Feed-in tariffs – a policy for the future?
The Heinrich Böll Foundation, which also hosts this website, recently produced a 132-page study (PDF) entitled “Energiewende 2.0” on the future of Germany’s energy transition. In a recent post, Craig Morris summarized the findings. Today, he has a bone to pick with its portrayal of feed-in tariffs.
The preface states that FITs “guarantee profits (Erträge) to private investors for 20 years.” As I have previously explained in this blog, FITs guarantee only a price for a kilowatt-hour generated; the law does not guarantee the amount of wind that will blow or sun that will shine, so if you don’t generate enough kilowatt-hours, you lose money.
More importantly, the preface later states that feed-in tariffs were “necessary in the beginning, but not tenable in the long run.” Germany certainly needs to tweak its feed-in tariffs; that much we can agree on. Germany’s current policy does not provide any incentives for wind and solar to smooth out power production in the ways possible, such as solar panels facing east end west to spread out power production across the day. So tweaking is certainly in order. But, any policy that replaces feed-in tariffs will have to look a lot like feed-in tariffs.
As I recently explained elsewhere, the justification for feed-in tariffs is that wind and solar power production cannot be adjusted in reaction to price signals; wind turbines and solar panels react to the weather. What’s worse, they undercut themselves; the more solar and wind power is generated at a given time, the lower prices are on wholesale markets.
FITs not a “startup mechanism”
The idea that feed-in tariffs were something merely “necessary in the beginning” also misrepresents the policy. Because of the focus on high feed-in tariffs for solar last decade, people have come to think of “grid parity” as the goal of feed-in tariffs. In this reading, FITs should exist until solar becomes cheaper than power from the grid, at which time we can get rid of the policy. In the US, the general misconception is that net-metering is the natural state of things after grid parity.
I have argued since 2010 that we should forget grid parity. FITs for solar were high only relative to other sources of renewable energy. The target profit margin was 5-7 percent for each energy source. Now, German retail power rates are approaching 30 cents, while FITs for new systems range from 9-13 cents. Even at that higher price, your profit margin is nearly 140 percent if you pay only 13 but offset 30 cents.
In other words, when FITs are higher than the price of power from the grid, the policy promotes deployment that would otherwise not happen; after grid parity, FITs prevent windfall profits, thereby keeping the cost of renewable electricity down for society.
But grid parity was never the goal of feed-in tariffs anyway. The first feed-in tariffs implemented in 1990 specified that the rate for wind power was 80 percent of the retail rate and 90 percent for PV – both of these tariffs were thus already below retail rates. Furthermore, the original architects of the feed-in tariffs redesigned in 2000 understood that feed-in tariffs would prevent ridiculously high profit margins like the 140 percent described above as retail rates continue to rise.
I contacted one of the authors of the policy from 2000, Hans-Josef Fell, and he confirmed that “the members of Parliament who designed feed-in tariffs in 1999 and 2000 did not see it as a policy for the beginning, but as a way of getting renewables on the market. The philosophy is that FITs will bring the cost of renewables down and eventually become less attractive than other options, so that people will resort to these other options even though FITs remain one.”
Herein lies the crux – what options are now more attractive than feed-in tariffs? You would think that, given the option of a 140 percent return on investments as described above, the solar sector in Germany would not care about FITs at all – but they are fighting tooth and nail for the policy. You see, from Arizona to Austria, politicians are cracking down on solar homeowners because there is actually no stopping solar without a policy. So politicians might implement policies to stop solar. Germany is considering one now. FITs not only guarantee a price per kilowatt-hour, but guarantee that renewable power has to be purchased. Get rid of FITs, and you get rid of that grid priority.
Wind power also needs FITs because the alternative – reverse auctions – will hand over the sector to corporations, potentially putting an end to community wind farms.
Therein lies the problem – if we want to get rid of feed-in tariffs, what do we replace them with? “Energiewende 2.0” does not say what the replacement is. The study complains that the coalition agreement does not pay enough attention to the millions of citizens who have been the driving force in the Energiewende up to now but says the policy of “direct marketing” – which is to replace feed-in tariffs – could mean “an end to priority grid access for renewables” (again, see my summary of that argument here). But if the days of feed-in tariffs are over and you don’t want to switch to what the government proposes, what do you want?