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Goodbye to FiTs

By Dave Elliott

A shift away from Feed-in Tariffs (FiTs) to project auctions as a way to support renewable energy seems to be underway across the EU. The UK government certainly has cut FiT levels and recently warned that the FiT system might be wound up entirely – and soon. Although it seems to have won a last minute partial reprieve, with the level of cuts being reduced from 87% to 64%, after something of an outcry, it is just a matter of time before it goes. Is this a good idea?

As new entrants to a market heavily dominated by powerful existing but environmentally dubious energy options, the rival clean green renewable energy options have had to be supported by a range of subsidy systems, to help them develop, like Feed-in Tariffs. But the FiTs’ days may be numbered, in part because they have been so successful at getting prices down and capacity up. Although some fear that the covert reason for cutting FiTs is to reduce the rate of expansion of renewables. Either way, FiT levels are now being cut around the EU and new more competitive market-based systems are being introduced. So what happens next?

In its new 2050 global renewable scenario (see my last post), Greenpeace provides an explanation of support options: ‘Overall, there are two types of incentive to promote the deployment of renewable energy. These are fixed Price Systems [essentially FiTs] and Renewable Quota Systems (referred to in the US as Renewable Portfolio Standards). In the former, the government sets the price (or premium) paid to the power producer and lets the market determine the quantity; in the latter, the government sets the quantity of renewable electricity and leaves it to the market to determine the price. Both systems create a protected market against a background of subsidised, depreciated conventional generators whose external environmental costs are not accounted for. These policies provide incentives for technology improvements and cost reductions, leading to cheaper renewables that will be able to compete with conventional sources in the future’. www.greenpeace.org/international/Global/international/publications/climate/2015/Energy-Revolution-2015-Full.pdf

Fair enough, although the details of the US RPS and UK Renewables Obligation (RO) differ and are a bit more complex. And neither has been very good at building up capacity. By comparison, FiTs have been spectacularly successful, even if they initially pushed up pass-through costs to consumers when used to accelerate PV solar deployment – a global process which pushed down its learning curve, so that prices have fallen, further boosting take up. Greenpeace notes that, globally, FiTs have now been enacted in 108 jurisdictions at the national or state/provincial level. But, it adds:‘ technology-neutral and technology-specific tendering continues to be adopted by a growing number of countries, with 60 countries having utilized renewable energy tenders as of early 2015’. That’s what the UK is now moving to via its competitive CfD contract auctions. And Greenpeace adds, ‘the European Commission issued guidelines to begin a continent-wide shift away from FiTs towards tenders’. Germany is already doing that.

Is this a good idea? Greenpeace says: ‘The main difference between quota-based and [fixed] price-based systems is that the former tends to promote the renewable energy source that is the cheapest, which is generally onshore wind power. In doing so, this policy thus gives the most support to the energy source that needs the least. In contrast, [fixed] price-based policies spread support across numerous renewable energy sources more equally, including those that are currently more expensive and need greater support. In doing so, they ramp up fledgling industries to bring costs down.’

That is debatable. It is true that the RO has mainly backed wind (and cheap sewage/landfill biogas). Similarly for the US RPS. But FiTs were also used initially (e.g. in Germany) to back wind (42 GW there so far), and only later to back PV, when it was high price – and they got its price down. That’s led to 38 GW of PV capacity so far there. Whereas, in the UK, the RO system has led to around 40% higher costs for wind than the FiTs used elsewhere, and much less capacity being installed, despite the much better wind speeds! That difference was mainly because, under guaranteed price FiTs, with prices known long in advance, developers could get loans for projects at low interest rates, whereas, under the market based RO system, they had little idea what the value of the tradeable Renewable Obligation Credits would be in future. So they had to pay more for capital and charge more for the electricity produced.

The cuts to FiTs may in part be due to concerns about the cost of the rapid rise of renewables, but it may be that FiTs have done as much as they can, given the tighter economic context. Arguably, they were, in any case, also better suited to industrial countries, where there was an affluent consumer (and potential prosumer) base, than in developing countries, where project auctions are now emerging. But a shift to auctions is part of a trend to market competition, which may not lead to the best social and environmental outcomes. Or even the best technology. Just the cheapest ones. For example, the auction approach will not support newer less developed options, some of which may turn out to be cheaper or environmentally better longer term, and (like the RO) it will focus on larger corporate projects, rather than on smaller more community-oriented local projects. Moreover, auctions may not even be very effective in capacity terms, judging by the experience of the previous auction-based system used initially in the UK under the Non Fossil Fuel Obligation (NFFO). Many of the low-price bids that won NFFO contracts were not actually built – they had bid too low to be viable in practice. The same has happened with the new UK CfD contract auction system – two PV projects that bid low and were accepted have, in the event, not gone forward.

However other options are possible. Since the more developed options like PV and wind may soon not need extra support, maybe cash will be available to support new entrants at a range of scales? Greenpeace looks at the various investment options and incentives taking account of the newly-emerging value chain, project start-up and asset finance, at all scales, including micro finance for local projects. It says that ‘for developing countries, feed-in laws would be an ideal mechanism to boost the development of new renewable energy’, noting that ‘countries that build wind and solar projects today do not face the high costs that Germany, for instance, did only a few years ago, so the cost impact on countries that start now will be much lower’. Maybe FiTs will survive!

Overall though, whatever the support system used, it would be helpful if the huge subsidies to fossil and nuclear were removed. Absent that, subsidies may continue to be needed for renewables. But continuing with renewable subsidies will be a hard-fought battle in most of the EU, in the UK especially and even in Germany. In Spain particularly where they have been all but abandoned. A bit of a mess…

*Actually I am just now off to Spain for an Xmas break, so my next post will be delayed a little. But I leave with the good news about the at least temporary survival (until 2019) of the UK FiT, following campaigns which saw around 55,000 written submissions and 127,000 e-mail responses to DECC’s consultation , most objecting to the cuts: http://www.gov.uk/government/uploads/system/uploads/attachment_data/file/486082/FITs_Review_Govt__response_Final.pdf

 

 

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