Key Tool in EU Clean Energy Boom Will Only Work in U.S. in Local Contexts

Both Germany and Spain are global leaders in clean energy development, thanks to a financing mechanism called feed-in tariffs, applied at the national level.

Essentially the government guarantees solar and wind energy developers a premium price for the energy they produce, so that they can compete with cheaper, dirtier sources of power. The extra cost of the clean power shows up on every citizen’s electric bill as a small increment. Everyone pays in common to support the transition to clean energy, a national priority enshrined in feed-in tariff law.

Thanks to feed-in tariffs, renewable energy use in Germany jumped at a blistering pace from 6.3 percent in 2000 to 16.1 in 2009. In Spain, renewable energy accounts for 12.5 percent of energy use. America lags far behind, with no jump start in sight.

Feed-in tariffs have only come to the US in isolated spots, and is working, but it is a mechanism that is not going to offer a national solution. It’s something that can only be implemented locally, and even then there are hurdles, as the case of California illustrates.

California has had a statewide feed-in tariff law in place for four years now, but the law may as well not have existed. It set rates so low (about 10 cents per kilowatt hour) that no utility in the state ever actually implemented a feed-in tariff program. It just didn’t pay.

Almost as soon as the original law passed, the California Solar Energy Industry Association (CalSEIA) began working on a new and improved version, to fix the pricing issue, and in 2009 a new feed-in tariff law passed —SB32. Still, that new law has yet to move the needle.

The reason? It now falls to the California Public Utilities Commission (CPUC) to actually implement it. Michael Peevey, President of the CPUC, wrote in a letter two weeks ago that implementation of the feed-in tariff is on his to-do list.

“Implementation” in this case essentially means setting the pricing for feed-in tariffs throughout the state. Per SB32, that price is calculated by adding what’s called the “market price reference” to the value of the renewable attributes of the energy. According to an economic analysis commissioned by CalSEIA, the price should fall in the range of 18 to 26 cents per kilowatt hour.

“You really need to understand local conditions for a feed-in tariff to work,” Sue Kateley, executive director of CalSEIA said. “Some of California’s public utilities are really tiny. And some have a ratepayer mix that’s largely low-income. People need to understand that there may not be a one-size-fits-all model for feed-in tariffs. We need to put them in place where they make sense and not try to make them fit where they don’t make sense.” 

Understanding local contexts is key to understanding why a national feed-in tariff is problematic in the United States. In addition to federal laws that make it next to impossible to institute a federal tariff such as those that Germany and Spain have been using to grow their solar industries for years, the abilities of American ratepayers to help shoulder the financial burden of renewable energy development varies drastically from region to region, as do the perceived benefits of renewable energy.

Los Angeles a Potential Model

The program currently being developed in Los Angeles illustrates the complexity of managing ratepayer increases. It also provides a model for the rest of the state and, eventually, the country. Long term programs are one key to success, according to J.R. DeShazo, a UCLA professor who works with the Los Angeles Business Council on feed-in tariffs. 

The Los Angeles Business Council is proposing a 600 megawatt program phased in over the next 10 years, parameters that DeShazo calculated as being cost-effective for all parties involved, while generating enough renewable energy to help meet the city’s goals. Although the program includes room for smaller residential installations, it’s focused on larger commercial or industrial rooftop installations, which DeShazo said would deliver the economies of scale needed to make the numbers pencil out.

After determining the physical capacity within the Los Angeles Department of Water and Power’s territory (5.5 GW), DeShazo and his team next looked at the economic capacity of the area. At 30 cents per kilowatt hour, slightly higher than what SEIA envisioned the tariffs being, the group found that commercial and industrial sectors alone could comfortably (and willingly) produce 1.6 gigawatts of energy.

Although time-consuming, those calculations were easy compared to calculating acceptable residential rate increases, according to DeShazo.

“Designing a program that was cost-effective for ratepayers was the greatest challenge we faced,” he said. “LA has a large lower-middle income and low-income population and the politics of changing rates are extremely complicated.”

The price they ended up with was an increase of 85 cents a month for residents and about $8 a month for businesses. According to DeShazo, communicating the story behind the rate increases will be crucial to getting public buy-in for feed-in tariffs.

“One of the challenges is that our elected officials have set [renewable energy] goals without communicating what it’s going to take to reach those goals,” he said. “And the utility has become the default mediator between those goals and the realistic cost of achieving them.

"Consumers need to understand that as utility energy needs increase, utilities need to get more power, and that’s going to cost something no matter the source. They can meet those additional needs through natural gas, but if they do it this way instead, they can also create local jobs and meet renewable energy requirements.”

Sacramento Program Oversubscribed within Hours

The case of Sacramento illustrates how much local context can affect the structure of a tariff program. When the city’s Municipal Utility District (SMUD) launched its feed-in tariff in January 2010 with a price of 16.5 to 18 cents per kilowatt hour its program was oversubscribed almost immediately. The utility announced its 100 MW program the morning of January 4th and it had applications for 119MW by that afternoon.

“These markets are very heterogeneous,” DeShazo said. “None of our financial models would have predicted that a return on investment as low as that would have been acceptable to firms, but it’s clearly palatable. We have to use two methods to develop these programs: first, looking at what worked in other programs, then looking at our models and coming up with the best option.”

In Gainseville, Fla., one of the first cities in the country to successfully implement a feed-in tariff program, the tariff was set at 32 cents after the Gainseville Regional Utilities determined that the 26 cents per kilowatt hour initially proposed would not be enough to incentivize participation in the program.

Feed-in Tariffs a Bridge to the Future

Despite all the effort required to establish state feed-in tariff programs, Kately said they are likely just a step on the path toward establishing financial mechanisms that incentivize renewable energy production.

“What we see is that feed-in tariffs will be a bridging policy and that longer term, net-metering with some sort of buy-back tariff that’s appropriately set is where we’ll be in next five to ten years,” Kately said.
“But we’re going to need feed-in tariffs in the meantime to get us there,” she added.

Critics of the currently proposed California feed-in tariff program have complained that it caps the program at 700MW and that it focuses solely on photovoltaics, but Kately said the idea is to get feed-in tariffs implemented now, then expand the program.

“The reason we did that is because there are a number of organizations that are uncomfortable with or downright opposed to a feed-in tariff,” she said. “By putting limits on it now, we figured we could get it going and if it works, which we think it will, we can expand it later.”

That sort of “small steps now, big steps later” logic is being applied to all sorts of climate legislation these days. In the case of feed-in tariffs, which still need to be proven successful in a US context, it might be a smart strategy.