Why we need feed-in tariffs for renewable electricity

[martinsf]

Bearing in mind the debate here about feed-in tariffs, this is a theme
of the current BERR (Government ) Renewable energy strategy
consultation [closing date September 26th].

Read this paper from our local Institute Of Physics/
environmentalresearchweb by Professor Elliott of the Open University
about how the curreent system in the Uk does not work.

Talking Point
Sep 2, 2008

UK renewables – how not to do it
Quota-based systems are not as good as feed-in tariffs at promoting
renewable energy, and may even have provoked public opposition, says
David Elliott

The UK has probably the best overall renewable energy potential of any
country in the European Union (EU) – conservative estimates indicate
that up to 67% of the country's electricity supply could in theory be
renewable by 2050 (see table 1). And yet at present the nation trails
behind almost every other EU country in the renewables league tables
and in terms of targets for the future.


This is still the case even if we remove hydropower, which is the main
renewable source of electricity for some of the EU leaders (see table
2). When we look at total energy – electricity, fuel and heat – the
situation is even more dramatic. In 2005 only Malta and Luxembourg had
lower renewables contributions and the UK's still-to-be-confirmed 15%
target for 2020 is amongst the lowest of the EU targets (table 3).


Competitive pricing
So what might explain this poor showing? The UK has adopted a
competitive market approach to simulating the take-up of renewables.
This is based on a renewables obligation (RO) on energy suppliers.
Introduced in 2002, the obligation is expanded in stages to a target
or quota of 10% of the suppliers' electricity by 2010, 15% by 2015 and
up to 20% by 2020.

Within this framework, prices are determined by the competitive
market. Incentives are provided by the ability to trade in the
Renewable Obligation Certificates (ROCs) that are allocated for each
eligible megawatt hour (MWh) of renewable energy supplied.

The extra cost of meeting the RO is passed on to electricity
consumers. By 2006 this had amounted to around £500m. It is expected
to reach around £1bn by 2010, adding 5.7% to average consumers'
electricity bills above 1990 levels. The RO system was actually
devised so as to avoid adding too much to consumers' bills by the
inclusion of a "buy out" price, initially set at 3 p/kWh. This allows
supply companies to escape their RO by paying, in effect, a fine; the
revenue from the "fine" is distributed to companies who do comply. The
buy-out price also sets a ceiling for how much extra companies will
pay for renewable energy. If green energy costs more than 3 p/kWh than
the price of conventional energy, then it is cheaper to pay the buy-
out fine, or to buy in ROCs from companies who have an excess, thus
creating a market for ROCs.

Within this arrangement, it is up to each company to decide how to
meet the targets/quotas. Given the competitive market framework, they
have naturally chosen the cheapest options – initially sewage gas and
landfill gas, but increasingly wind power. Opportunities for
significant further expansion of the waste-biogas options are
relatively limited but, even so, wind projects are still in the
minority. For example, wind only supplied around 20% of the
electricity traded in the RO system by 2005, although this will change
when and if larger on-land and offshore projects come online.

Winds of change
The relatively slow progress of wind power and the other renewables in
the UK seems mainly to be the result of the highly competitive market
created by the RO arrangements. In particular, under the RO system
there is no certainty as to the future value of the ROCs, which makes
it hard to get investment capital at reasonable interest rates for new
projects. Those projects that have gone ahead have had to charge
higher prices to balance the uncertainty about future income. Given
that one of the ostensible aims of the RO was to ensure that capacity
was built with low prices, something has clearly gone amiss.

By comparison, Germany and many other EU countries have adopted a
direct subsidy, guaranteed price approach, which has proven to be far
more successful than the competitive price/quota system. For example,
by 2004 the UK had only managed to install about 600 MW of wind
generation capacity, while Germany had installed over 12,000 MW – more
than 20 times more. And this in a country with much lower average wind
speeds than the UK.

How was this done? Germany's system, initially called the "Renewable
Energy Feed-in Tariff" (REFIT), provided a guaranteed fixed price for
renewables. The supply companies have to buy in and pay fully for
every MWh of renewable energy offered. That created a secure
investment climate for expansion. As a result, not only has more
capacity been installed, but electricity prices have fallen below
those needed under the RO system.

For example, one comparison of EU wind projects showed that in 2003
the UK's RO was delivering electricity at 9.6 euro cents/kWh.
Meanwhile in Germany the REFIT scheme – or rather the revised version
adopted in the Energy Law of 2000 – was running at 6.6–8.8 euro cents/
kWh. The REFIT-type schemes in the Netherlands, France, Portugal,
Austria and Greece were also delivering at less than the RO. And the
figure for Spain, which is fast becoming a wind leader, was 6.4 euro
cents/kWh (Grotz and Fouquet 2005).

Despite REFIT involving many more wind projects, in areas with
generally much lower wind speeds than in the UK, the final extra cost
to consumers under the REFIT scheme has also not been excessive. For
example, the German Federal Environment Ministry has claimed that the
system only adds around 1.6 euros to the average consumer's monthly
electricity bill. Overall calculations show that the German system has
added around 3% to household electricity costs (Stern 2007).

What's more, in terms of overall project costs, the subsidy per kW of
installed capacity provided by Germany's REFIT may actually be around
30% lower than that delivered by the RO in the UK so far (Toke 2004).
Another study has suggested that this imbalance is likely to remain
the case over the medium term (Butler and Neuhoff 2004). The most
recent comparison, by UK consultants Ernst and Young, found that in
2005/6 the RO cost consumers 3.2 p/kWh, whereas in 2006 the German
Feed In Tariff only cost consumers 2.6 p/kWh (Ernst and Young 2008).

Promoting wind
The UK's poor performance has been compounded by planning disputes
over wind farms, some of which can be traced back to the competitive
market approach. Certainly there has been far less opposition to wind
in most of the rest of the EU. The competitive approach has meant that
companies have located projects in upland areas with high wind speeds,
where they will be more profitable but are often perceived as more
environmentally invasive. This is one reason for the local backlash
against wind projects, which has slowed deployment dramatically and
added to investment risk and cost (Elliott 2003).

Helping the backlash against wind is the fact that, under the RO, all
projects get one ROC/MWh regardless of their location. So wind farms
in good locations can get more subsidy than they need, soaking up
money that could have gone to other projects. Similarly, sewage gas
and landfill gas energy projects can also get more than they require.
UK energy regulator OFGEM has calculated the total excess payments
between 2002 and 2005 as £740m.

In contrast, the German feed-in tariff system avoids this problem as
prices are set at different levels for each type of technology and are
reduced in stages by a pre-set percentage "degression" formula. This
reflects the "learning curve" improvements expected as renewables
technology develops and the market expands. The UK government now
plans to introduce technology bands into the RO to try to reduce the
excess payment problem. But, although it has proposed reduced support
for sewage gas and landfall gas, on-land wind projects will still get
the same as before – 1 ROC per MWh.

Meanwhile, under the feed-in tariff, Germany has installed 22 GW of on-
land wind capacity to date. That compares in the UK to only about 2.2
GW of on-land wind, plus a mere 400 MW of offshore wind. These UK
offshore wind projects have had the benefit of direct state grant aid,
on top of the RO, in recognition of the fact that the RO did not
provide enough investment security.

The UK government nevertheless insists that the RO is the best way
ahead. To try to keep things moving, under the proposed new banding
arrangements future rounds of offshore wind development will get 1.5
ROCs/MWh. And the next set of promising technologies – wave and tidal
current projects – will get 2 ROCs/MWh. Whether this will be enough to
enable the UK to meet the 15% renewable energy by 2020 target is far
from clear.

What is clear is that the 18 EU countries that have adopted feed-in
tariffs have done much better than the UK. In 2005 France had a low
contribution from wind power. Since then it has adopted a feed-in
tariff and has now overtaken the UK for wind onshore electricity. The
same holds for other technologies. For example, Germany has installed
200 times more photovoltaic (PV) solar than the UK. There is talk of
considering a feed-in tariff in the UK just for micro-generation
projects such as PV solar, but the government remains adamant that the
RO will stay for bulk supply grid renewables. It's true that a change
over at this late stage would be disruptive, but surely that's not a
good enough reason to stay with an ineffective, inefficient and costly
approach?

Interestingly, with feed-in schemes proving so successful in the EU,
there is now pressure to adopt similar schemes in the US, at both
local and national level. California has already introduced one, so
has the province of Ontario in Canada, and there are proposals for
such a scheme in Australia. China has also seen pressure to adopt feed-
in tariffs as an alternative to the tendering process currently used
for most projects. It is argued that, if China is to reach its target
of getting 15% of its primary energy from renewables by 2020, then it
will have to adopt a feed-in tariff approach.

References
Butler, L and Neuhoff, K. 2004. Comparison of Feed in Tariff, Quota
and Auction Mechanisms to Support Wind Power Development. Cambridge
University, Department of Applied Economics.

Ernst and Young. 2008. Renewable Energy Country Attractiveness
Indices. Available online.

Elliott, D. 2003. Energy, Society and Environment. Routledge, London.

Grotz, C and Fouquet, D. 2005. Fixed prices work better. New Energy 2.
See also Grotz, C and Fouquet, D. 2005. Fixed Prices Work Better.
German Wind Energy Association. Available online.

Stern, N. 2007. The Economics of Climate Change. Review for HM
Treasury by Sir Nicholas Stern, Cambridge University Press.

Toke, D. 2004. Are green electricity certificates the way forward for
renewable energy? Paper to fourth International Conference on Business
and Sustainable Performance, Aalborg, Denmark.

About the author
David Elliott is professor of technology policy at the Open
University, UK. His main research interests relate to the development
of sustainable energy technologies, and in particular renewable energy-
based systems. He is co-director of the Energy and Environment
Research Unit and editor of the Renew newsletter. This talking point
is based in part on an article entitled "Choosing Technologies: is
wind really best?" published in the WREN annual report Renewable
Energy 2007–2008 (Sovereign Publishing Company, December 2007) and a
paper presented to the WREC X conference, Glasgow, July 2008.

[Rob]

I generally agree with the points raised but some important failings
of a German type feed in tariff system were missed which I will tackle
later

First I'd like to address the statement "The relatively slow progress

of wind power and the other renewables in
the UK seems mainly to be the result of the highly competitive market

created by the RO arrangements" Whilst this might be true of
renewables other than wind make no mistake wind capacity increase is
being held back primarily by the planning system NOT uncertainties
over the RO. Even the government has recognised this in proposed
changes to the planning laws regarding 'nationally important
infrastructure projects' And what is the problem with putting wind
developments in wind locations anyway! If wind is to make the sorts of
contributions the our energy needs everyone is talking about pretty
upland areas will have to get developed at some point.
Note Vestas' recent decision to close their factory in Campbeltown
siting 'lack of local demand for product' - number of planning
applications for wind farms rejected due to local opposition on the
Kintyre peninsular since the factory opened.....six !

I believe that the RO like many government policies is a good idea
poorly implemented. The problems correctly sited with the RO could for
the most part be solved with a commitment from government to the RO
that cannot be undone after the next election. This, like the poor
uptake of wind is a failing of our political system not the policy
instruments. Done right the RO should encourage best value
technologies. True the Germans have massive renewable uptake but they
have hurdreds of sub 20% CF turbines and PVs in places you would not
put them if you had the slightest concern for economic realities. I
have discussed some of the drawbacks of a German type system on
previous posts.

The problem as I see it is that is that many people hold the view that
the best way to reduce CO2 emissions is focus financial support on
those technologies that give the smallest 'bang for the buck' in the
believe that this will in time these will deliver substantial savings
(at some undefined point in the future) given the right 'pump prime'
or 'kick start' etc. Meanwhile across the OECD CO2 emissions continue
to rise.

We should be doing what works now first. If your house is on fire you
don't spend money on researching a new slightly more efficient hose
for delivery next week.

On 4 Sep, 10:50, martinsf <martin.fo...@environment-agency.gov.uk>
wrote:

[Ian, Y]

When looking at the level of feed-in-tariff (FIT) required to
stimulate the market for small scale renewables (not large scale
wind), it becomes clear that the higher the tariff required the less
efficient the technology. Whilst we clearly need to help stimulate
demand and capacity for renewables - there is a debate to be had about
the technologies that should qualify and the way the FIT should be
funded.

If the Government were to implement a FIT then it is likely it would
use energy bills to raise the funds rather than taxation. If the funds
for a feed-in-tariff were accrued from energy bills, the lowest income
consumers would benefit least as they are also the unlikely to
purchase the measures supported and may also pay a higher proportion
of their energy expenditure towards the policy. There are ways around
this of course, free renewables for the fuel poor through Warm Front
for example.

Let's say the Government uses taxation. PV would require 50 p/kWh+ to
make it anywhere near viable, compared to 7 to 8 p/kWh for small scale
wind to give a payback of 15 years (0% disount rate or interest rate)
@ 5 ms-1. I would argue that 50 p/kWh doesnt represent best use of tax
payers money.

The other option is a heat incentive (see UK Renewable Energy Strategy
consultation). A deemed FIT for heat (see Element Energy Microgen
report for BERR) may be far more cost effective than a tariff for
electricity. If the fuel poor were given free measures, this would
have an even larger benefit as heat represents the largest proportion
of their expenditure.

In terms of large-scale wind, planning is handled in a completely
different way in Germany. One of the biggest barriers to wind in this
country is planning, so its not necessarily fair to draw comparisons
between the UK and Germany.

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[Rob]

Just one more point a quick scan over some stats reveals that the
average capcity of German FIT supported wind turbines is 17% whereas
the 'flawed' UK RO based system delivers 25% opions aside its the
readings on the meters not the number of installations that count.

Taking the a broader view renewables ARE NOT a weapon in the fight
against fuel poverty. Even a coursory look at the root causes of fuel
poverty (poor energy eduction, private landlord shortsightness etc)
shows that eco bling really is not a cost or carbon efficient of
helping the fuel poor.

Robert

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[Ian, Y]

Clearly the first thing you need to do to a fuel poor household is
insulate it thorougly and provide some decent advice on energy
efficiency. The Gov's own fuel poverty programme doesnt fund solid
wall insulation, hard lines for the 50% of fuel poor households living
in hard to treat properties. That aside, for some fuel poor off gas
households - insulation isnt enough. In this case, tackling the heat
load and replacing oil or mains electricity with a more efficient or
sustainable fuel source makes total sense.

I think a family or single pensioner facing the heat or eat dilema
would jump at the chance of some 'eco bling'

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[martinsf]

While not entirely related to feed in tariffs the debate about fuel
poverty misses the point that social housing initiaitives (where some
fuel poor people live) have been among the most successful places for
microgeenration and small scale renewables. This is because they are
managed and equipment is installed after proper feasibility studies,
and then gets maintained with suitable management. Private hosuing has
little in place institutionally to achieve and maintain this. The
technologies used vary but Pv systems have been installed by many
social landlords under the PV Major Demonstration Programme and the
more recent Low Carbon Buildings Programme. This benefits tenants in
various ways, sometimes for communal power requirments they would
otherwise be charged for eg stairwells. Solar thermal systems have
also been installed in various estates under Clear Skies and LCBP and
again these systems are more likely to be carefully designed and
properly maintained to provide hot water and reduce bills in homes.

It's also in social housing that a lot of energy effficiency work is
of course underway due to Decent Homes Standards - though falling
short of what could be required (it's below modern building regulation
standards) it has meant basic upgrading of fabric. More of this is
essential of course as only energy efficiency provides permanent
solutions to fuel poverty, unlike cash giveaways (back to suppliers!)
or fuel price cuts through tax or tariff changes.

The group missing out in most of the above are of course private
tenants.

Bear in when thinking of retrofitting older homes that we are stuck
with older buildings for 99% of the stock. These are where so much
heat and power is needed. The most cost-effective solution to get the
carbon footprint of older, solid walled or otherwise constrained
buildings is to add some renewable heat or power.

Widespread adoption of effective microgeneration could take place
especially with group schemes managed locally for people. Given the
massive externalities of large scale renewables if all the real costs
and issues are factored in then localised renewables could be far more
beneficial and would not suffer grid losses for instance. They are far
closer to most installers and users so local economy and social
benefits wil be higher. This does not come into the carbon headline
cost but is part of whole of life cycle system costs and benefits.

[Rob]

Unfortunately my experience of working with renewables in social
housing over the last 10 years is very different to the one described
above. Keen to avoid a personal debate above over differing points of
view I will just relate my experiences.

The problems I have almost universally encountered fall into two
areas.

Firstly the vast majority of the installations are politically
motivated. This lead to a ‘never mind the output count the panels’
approach. Up until recently a £10k PV grant could be given to a
building without draught proofing. Beyond that I can think of
countless RE installations in social housing that save some the most
expensive CO2 on the planet!

Secondly issues around the causes of fuel poverty are very complex and
are simply not solved by fitting a wind turbine. Many of the tenants
in such schemes I’ve spoken to view the RE technology as a bit of joke
dumped on them by ‘eco do gooders’ with some actually resentful
“couldn’t the money have been spent on stopping kids burning out cars
in the park….” True there is some genuine gratitude but I refer to the
first point.

Private landlords now facing all the problems of a deflating property
market are believe me very uninterested in fabric improvements to help
reduce the energy bills of here today gone tomorrow tennants.

Finally as I’ve stated before while CHP and solar thermal do have mass
role out potential other micro (electric) generation is and is likely
to stay too expensive to be a serious carbon reduction technology.

Cost of externally cladding a solid wall semi £10-15k = 12,000 kWh pa
saved = 2.4 tonne CO2 (assuming 18,000 kWh consumption and gas CH)

£15,000 spent on PV’s = 4kWp system saving 3,200 kWh electricity = 1.6
tonne saving

Actually neither is terribly practical when compared to the myriad of
other measures that can be applied to older properties. A 10%
reduction to 9 houses is always cheaper than a 90% reduction to
one.

As for urban wind the monitoring I’ve seen has shown some very low
returns.

One other misconception about distributed micro generation G83
regulations aside is that they buy any grid independence. For PV’s not
if (as is likely) the power goes off at night and for sub-optimal wind
not if you want to watch TV and have the lights on.

Sorry to go a little off message but the future is about serious
lifestyle changes and a massive conservation effort. To which micro-
renewables can only play an important but ultimately periphery role.

Robert Borruso

[sleeg...@googlemail.com]

It is my (limited) understanding that the way in which the energy
market works in England is terrible in conducive to renewable
investment especially in wind due to the fact that you have to
forecast your output accurately 3-4 hours in advance of production. If
these quotas are not met strict financial penalties are often incurred
and power generated is unable to be sold for profit making rates or
worse lack of generation incurs fines. And so the intermittency that
is a part of wind generation is financially penalised by the system
making it hard to forecast profits and therefore discourages
investment.

Is this really the case? or have I misconstrued it.

sam

[Miguel Mendonca]

All,

You will find several (free) mines of information on feed-in tariffs at:


http://uk.groups.yahoo.com/group/feed_in_tariffs/

www.onlinepact.org

www.allianceforrenewableenergy.org

http://www.wind-works.org/articles/feed_laws.html

http://www.feed-in-cooperation.org/


Regards,

Miguel