Feed-in Tariffs: The Proven Road Not Taken
By J. Peter Lynch, Advisor to Principal Solar, Inc.
J. Peter Lynch, Advisor to Principal Solar, Inc.
Feed-in tariffs (FIT) are a policy mechanism designed to accelerate investment in renewable energy technologies. Producers of renewable energy are paid a set rate for the electricity they produce, usually differentiated according to the technology used (wind, solar, biomass and so on) and the size of the installation. FITs guarantee that anyone who generates electricity from a renewable energy source -- whether they are a homeowner, small business, or large electric utility -- is able to sell that electricity into the grid and receive long-term payments for each kilowatt-hour produced. Payments are set at pre-established rates, often higher than what the market would ordinarily pay, to ensure that developers earn profitable returns.
The FIT takes credit for the rapid deployment of wind and solar power among world renewable energy leaders Denmark, Germany and Spain over the past decade. Similar policies have since been adopted by many other countries, leading the FIT to become a key tool for promoting renewables. The fact that the payment levels are performance-based puts the responsibility on producers to maximize the overall output and efficiency of their project.
The U.S. needs a nationwide FIT to kick-start the renewable energy industry, restore leadership in this space, and accelerate expansion of the renewable industry worldwide. The rapid expansion of the renewable energy industry is a win-win for the entire world and future generations, as well as a critical component to the long-term survival of humanity.
"The U.S. needs a nationwide FIT to kick-start the renewable energy industry, restore leadership in this space, and accelerate expansion of the renewable industry worldwide."
Why is a FIT critical?
The world is running out of cheap fossil fuels. No other replacement source of energy, abundant enough to sustain energy needs for more than 40 or 50 years, exists. If the U.S. were not running out of "cheap" fossil fuels, there would be no drilling for oil through 20,000 feet of water and 10,000 feet of ocean bedrock to reach an oil field -- an expensive, technically complex, dangerous and, overall, risky investment fraught with a number of uncontrollable variables.
Current world energy use is approximately 16 TW per year. The amount of direct solar energy that arrives on Earth during an average four-week period, roughly 1,853 TW per year, is greater than the total remaining reserves (1,755 TW per year) of all fossil fuels. Clearly, the only technically feasible, long-term solution today is renewable energy. Going forward, the strategy should be to accelerate the worldwide development of renewables as quickly as possible. This means establishing a nationwide FIT.
The most significant FIT benefits include:
- Proven results -- In 2000, Germany set a 2010 target of getting a 12.5 percent share of its electric generation mix from renewable energy. In 2007, they surpassed that goal with 15.1 percent -- 20 percent better and two years ahead of schedule. Since Germany has launched their FIT program, approximately 35 to 40 countries have followed suit and implemented their own.
- Pays for itself in less than a year -- In 2008, Germany's additional cost for their national FIT was $3.2 billion euros. The return on investment, calculated by the German Federal Ministry for the Environment, was:
- $7.8 billion euros from reduced amounts of fossil and nuclear fuels purchased
- $9.2 billion euros from the avoidance of external costs
A total of $17 billion in savings for $3.2 billion in additional costs is a superior return.
- Independent of taxpayer funds -- A FIT is not a subsidy and no new public debt is needed to fund such a program, making it a stable and self-sustaining proposition in any economic and political environment.
- Cost reduction -- Encourages decreases in production costs and cost per watt installed.
- Economic growth -- Encourages private investment, creates jobs, expands manufacturing and increases private sector research and development.
- PPA (power purchase agreement) improvements -- Reduces government bureaucracy and red tape associated with a typical PPA.
- Increased security -- Enhances national security by lessening U.S. dependence on foreign oil, while helping to decrease the associated massive annual cash drain.
"A FIT program is the most effective way to spark rapid development of the massive amount of renewable energy required to keep the U.S. going strong."
The Cost of Dismissing FITs
FITs are not theories. They have been demonstrated and proven. They do not need further research, development or testing. In other words, they are not the next Solyndra. In fact, FITs are currently operating programs that have been developed and honed in highly industrialized countries, and they have been in successful operation for more than 10 years. The U.S. can learn from the FIT in Germany, a country that was quick to recognize the transparency and effectiveness.
It is interesting to note that in 2006 China avoided implementing a FIT. In 2011, China implemented a FIT program, and their domestic market is now booming, with Chinese solar manufacturing having scaled up to the point where it can address this huge new market without reliance on imports.
A FIT program is the most effective way to spark rapid development of the massive amount of renewable energy required to keep the U.S. going strong. Renewable energy projects in the U.S. have often met resistance from wary investors, but the FIT policy removes uncertainty by ensuring that anyone with access to sun and wind can receive funding for a set period of time.
About the Author
J. Peter Lynch is an advisor to Principal Solar, Inc. and a pioneer in the renewable energy sector of the investment banking industry. He is widely regarded as an expert in renewable energy, and brings a wealth of knowledge from his 35 years as a Wall Street security analyst, independent security analyst and private investor in small, emerging technology firms. He can be reached via email at SOLARJPL@aol.com. Please visit his website for the promotion of solar energy at www.sunseries.net.