germany and other countries. . . The sooner feed-in tariffs are adopted and expanded in markets worldwide, the sooner we can achieve the 100 per cent objective. . ,” says Ahearn.

Renewable Policy—Not a Solar Only Policy

The Feed-in Tariff Handbook stresses that feed-in tariffs are a renewable energy policy, not a policy for only one technology. In the US for example, FITs are often considered only for solar PV, still the most expensive the new renewable technologies. “Importantly,” say the authors, “feed-in tariffs can also help bring disparate renewable energy industries together, instead of leaving them to scrap for support from a variety of grants and other schemes.”

Technology Development & Average Cost

“In essence a FIT is a tool for technology development and cost reduction. It is one of the major advantages of FIT schemes that the technology-specific approach allows for the development of a wide range of technologies at relatively low costs.”

Even when the costs of specific technologies, such as solar PV, seem high relative to retail rates, a large portfolio of technologies that are eligible under a FIT program, the average cost all renewable generation combined can be quite low. “To a certain extent, more mature technologies such as wind power will help less mature technologies such as [solar] PV to be developed.”

Transparency

The authors recommend that in return for participating in FIT programs, generators should provide full data on their operations, including data on costs. The Spanish FIT program, for example, specifies that participants must disclose all cost data so that “to have optimal information for setting the tariff.” Most model FIT policies follow this advice and many of the proposed laws introduced in the US during the past decade have included provisions calling for full data transparency.

Calculating Tariffs

Long a controversial subject in the US is how to set the tariffs. The authors make clear that in Germany they do not use a discounted-cash flow model. Instead, German tariff designers use the annuity method. The significance of this distinction may be lost on those who have not been in the trenches with so-called financial consultants in North America, such as Navigant, who are typically the first to be called upon when politicians or regulators begin discussing tariffs. Navigant and its peers typically proffer the discounted-cash flow model because it is more complex, less transparent, often “proprietary” and otherwise allows the consultant to appear before their client as the only possible seer capable of reading the entrails of a complex spreadsheet and offering a bullet-proof recommendation. The much simpler and more transparent annuity method gives an estimate as equally accurate as the discounted-cash flow approach.

Germany was not alone in setting tariffs using the annuity method. France’s original wind tariffs that vary by resource intensity were also developed by a variation of the concept called the Profitability Index Method. The Feed-in Tariff Handbook includes a detailed explanation of how the Profitability Index Method works and how Bernard Chabot used it to calculate the French wind tariffs.

Increasing Tariffs

Followers of feed-in tariff policy are generally aware of a feature in most programs: degression schedules that gradually reduce tariff levels for new projects in each succeeding year. However, most are not aware that feed-in tariffs can increase from year-to-year for new projects as well.

For most, when they think of degression, they think of the rapid degression of solar PV tariffs. However, degression can apply to all technologies in a program or only some. And if the tariffs are based on the cost of generation model and not on the “value” model, then tariffs can just as easily go up as down.

The Feed-in Tariff Handbook uses as an example of wind energy. In the early years of a program, developers will naturally seek out the windiest sites. As years progress, wind developers will have to move to progressively less windy sites where their revenues will decline while their costs remain much the same. Consequently, wind developers will need a higher tariff to maintain the same level of profitability as when the program began. The authors cite Spain to illustrate their point. They could also add Germany and even France to the list of jurisdictions that have increased wind tariffs because of price increases, lower revenues, and a too aggressive degression that had lowered the tariffs too far too fast.

The authors argue for a Goldilocks approach to tariff design. Tariffs too high are just as bad for renewable energy as tariffs that are too low. The tariffs need to be “just right” and there needs to be flexibility in setting and adjusting the tariffs to respond promptly to changes in the market.

Flat-Rate Tariffs

The authors rail against a one-size fits all tariff. They argue that if society goes to all the trouble of introducing a feed-in tariff, it doesn’t take much more effort to establish different tariffs for different technologies. In fact, the authors argue, that differentiation in size and technology is one hallmark of modern feed-in tariffs and without that you really don’t have a FIT at all.

Who Pays

The Feed-in Tariff Handbook also clearly explains why it is central to success that ratepayers pick up the tab for a FIT program and that they pay as they go. They cite as an example Spain of what to avoid. Their concise explanation of what happened in Spain is a cautionary tale. And they duly note that most of the budget shortfall that Spanish taxpayers have to pick up for electricity has nothing to do with feed-in tariffs at all. Electricity prices are regulated by the national government in Spain and the national government has been effectively subsidizing the cost of electricity for years from the national budget. The overcost from solar PV added only a small amount to the total shortfall.

Merit-Order-Effect

Because understanding how the rapid introduction of massive amounts of renewables can result in lower prices—not higher--The Feed-in Tariff Handbook includes a thorough description of the merit-order-effect. The explanation of this complex subject in such a concise format is alone worth the price of the book.

 

Feed-in tariff advocates, regulators, and politicians wanting to add to their arsenal of technical information on feed-in tariffs, how to design them well, and how to avoid the pitfalls, and rebuttals to the many myths about FITs would be well served by including a copy of The Feed-in Tariff Handbook.

Powering the Green Economy: The Feed-in Tariff Handbook by Miguel Mendonça, David Jacobs and Benjamin Sovacool, Earthscan, London, ISBN 9781844078585, 2009, 224 pages, 234 x 156 mm, paper, $39.95.

CONTENTS

Introduction

1. The Green Economy

2. Basic FIT Design Options

3. Advanced FIT Design Options

4. Bad FIT Design

5. FIT Design Options for Emerging Economies

6. Developments in Selected Countries

7. Dispelling the Myths about Technical Issues

8. Barriers to Renewable Energy Development

9. Other Support Schemes

10. Campaigning for FITs

Endnotes

Index


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