"Feed-in tariffs" - a proven path for greening California's electricity
How can California encourage investors to generate renewable electricity? How about a guarantee that if they generate the power, they'll be paid at a good price?
That's the idea behind the so-called "feed-in tariff", the most-effective proven strategy to bring renewables on-line - rapidly, in quantity, and at appropriate cost. Under a feed-in tariff, a utility pays standardized rates to producers of renewable power so that they can compete against conventional power.
California utilities now pay electricity generators (e.g. a plant fueled with natural gas) according to the "market price referent", a rate paid to all such producers, currently about $.11/kWh (kilowatt hour) for base-load electricity.
Some cleaner technologies, though, may be more expensive in the short term, and if they have to compete with the constantly changing price of power from natural-gas plants, for example, they will never be built. A feed-in tariff would be set to reimburse the developer of a renewable-electricity generating plant (such as a wind farm or solar-thermal plant) to cover costs and provide a reasonable profit - independent of the price of natural gas. Because costs vary for different types of renewables (photovoltaic solar, thermal solar, wind, geothermal, biogas, etc.), different payment rates ("tariffs") would be set depending on the type and size of the project. The contract rate would be guaranteed for 20 years.
Over time, as with any new technology, the cost of these new sources of energy can be expected to decrease and become more cost-effective. The state would reassess rates for each technology, and as costs come down, new contracts would be pegged at lower rates. For example, a 20-year contract signed in 2010 for a 10 MW wind system might pay $.09/kWh, while a contract in 2012 for a similar project might pay only $.08/kWh. In fact, Germany has built into its tariff system an annual lowering of rates by 5 - 6.5% for most renewables. Utilities have decades of experience at setting long-term rates to cover costs plus a profit. The concept is not new, but would be applied in a new way to renewables.
Feed-in tariffs have worked elsewhere
Already 18 countries have adopted feed-in tariffs. A European Union Commission analysis finds that feed-in tariffs achieve greater growth in renewable energy, at a lower cost, than other policy types. Due to feed-in tariffs, Germany and Spain have become Europe's largest renewable-energy producers, and Denmark now produces more than 20% of its electricity from wind alone.
Germany launched its program in 1991 and has improved it through several iterations. In just seven years, from 2000 to 2007, the share of electricity from renewable energy more than doubled, from 6.3% to 14.2%, making Germany the world leader in installed capacity for both photovoltaic solar and wind. Germany installed 10 times more wind in 2008 than California.
Spain started working to incentivize the development of renewables in 1980 and also improved its program over time. During 2007 Spain's wind-capacity additions set a European record with 3,522 MW installed in a single year, and Spain's photovoltaic market grew by over 300%.
On March 1, Gainesville FL implemented the first feed-in tariffs in the U.S. for photovoltaic solar. On March 10 its web site reported: "We have already received enough completed applications to reach our 2009 and 2010 target of 4 megawatts each. We will continue to accept and approve applications, in the order in which they are received, to fulfill targets for future years."
In less than 10 days, Gainesville achieved its goal for 2009 and 2010!
Will feed-in tariffs increase electricity bills? In the short term they probably will, since some categories of renewable energy will be more expensive - but not by much. In Germany the program increased costs to ratepayers by about $3/month. A 2007 study by the Lawrence Berkeley National Laboratory analyzed 28 state-level studies designed to project the impact of increased renewables on electricity rates. It concluded that the median bill impact across all of the studies would be an increase of only $0.38 per month. Only two of the studies showed increases greater than 5%, 19 projected increased rates of 1% or less, and six predicted rate decreases. Whether the increase in California will be this small remains to be seen, but considerable evidence suggests that it should be fairly small.
In the long run, relative costs are less predictable, but there is reason to believe that costs will become lower than if we stuck with conventional power. The cost of fossil-fuel-produced electricity continues to increase while the costs of renewables are expected to decrease over time. At some point electricity produced with an increased portion of renewables will cost less than without them.
On the one hand, the cost of natural gas can be expected to rise. On the other hand, the largest cost of a renewable is typically the initial capital costs of installation. Ongoing operating costs are often less than for natural-gas plants, and the fuel is essentially free. Wind power is already becoming price-competitive with natural-gas plants. Recent analyses in both Spain and Germany have shown that rapid expansion of renewables has decreased wholesale spot-market prices. In other words, competition from renewables has caused relatively decreased demand for other more-polluting conventional fuels, causing their prices to decline. In both countries, estimated savings from this effect have been about the same or even greater than the cost of implementing the feed-in tariffs themselves.
These price analyses, of course, don't include many of the costs to society of other energy sources - from pollution, climate change, health impacts, national security risks, destruction of the environment from coal-mining, etc. Taking these into account, the economic case for increased renewables becomes even more compelling.
Moving forward in California
In December the California Energy Commission (CEC) accepted staff recommendations for California to implement feed-in tariffs much like those in Europe. It is the California Public Utilities Commission, however, that must implement these policies, and so far it has lagged in implementing well-structured and comprehensive feed-in tariffs.
Sierra Club California is reviewing proposed legislation for two key objectives:
- enacting into law the target of 33% renewables by 2020, as declared by Gov. Schwarzenegger in an executive order;
- implementing a well-structured feed-in tariff to help reach this objective.
Key features of such a tariff include:
- differentiation by technology and size;
- pricing based on costs plus a reasonable profit;
- 20-year contracts;
- applicability to both investor-owned utilities (such as PG&E) and publicly owned ones (such as Alameda Municipal Power);
- standard "must take" contracts so that generators would be spared the legal and other costs and delays of custom-negotiated contracts.
- apply to projects with a large-enough generation capacity to make a difference - from 0 to at least 20 MW. (This is the project size recently supported by the California Energy Commission. The CEC also supports investigating larger sizes in the future.)
As we move forward on this campaign, we would greatly appreciate your help in advocacy with California legislators. To receive alerts when action is needed, go to the Sierra Club California web site. Click on "Take Action" and fill out the form.