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Public Affairs - Illinois Energy

 

What is the feed-in tariff?
Why don't we have it?

 

The German Renewable Energy Act (Emeuerbare-Energien-Gesetz, EEG) encourages the growth of electric energy supploes beyond nuclear, coal and petroleum by guaranteeing the rates a generator of renewable  energy will be paid over a 20-year period.

The legislation has put Germany in the leading ranks of nations with sustainable energy programs, and led to the development of an industry that employs more than 300,000 people.

The EEG rejects direct subsidies by the government to utilities, and instead relies on a tariff designed to ensure sustainable energy utilities have a market at a rate that guarantees repayment of their capital investment.

The EEg also ensures efficiency in the sustainable utilities by lowering their payments by 1 percent every year, to reflect rising efficiencies of scale and technological expertise in the rates consumers pay.

The heart of the EEG model is the "feed-in tariff (FIT). "This tool was first adopted in the United States, where it failed, and has been successfully implemented in more than 50 countries since then.

The U.S. Model, the first failure

The earliest FIT, although it was not called that, was part of the National Energy Act (NEA) which then-president Jimmy Carter signed into law in 1978. its sponsors billed it as a law to encourage development of renewable energy by requiring the electric utilities that controlled the marketplace to buy electricity from sustainable producers at a reasonable price.

These provisions were in part of the NEA called the Public Utility Regulatory Policies Act (PURPA). The provisions of the act were flawed in design, and (like most of the initiatives of the Carter Administration) fumbled in execution.

PURPA requires utilities to buy electricity from renewable energy producers at the utility’s own “avoided cost.” This was (too) loosely defined as the additional costs a utility would incur if it generated the power itself or bought the same amount of electricity from another utility.

 The actual implementation of PURPA was left up to state utility regulators who could interpret this any way they wanted. The “avoided cost” raised a number of questions, even for state regulators who may have wanted to honestly and equitably enforce it. Does “avoided cost” mean just the fuel costs the utility pays for its existing plants, or does it mean the whole capital investment in those plants? Is it a “cost” to a utility if being required to buy wind or solar energy from a third party means its own fossil fuel generators operate at lower and less-efficient levels, or that its own repayment of investors bonds in those generating plants is affected?

PURPA also forbids the established electric utilities from owning more than 50 percent of a renewable energy generation supplier, thus barring them from active participation in the industry.

In some state PURPA was largely ignored. In others utilities were required to buy renewable energy at rates set by the projected fossil fuel price over the coming decades, based on the idea that oil prices would continue to rise. When oil prices fell in the 1980s, utilities were forced to buy renewable energy at a high premium to their real, current “avoided cost.”

PURPA also banned use of natural gas to generate electricity, which was a major policy mistake in several ways. It distorted the natural gas marketplace and protected older an dirtier fossil fuel plants from more modern and efficient competiton.

While PURPA did lead to development of alternative energy industries in some states that aggressively implemented it, like California, Maine and Florida, the experience soured the public perception of renewable energy suppliers who were guaranteed payments that is at times far above the cost of electricity from fossil fuels.

Germany, the second failure

In 1990 Germany took the next tentative half-step toward a full feed-in tariff with its Stromeinspeisungsgesetz (StrEG), or “Law on Feeding Electricity into the Grid.”

The StrEG requires utilities to purchase electricity generated from renewable energy sources at prices set at a percentage of the prevailing retail price of electricity. This almost arbitrary price level let to solar and wind power developers being paid at 90 percent of the residential electricity rate.

This price scheme ignored the higher costs of technological development and capital investment faced by solar and wind power initiatives. it set their repayment as 90 percent of what was paid to mature electric utilities with huge customer bases and large economies of scale.

Also, renewable energy projects were limited to 5 megawatts of generating capacity, meaning they never would realize an economy of scale.

Still, the guarantee d 90 percent of market rates and the requirement that renewable projects have access to the electric grid encouraged a dramatic growth in Germany's wind energy industry during the 1900s. Wind energy was less expensive than photovoltaic power and it benefitted from the full resources of the country's technological prowess.

Germany installed 4,400 MW of wind capacity in the 1990s, ending the decade with one-third of the global wind energy capacity from an industry employing 20,000 people. By 2000 German electric customers were paying half of what they paid a decade earlier for electricity generated by wind energy, thanks to technological advances, economies of scale and an emerging environment of global competition spurred by similar FIT tariff programs adopted in Denmark and Spain.

However, the StrEG did not create a similar environment for the more expensive and challenging solar and biomass industries. Also, it limited its benefits to renewable energy sources making up no more than 5 percent of the national energy supply, and the industry soon exceeded this.

Success with the EEG

The FIT reached its current and successful form with the EEG passed in 2000.

The major change was that now the German government sets price utilities pay for each source of sustainable energy.

These prices apply to renewable energy generation sources of 5 megawatts or less. Also exempt are plants in which the German federal government owns more than one-quarter interest.

All operators of public electric power grids are required to buy power from renewable energy sources in priority over other sources. Specific prices are set for eight different types of renewable energy sources, with adjustments to be made in the future. For instance, wind energy was set at 17 pfennings per kilowatt-hour for the first five years after passage of the EEG, extendable in certain circumstances and set at nine years for offshore wind farms. After that initial period, the price is reduced by 1.5 pfennings a year for new installations that are presumed to benefit from the economies of scale and technical developments of the older plants..

Similarly, solar radiation was initially prices at 99 pfennings per kilowatt-hour but reduced by 5 percent a year for new installations.

The extra cost of purchasing renewable energies is shared among all electric utilities purchasing power under the EEG. Every March 31 they each report the percentage that EEG purchases are to their total purchases. If a utility’s purchase are above the national average, then they are able to sell EEG power to other utilities whose EEG percentage is below the average until the costs are leveled out over the whole country.

The EEG covers only 29 pages and 11,790 words, with the executive summary and all explanatory notes addendum. By comparison, the Carter administration’s PURPA law is 35,370 words.

A 2007 report by the European Community (EC) found that feed-in tariffs were used by 18 EC member states, and it the main tool used by EC members to encourage renewable energy. Among the report’s conclusions is, “. . . historic observations from EU Member States suggest that feed-in tariffs achieve greater renewable energy penetration, and do so at lower costs for consumers.”

For wind energy, the FIT states of Germany, Denmark and Spain showed the highest effectiveness in growth between 1998 and 2006. In generating power from biogas, the highest growth in the same period was all in FIT states: Austria, Denmark, Germany, Greece and Luxembourg. The United Kingdom, which relies on quotas and trading of offsets, was behind the FIT-state performance. A graph in the report shows that FIT gives its nations a growing renewable energy supply, while the UK policies mainly increase the profit of the utility without encouraging growth.

Global Landscape for Cleantech and Climate Change

 

In stark contrast to the thousands of people (including www.curiositas.us) who make livings only talking and writing about climate change, a half-day conference in Chicago May 15 examined what people are actually doing about it

The event was the “Global Landscape for Cleantech and Climate Change” at Northwestern University’s downtown campus in Chicago, IL. It was sponsored by the Environmental Law and Policy Center and the Midwest Energy and Sustainability Leadership Alliance.

The two sessions focused on global security issues and how national and international policy drives sustainable industries.

Some highlights:

Denmark

Denmark now gets 28 percent of its electric energy supply from wind generation, moving toward a goal of eventually getting 50 percent of the total from wind. The progress to date has built a wind energy technology industry that totaled $10 million last year, eight percent of Denmark’s total exports.

With most Danish on-land wind energy locations already hosting generators, the Danes are now expanding their technological expertise to off-shore sites.

“We want to ensure Danish companies can leverage their competence worldwide in developing the offshore sector,” explained Ali Mushtaq, director, North American Wind Energy Advisory at Trade Commission of Denmark in Chicago.

Denmark’s energy policy law set the goal of having the Danish electric energy supply become 100 percent renewable by 2050.

“The role of the Danish government has been to promote renewable energy thorough levelized incentives,” Mushtaq

 added.

This means adopting the legal framework that is necessary to promote the policy to create a stable regulatory environment for companies to plan and operate.

Further, the wind energy initiative has made Denmark less vulnerable to We do have the NATO summit as a backdrop. In the 1970s Denmark had a handful of power plants, which were big soft targets for attack. Now wind energy resources are decentralized and there is a certain level of security along with the significant wealth and job creation effect distributed across the country.

 

Germany

“Germany is on the level of Alaska in terms of solar radiation,” explains Mark Tomkins, vice president of the German American Chamber of Commerce. “On shore, Germany has about the same wind resources as the American Southeast, and you don’t see many wind energy developments sprouting up in the Southeast.”

Germany had no petroleum resources. In the past it has been beset by acid rain pollution and such a shortage of natural gas supplies that it turned to Russia for a natural gas supply, which is a security issue.

 But today Germany gets about 20 percent of its electricity       coming from renewable sources. How did this happen. “Like all good Germans, they go and make a plan,” Tomkins said. This came in “a real comprehensive cohesive policy that started back in the 1990s,” resulting in a tariff law in 2000 that is a major piece of policy legislation extending for 20 years.

“It was not based on direct investment by the government, quick tax rebates or other short-term tactics,” Tomkins stressed. “It has been tweaked from time to time, with an update in 2004.”

[Tomkins was referring to the German Renewable Energy Act (Emauerbare-Energien-Gesetz, EEG). See the sidebar article at the right.]

This gave the Germans an aggressive policy to continually develop improvements. It addresses renewable energy sources, energy efficiency, transportation, heating, insulation and industrial efficiency.

“You also have to decrease energy demands,” Tomkins explained. “Germany is a major industrial economy, What may work well in an agrarian or mainly rural environment may not work as well in an economy where you are making cars, turbines and all the exports Germany is famous for. So you also have to decrease energy demands, and energy efficiency plays a huge role in Germany’s plans going forward.”

Today 38 percent of the total electricity supply from renewable sources, about 20 percent of total German electricity market, is coming out of wind power. Solar energy provides 15.6 percent. Biomass, primarily biogas from organic waste, accounts for 30 percent of the renewable secor while the remaining 16 percent is hydroelectric power.

There are, depending on whose numbers you use, a couple hundred biomass installations here in the United States, and Germany is pushing 6,000” Tomkins said. “As part of an energy security model, most of Germany’s biomass installations are at least possible to be converted to feeding gas into the network should there ever be a shortage or reduction in supply.”

What is the result for Germany and its economy? Roughly 15 billion euros was invested in construction of German photovoltaic energy facilities last year. Roughly 30 percent of the world’s total solar investment went into Germany last year.

“The year before it was closer to 45 percent, but as other markets in China and the U.S. have grown, Germany’s share declines,” Tomkins added. “Wind is close to 3 billion euros of investment.”

Like Denmark, this means a lot for German companies that have entered the market created by the EEG. “Solar industry alone there was well over 100,000 jobs, and it’s roughly the same in wind,” Tomkins said. “There are 6,000 components that go into a wind turbine, and they have to be made somewhere.”

“This also contributes to Germany’s role as a leading exporter of high-value technologies, he added.

 The Industry Perspective

 Dan Foley, CEO of the North American operations for Acciona S.A., began by listing companies in Chicago that work in the renewable industry business. Acconia is a Madrid-based company that provides three products that it believes will be increasingly scarce in coming years: health care, water and energy.

Acconia has 30,000 employees worldwide, and focuses on renewable and sustainable practices

“We tend to compete in innovation,” Foley said. “We like to take a technology to the utility scale.”

Among the projects he described were desalination plants at the mouth of the Thames, in London, and in Tampa, Fla., electric car charging stations and the Cantabrian Expressway Bridge in Spain built of carbon fibre.

“In Toronto we take water from the bottom of Lake Ontario and use it for cooling in the downtown area,” he noted. Solar energy storage is another emphasis. Acconia is building a

floating platform for wind energy in Bilbao harbor this summer.

“When is wind going to be competitive?” Foley asked. “We always talk about levelized costs. We need to compare a new-built renewable with a new-built gas plant. Our infrastructure needs to be replaced in the next 10 years and wind is competitive today.”

“The industry is here, we just need a sound policy to work 10-15 years into the future,” he said.

 An earlier session of the meeting addressed “Climate Change and Global Security” and featured Rebecca Ranich, director Federal Energy and Resources Management, Deloitte Consulting LLP, and Howard Learner, executive director, Environmental Law and Policy Center.

The security issue was timely because of the NATO summit meeting in Chicago a week later.

The highlights:

Ranich: “I'm not going to blame carbon emissions for weather. I'm going to blame growing population.” 

“It is not our (Deloitte’s) business to argue the science of climate debate. We don't want to be part of that debate. We focus on what is to be done.”

 Learner: “We need to stop arguing about whether climate change is real. It is.”

 

Ranich: “We have developed a large-scale infrastructure to deliver energy to you. Disrupting it is not going to be done overnight and not without pain.” Asked about the controversial topic of extracting oil from oil sands, she pointed out, “Tar sands meet the four criteria of the economic decision:

They are economic. They are scalable. They are reliable for many decades, and they are sustainable.”

Ranich: “The U.S. Navy uses 15 percent less power in its bases around the world. The Department of Defense is changing the source of its power. It is a very exciting and powerful momentum.

Learner: “We had the hottest March in Chicago since temperatures started to be recorded in 1895. We have

 seen many 100-year or 500-year floods in recent years. The prevailing, overwhelming scientific view is that something is happening here. It is changing the way we can and do live here in the United States.”

Learner: Chicago has more solar intensity here than either Berlin or Tokyo do, (although Japan and Germany are doing more on solar energy). Solar energy is now below $1 a watt. That used to be cited as the breakthrough cost.

China is passing the United States in solar and wind technology.Other countries are taking leadership position in the global technology wave, while the United States has both opportunities and threats. The opportunity is to move forward and be a technological leader, or the threat that we will be and can be left behind.