Feed-In Tariffs Are Good for Expensive Renewables, But Are They Good for Consumers? Wind

Posted September 10, 2010 | folder icon Print this page

Solar technologies are expensive and require government assistance to turn them into lucrative enterprises, as Germany and Spain have found and as China is now learning.  Offshore wind technology is facing the same issue; for example, the wind farm off Cape Cod is costing about twice the average price of electricity in the United States. The assistance, often, is in the form of “feed-in tariffs,” which forces electric utilities to purchase electricity generated from wind or solar technologies at prices high enough to make them viable. Of course, these costs are passed onto consumers through increased electricity prices.

The United States ranks fourth in solar capacity, behind Germany, Spain, and Japan.[i] But even with such a high ranking, solar represented only 0.11 percent of all energy consumed in 2009,[ii] and only 0.02 percent of all electricity generated in the United States.[iii]

Generating Costs

According to the Energy information Administration (EIA), the annualized cost of solar photovoltaic technology is 39.61 cents per kilowatt hour (in 2008 dollars), and solar thermal is about 35 percent less: 25.66 cents per kilowatt hour.  Offshore wind is expected to cost less than the solar technologies, 19.11 cents per kilowatt hour. These costs are levelized costs, which is the present value of the total cost of building and operating a generating plant over its financial life, converted to equal annual payments and amortized over expected annual generation. The EIA estimates these costs for the year 2016, which is the first future year that generating technologies can be compared because of the different lead times for building the plants. Some plants, such as photovoltaic plants, require 1 or 2 years to build, while others (such as nuclear plants) require 6 or more years.[iv]

The costs for solar technologies are higher than the costs of competing technologies. For 2016, natural gas combined-cycle technologies have costs estimated at 7.93 to 8.31 cents per kilowatt hour, and pulverized coal and coal-fired integrated gasification combined-cycle technologies have costs of 10.04 and 11.05 cents per kilowatt hour, respectively. EIA includes a 3-percentage point increase in the cost of capital when evaluating investments in greenhouse gas intensive technologies to represent the difficulties in obtaining financing, which is equivalent to a $15 per ton carbon dioxide emission fee; EIA includes a 2 percentage point reduction in the cost of capital for eligible renewable technologies, because of the loan guarantee program of the Stimulus Act. [v]

If one considers just the capital cost of building these plants, without finance charges, the EIA estimates those at $6,171 per kilowatt (in 2008 dollars) for photovoltaic technology, $5,132 per kilowatt for solar thermal technology, and $3,937 for offshore wind.[vi] Of course, plant costs can vary depending on site locations, terrain, labor costs, and other factors. For a solar photovoltaic plant that came on line last October in southern Florida, Florida Power and Light spent $152 million building a 25-megawatt plant, which is equivalent to $6,080 per kilowatt.[vii]

If constructed, the Cape Wind project, off the coast of Cape Cod in Massachusetts, would be the first offshore wind farm in the United States. The 130-turbine wind farm is estimated to cost at least $2 billion and was approved this year by Interior Secretary Ken Salazar after more than eight years of federal review. The Massachusetts Department of Public Utilities will begin considering this month whether Cape Wind is a good deal for ratepayers. The utility company is to buy half of Cape Wind’s power, starting at 18.7 cents per kilowatt hour,[viii] slightly less than EIA’s estimate of 19.11 cents per kilowatt hour. But that’s still about twice what the utility pays for power from conventional sources, and almost twice the average U.S. cost of electricity—9.9 cents per kilowatt in 2009.[ix]

German and Spanish Experience

Both Germany and Spain have adopted the goal of achieving a certain percentage of renewables in their electric generation mix. To spur interest in solar technologies in particular, they instituted feed-in tariffs, whereby their electric utilities are obligated to purchase renewable electricity at a higher rate than retail, in order for the renewable technology to overcome price disadvantages with more competitive technologies.  This pricing policy is in addition to the costs of the European Trading Scheme, which taxes carbon dioxide emissions from fossil energy, reducing the cost differential between the two types of technologies.

In Germany, owners of solar panels receive as much as 43 euro cents (64 U.S. cents) per kilowatt hour of power they generate.[x] This feed-in tariff for solar photovoltaic power is more than eight times higher than the electricity price at the power exchange and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines. Even so, because the sun doesn’t always shine on solar plants, solar power has a low capacity factor and cannot compete with more mature generating technologies: solar generated only 0.6 percent of Germany’s electricity in 2008.[xi] In order to ease the cost of electricity to its citizens, the German government is scaling back its solar subsidies. Feed-in tariffs for roof top systems are expected to get a 16 percent cut; open-field projects a 15 percent cut, and solar installations on agricultural land a 100 percent cut. Nevertheless, German electricity consumers are projected to spend an estimated €100 billion on solar subsidies over the next 20 years. [xii]

Spain’s legislation required 20 percent of its electricity production to come from renewable energy by 2010. Spain’s National Energy Commission estimates that 2,945 megawatts of solar capacity were installed by year-end 2008, making Spain the second-largest country for installed solar capacity. Yet solar energy generated less than 1 percent of Spain’s total electricity production in 2008, and at a price per kilowatt hour that was over 7 times higher than the average price. To attract investors and make renewable energy profitable against other forms of energy, Spain found that renewable energy must be subsidized with feed-in tariffs and direct incentives to attract investment and so meet the country’s policy goals.[xiii] Last year, however, owing to a sluggish economy and a downgrading of its financial rating, the Spanish government decided to slash subsidies to solar power, subsidizing just 500 megawatts of solar projects over the next 4 years, down sharply from 2,400 megawatts in 2008.[xiv] In 2010, the Spanish government announced a 45 percent cut in their feed-in tariffs for ground-based solar PV panels, and reduced support for large roof-based systems by 25 percent and for small roof-based systems by 5 percent. Prior to this change, the country’s 52,000 PV installations could earn up to €440 per megawatt hour, nearly 10 times the value of 2011 power futures on the wholesale market. [xv]

Chinese Plans and Realities

First Solar, the world’s largest maker of thin-film solar power modules, announced last year that it would build a 2,000-megawatt photovoltaic plant in China, with completion scheduled for 2019. Construction on the first phase was to have begun on June 1, 2010, but the company is still negotiating terms of subsidization with China. In May, China delayed approving feed-in tariffs, which First Solar believes are essential for the viability of the project.  China has since moved past their original memorandum of understanding with First Solar and is seeking bids for the project. [xvi]

The First Solar plant is to be constructed in Ordos, a newly built city in Inner Mongolia, in northern China,[xvii] but the city (built by Chinese stimulus funds) has very few inhabitants: 17.8 people per square kilometer—about a  tenth of the population of New York City. Although China purports to have sold all of the city’s housing real estate, much of it is most likely to investors.  So, is China delaying subsidization because there are few inhabitants to pay the feed-in tariff rate or because of the other energy sources available to Ordos? The city has a high income rate per capita, second to that of Shanghai, but that is due to nearby coal mines and other rich resources, including electricity generation.[xviii]And China has few qualms about generating its electricity from coal—80 percent of its generation is coal-fired.[xix]

Conclusion

Countries in Europe have found it essential to provide subsidies and feed-in tariffs in order to promote and sustain renewable technologies, particularly solar photovoltaics, and to reach their legislated mandates and/or goals for renewable energy in their generation mix. However, their feed-in tariffs were much higher than their average price of generation, resulting in price increases their economies could ill afford, particularly at a time of global recession. As a result, they have scaled back or are scaling back their feed-in tariffs by 5 percent to 100 percent, depending on type and location. First Solar wants China to use a feed-in tariff for the solar plant the company is to construct in Ordos. So far, however, the Chinese have not implemented a feed-in tariff. Perhaps, they have learned from Europe’s experience—something that the United States needs to do.


[i] Solar Energy Industries Association, http://www.seia.org/cs/about_solar_energy/industry_data

[ii] Energy Information Administration (EIA), Monthly Energy Review (MER), Table 1.3, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec1_7.pdf

[iii] Energy Information Administration, Monthly Energy Review, Table 7.2a, http://www.eia.doe.gov/emeu/mer/pdf/pages/sec7_5.pdf

[iv] Energy Information Administration, 2016 Levelized Cost of New Generation Resources from the Annual Energy Outlook 2010,  http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html .

[v] Ibid.

[vi] Energy Information Administration, Assumptions to the Annual Energy Outlook 2010, Table 8.2, http://www.eia.doe.gov/oiaf/aeo/assumption/index.html

[vii] “Solar plant set to open, even as shadows loom”, Herald Tribune, Zac Anderson, Oct. 14, 2009, http://www.heraldtribune.com/article/20091014/ARTICLE/910141033/2055/NEWS?Title=Solar-plant-set-to-open-even-as-shadows-loom

[viii] The Associated Press, Mass. court rejects challenge to Cape Wind permit, August 31, 2010, http://www.google.com/hostednews/ap/article/ALeqM5gz8VVwo2TgZdHn9MmdvajJdSGq2QD9HUN0TO3

[ix] Energy Information Administration, Monthly Energy Review, Table 9.9, http://www.eia.gov/emeu/mer/pdf/pages/sec9_14.pdf

[x] Bloomberg, “Merkel’s Coalition to “Definitely” Cut German Solar subsidies”, Brian Parker and Nicholas Comfort, , October 12, 2009, http://www.bloomberg.com/apps/news?pid=206011

[xi] “Economic impacts from the promotion of renewable energies”, Rheinisch-Westfälisches Institut für Wirtschaft sforschung

[xii] Solar Power Market Update, August 13, 2010, http://www.ifandp.com/article/006338.html

[xiii] Study of the effects on employment of public aid to renewable energy sources, Universidad Rey Juan Carlos, March 2009, http://www.juandemariana.org/pdf/090327-employment-public-aid-renewable.pdf

[xiv] Wall Street Journal, “Darker Times for Solar-Power Industry”, May 11, 2009, http://online.wsj.com/article/SB124199500034504717.html .

[xv] The Guardian, Spain proposes deep cuts to solar PV support, August 3, 2010, http://www.guardian.co.uk/environment/2010/aug/03/spain-cuts-solar-pv, and Solar Power Market Update, August 13, 2010, http://www.ifandp.com/article/006338.html

[xvi] The Street.com, Will China Renege on First Solar Deal?  August 31, 2010

http://www.thestreet.com/story/10835523/1/will-china-renege-on-first-solar-deal.html

[xvii] Bloomberg, First Solar ‘Confident’ of Price Accord With China on Biggest Solar Plant, August 24, 2010, http://www.bloomberg.com/news/2010-08-24/first-solar-confident-of-price-accord-with-china-on-biggest-solar-plant.html

[xviii] Ordos: China’s Modern Ghost Town, April 15, 2010, http://www.weirdasianews.com/2010/04/15/ordos-chinas-modern-ghost-town/

[xix] Energy Information Administration, http://www.eia.doe.gov/emeu/cabs/China/Coal.html

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  • Tstacy

    I really appreciate the proactive timing of this post, as well as its defensible “reality check” approach. In the end, there are many ways to impart large inducements in subtle ways. Few of them are necessary when shown scientifically to be prudent. Not only is the electorate intent on regaining control of government, they are doing so with the recognition that with power comes the responsibility for rigorous reasoning and testing before spending.
    In this, my hopes for America are on the rise!

  • Tstacy

    I really appreciate the proactive timing of this post, as well as its defensible “reality check” approach. In the end, there are many ways to impart large inducements in subtle ways. Few of them are necessary when shown scientifically to be prudent. Not only is the electorate intent on regaining control of government, they are doing so with the recognition that with power comes the responsibility for rigorous reasoning and testing before spending.
    In this, my hopes for America are on the rise!

  • Tstacy

    I really appreciate the proactive timing of this post, as well as its defensible “reality check” approach. In the end, there are many ways to impart large inducements in subtle ways. Few of them are necessary when shown scientifically to be prudent. Not only is the electorate intent on regaining control of government, they are doing so with the recognition that with power comes the responsibility for rigorous reasoning and testing before spending.
    In this, my hopes for America are on the rise!

  • Tstacy

    I really appreciate the proactive timing of this post, as well as its defensible “reality check” approach. In the end, there are many ways to impart large inducements in subtle ways. Few of them are necessary when shown scientifically to be prudent. Not only is the electorate intent on regaining control of government, they are doing so with the recognition that with power comes the responsibility for rigorous reasoning and testing before spending.
    In this, my hopes for America are on the rise!