Feed-In Tariff = Feeding at Trough?

by Richard T. Stuebi

One of the more popular policy prescriptions often made by ardent renewable energy advocates is the adoption of a “feed-in tariff” (FIT).

With a FIT, the government sets a price for electricity supplied by a qualifying renewable energy source, and the price is usually sufficiently high to produce a good return for the investor to install the renewable energy project. This, in turn, provides a substantial economic motivation for the growth of the renewable energy sector.

Supporters love the fact that a FIT policy provides a long-term, stable, predictable, and lucrative return on renewable energy investment. Naturally, this leads to booming markets for renewable energy where FITs are in place.

FITs are in wide use in many parts of the world – mainly in Europe, but increasingly in Canada as well. Correspondingly, these markets are experiencing exploding growth for renewables.

However, to date, traction has been slow to come for FITs in the U.S. because the policy mechanism is innately at odds with the prevailing philosophy of the American economy: to let market forces sort things out.

In the U.S., the renewable portfolio standard (RPS) has been the preferred policy mechanism to promote the penetration of renewable energy (along with the predictable potpourri of incentives and subsidies buried in the piles of the tax codes). In an RPS, the government sets a target for a quantity of renewables to be adopted by a certain date – and then lets market forces dictate what mix of renewables will supply the requirement, as well as the price implications of that mix.

By contrast, a FIT explicitly puts the government in the position of price-setter, and picks technological winners by placing prices as a function of the renewable energy technology in question.

If the price of the FIT is set too high, unquestionably this pushes renewable energy adoption, but tramples competitive forces in doing so: bad (meaning, to me, highly-uneconomic) projects get done, and/or companies or investors make outrageous profits. On the other hand, if the price of the FIT is set too low, then the policy won’t have any impact at all: no incremental investment in the desired renewables will occur.

In other words, the government has to be able to set the price at exactly the right level to induce a lot of investment – but no higher so as to provide a free wealth grab, and no lower so as to discourage the market from happening at all. No government is that smart to be able to perfectly set the price of a FIT. So, in practice, FIT prices are very high – and the renewable energy interests profit immensely from it.

Although FIT policy has historically gone nowhere in the U.S., that may be changing, as FITs are starting to get more serious consideration. In early 2008, the California Public Utilities Commission adopted the first FIT in the U.S., to promote up to a maximum of 480 megawatts installed. Earlier this year, the city of Gainesville, Florida enacted a feed-in tariff for its municipal utility. Even in Michigan, not considered one of the leading states in pro-renewables policies, the Public Service Commission is considering a pilot feed-in tariff.

I am not sold on the FIT mechanism as good policy, because it is so heavy-handed and arbitrary. However, as the rest of the world adopts FIT policies, they extend their leadership over the U.S. – and the leadership is not just in market size, but also in technological advancement. If the U.S. doesn’t maintain technological leadership, then we’ve lost arguably our best asset. If a FIT policy is necessary to be leaders in renewable energy, then maybe it’s a necessary evil.

It wouldn’t be the first time I’d have had to swallow hard in lukewarmly supporting a policy that otherwise I find fundamentally challenging.

Some have argued that the aggregate economic subsidy associated with a national FIT policy is outweighed by the faster reduction in costs associated with renewable energy advancement promoted by the FIT, plus the avoided expenditures on fossil fuels displaced by the increased renewable energy production caused by the FIT. It’s an interesting argument, but counter-intuitive to me, and I’d like to see some quantitative support for this line of reasoning.

Richard T. Stuebi is the Fellow for Energy and Environmental Advancement at The Cleveland Foundation, and is also the Founder and President of NextWave Energy, Inc. Later in 2009, he will also become Managing Director of Early Stage Partners.

3 replies
  1. Anonymous
    Anonymous says:

    One of the biggest downfalls of American society is the lack of flexibility and the innate tendency to go 'full out' on something instead of 'throttling' the response.Whether it's the vision to understand that a FIT can be used to jump-start an industry which will then lead to the introduction of market forces to let the strong survive….or thinking that American Idol is the greatest thing ever!Even the author of this entry recognizes the benefits of a FIT in stimulating technological advances and effectively giving renewable energy a foothold in a society already accepting coal based energy full bore. But then he has to 'swallow hard' to accept it.Don't worry…we won't judge you if you admit that it will help. You won't be any less of a person by saying that a FIT will help to start and will lead to better adaptation than just relying on market forces….this isn't a competition for our affection.But that's the funny thing…the adaptation of renewable energy requires the energy industry (and american society) to learn to be flexible. Installation of smart-grids which can handle multi-node energy production (instead of single, 'normal' sources of energy production) is a good example of this flexibility. And unfortunately, because this inflexibility doesn't inherently exist in American culture, it will make it that much more difficult to adapt any type of renewable energy platform/plan.All the while all these other 'wrong' (?!) countries enacting a FIT program are progressing to a world with less dependence on coal based energy production.

  2. Rob Lewis
    Rob Lewis says:

    As explained in great detail here: http://www.dailykos.com/storyonly/2009/5/2/112652… tariffs are needed to prevent a situation in which, for example, wind power drives the cost of power so low that wind farms lose money. Sounds counter-intuitive, but the article shows how it can happen. Well worth reading–a really enlightening introduction to the economics of wind (written by a banker who finances wind projects).

Leave a Reply

Want to join the discussion?
Feel free to contribute!