The Future of Renewables and the Role of Feed-in-Tariffs

February 17, 2015
By Ipshita Chaturvedi

Rising emissions and climate change have been the driving force behind renewable energy policy world over. While all economies use an energy mix, the overall global quest is to move towards non-fossil fuel alternatives, the preferred ones being wind and solar. Policies promoting the production and use of Renewable Energy (RE) may be arranged in several ways, the most popular being a Feed-in-Tariff (FIT) system. FITs are easy to implement and give fast results but they are also accompanied with a range of problems which will surface in the future if care is not taken to design them properly. FITs are also the most preferred RE policy globally (they’ve been enacted in over 50 countries) which makes them relevant to analyse when talking about the future of global energy which in turn directly impacts economic and environmental security.

An FIT is a government-backed incentive for all producers of RE.  This is done by offering long-term contracts (typically 15-20 years) to RE producers by offering a set high price for RE sent to the electricity grid. One of the salient features of FITs is that they always guarantee access to the electrical grid – no matter how small a producer. The other is a guaranteed return on investment. This policy mechanism has given a massive boost to the quick and effective production of wind and solar power. In 2013, the International Energy Agency declared that FITs accounted for nearly 72 per cent of all solar photovoltaic installed worldwide.

The example of Germany provides an illustration of both the benefits and challenges brought about by the implementation of FITs. Germany was the first country in the world to adopt an FIT program in 1990 as a powerful policy tool to drive renewable energy deployment and to fulfil their aspiration of moving from nuclear power to solar and wind by the middle of the 20th century through the Energiewende policy (the Energy Transition/Revolution). At first, the program worked wonders; it created jobs while propelling Germany as the world leader in RE deployment. Part of the policy was also protection of industry which was done by exempting those companies that depended heavily on electricity to ensure their global competitiveness. 

However, by 2014, the Vice-Chancellor to Angela Merkel, Sigmar Gabriel announced that Germany’s Energiewende was on the verge of failure. Suggesting major reforms and targeting big businesses he said, “The complete exemption from paying feed-in tariffs is a model that is wonderful for you as a business model, but is one that is a problem for everyone else”. He refers to one of the major problems of FITs – how does one ensure RE deployment while safeguarding a company’s global competitiveness and simultaneously ensuring that not all costs are passed on to the consumers?

It is important to remember that FITs are not commercially viable without huge government subsidies including long-term contracts by energy utilities (government owned or otherwise) to pay two-four times the going wholesale electric rate for solar and wind generated power i.e. the salient features of an FIT system. The primary question that plagues the use of FITs is whether long-term contracts for high-power solar are commercially feasible and who will fund it. Although theory suggests that the extra cost paid by energy utilities to the producers of RE is shared between the energy utilities, the reality is different. In essence that cost gets shifted to households and small and medium enterprises. Cost escalation faced by households may reduce support for feed-in-tariffs especially in developing countries where other social and economic concerns usually supersede concerns of RE production and energy transition. Additionally, FITs will increase costs for companies, making them less competitive than rivals from other countries where energy prices could be falling because of a fracking boom. For example, a company which relies on electricity and which is hit by an FIT cost will not be able to compete with companies that operate in an economy where new oil and gas deposits have been discovered. The mining/fracking boom will drive overall energy prices down benefiting companies that do not have a renewables obligation. To avoid such a situation, the biggest users of non-renewable energy will not be hit by an FIT potentially creating an adverse situation which is what Germany is facing today.

Several developing countries such as India, South Africa and Kenya have FIT systems in place as a policy tool for a renewables future. It is suggested that before any renewable policy is chosen (especially FITs), it is imperative that certain other factors are taken into account without which there could be a counter-productive impact on the economy and also the renewables industry.

A 2012 UNEP report accurately pointed out that tariff differentiation (how much and in what way will the differential work), FIT payment duration, costs and funding, and implementation and monitoring expertise should be the main determinants when designing an FIT policy.  

It is clear that FITs will continue to play a massive role in the RE future. Instead of a one-size-fits-all approach, countries should design schemes based on their own strengths and weaknesses. These strengths and weaknesses should be viewed in reference to the job-creating potential of the FIT scheme and its interface with the country’s internal clean energy tax rates. The scheme should provide economic incentives for promoting grid expansion particularly in countries where energy security is still a far reality. It must also be ensured that industry protectionism does not translate into extremely high electricity costs for the householder. Whether this is addressed by having a dedicated RE policy fund or attracting private or foreign investment could be guided by a country’s international emissions reduction obligations.

An in-depth analysis is also required to analyse the time period for which the FIT would be operational, i.e. when the price of RE in the grid becomes lower than other sources, the policy assistance should be slowly withdrawn. If well structured, FITs will continue to play a pivotal role in accelerating the implementation of renewable energy projects, if not, the policy will fail in the long run.  

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