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Model Advanced Renewable Tariff LegislationDesigning Model Legislation for a System of Feed-in TariffsSeptember 18, 2008 This page describes several key elements to be considered in designing a policy to promote the rapid development of renewable energy using a system of feed-in tariffs. This is a complex subject in a rapidly evolving field. Thus, this remains a work in progress. Periodic updates to this page will be made as needed. In addition to the discussion below, the World Future Council maintains an excellent site for the design of feed-in tariff legislation. The PACT or Policy Action on Climate Tookit site contains many of the same elements found below, but in an interactive format. However, this page contains some details not found on the PACT site as well as summaries culled from policies in many different countries. The source for the tables on this page can be found at Tables of Feed-In Tariffs Worldwide. Following the discussion of different design elements below, there are examples of legislation, draft legislation, and a sample of the output from the World Future Council's PACT interactive design guide.
The world's most successful policy mechanism for the rapid development of renewable energy is Advanced Renewable Tariffs. Germany and Spain have have used this policy to become the world leaders in the development of wind, solar, and biomass energy. Many other countries now use similar programs, including Portugal, France, Switzerland, and Greece to name a few. Advanced Renewable Tariffs employ a system of tariffs to pay renewable generators for every kilowatt-hour of electricity they feed in to the grid. Unlike earlier feed-in tariffs that paid one price for all technologies in all locations, these Renewable Energy Payments are differentiated by technology, project size, and several other factors. By the end of 2007, Germany was generating 14% of its electricity with renewable energy, nearly all of this from new renewables installed since 1991, and the majority installed in just the past decade. For its part, Spain generates more than 10% of its electricity from wind energy alone and as a result has joind Germany as a world leader in wind energy. In both cases, the rapid growth of renewable generation was directly due to a system of feed-in tariffs designed to make investments in renewable energy profitable. Importantly, Advanced Renewable Tariffs include all renewables. These policies are neither "solar" programs, nor "wind" programs, but programs for the development of renewable energy. Successful programs include specific tariffs for many different renewable energy technologies. The goals of any program to rapidly develop significant amounts of renewable energy should be to
Because renewable sources of generation are capital-intensive, they require long periods of time to return their investments and earn a profit. Consequently, the prerequisites for successful policies include:
Successful programs of Advanced Renewable Tariffs must
Design ElementsAll mechanisms for developing renewable generation of electricity must, at a minimum, include measures for:
These elements are the two essential parts of the development equation. One without the other will not lead to significant development. All successful policies include these two elements. In the United States, for example, PURPA (the Public Utility Regulatory Policies Act of 1978) provided access to the grid and specifically prohibited discrimination against "qualifying facilities". PURPA also provided a mechanism for determining the price (avoided cost) that would be paid for generation, but it famously did not specify a price. At the time, there were also lucrative tax subsidies available. Nonetheless, there was little development until a price was eventually determined. Independent power producers did not have sufficient countervailing power to negotiate successfully with the entrenched electric utilities that operated state-sanctioned monopoly franchises. It wasn't until California forced the state's investor-owned electric utilities in the early 1980s to offer standardized contracts, that development of wind energy and other renewable sources of energy began in earnest. And it wasn't until one contract, Standard Offer #4, provided specific prices (tariffs) for generation, that development boomed. Germany's groundbreaking Stromeinspeisungsgesetz (StrEG, 1991) is an example of a policy that provides both elements: access and price. Literally translated, the law on "feeding-in" electricity provides for both access and price. For this reason, the law and subsequent revisions are commonly referred to as feed-in laws. Unlike PURPA in the USA, Germany's StrEG specified how much the renewable generator would be paid--the feed-in tariff. Germany's more recent Erneuerbare Energien Gesetz (EEG, 2000 and 2004), for example, clearly provides for access in its preamble by stating that its purpose is not only to permit but also to encourage interconnection with the network. Germany's EEG is formally known as the "Act on granting priority to renewable energy sources" of electricity from qualifying generators. The EEG, or Renewable Energy Sources Act, as it is known in English, then goes on to specify--in great detail--the prices that will be paid for renewable sources of generation. Corollaries to the elements of access and a means of payment are that access must be non-discriminatory, with no need of lengthy and costly regulatory proceedings, and that payment must be sufficient to drive development. Revenues from tariffs, or from tariffs plus monetary support, must exceed the costs of generation by a sufficient margin for profitability, or else development will not proceed, or will proceed at a tepid, insignificant pace. The degree to which revenues exceed generation costs determines the rate of deployment, everything else being equal.
Most importantly, renewable tariffs must be sufficiently differentiated, in order to deliver renewable development with the technology desired in the location desired. In countries where Advanced Renewable Tariffs are successful (Germany and Spain), they are the principal, if not only, policy mechanism used to develop renewable energy. Some countries (France) use both renewable tariffs and Requests for Proposals (RFPs), side by side. However, in France the principal program for meeting French renewable targets is Advanced Renewable Tariffs and RFPs (Calls for Tenders) are only used for niche applications, for example France's first large offshore project. Feed-in tariffs pay for generation. They are not a form of net metering (the ability to run your kilowatt-hour meter backwards). As such, systems of feed-in tariffs universally require a dedicated or separate kilowatt-hour meter. This meter measures the amount of electricity that is fed into the grid. For example, consumers who install a wind or solar system with the intent of selling electricity to the grid under a system of Advanced Renewable Tariffs will have two meters on their home or business: one to measure the electricity they buy from the utility company, and a second meter for the electricity they sell to the grid.
This distinction between "net metering" and feed-in tariffs is important to keep in mind when designing a system of Advanced Renewable Tariffs. Some renewable energy advocates have proposed legislation that modifies net metering policies under the banner of "feed-in tariffs". These "faux" or false feed-in tariffs offer to pay only for "net" generation from a consumer after on-site consumption is met. This practice is troublesome for two reasons. First it confuses the public and policy makers. Second, it's deceitful because it misrepresents feed-in tariffs. True systems of feed-in tariffs do not require a "consumer" or existing utility customer to make them work. Systems of Advanced Renewable Tariffs are policies for increasing the amount of renewable "generation" and are not a form of energy conservation. Because they "pay for generation", feed-in tariffs can apply to greenfield projects, and projects that are owned by groups of investors not affiliated with a consumer or utility customer. Payment (Tariff) Differentiation One of the key features found in all Advanced Renewable Tariff programs is tariff differentiation by technology, project size, application, and resource intensity. The programs in Germany, France, and Spain differentiate price by technology and within each technology, tariffs vary by project size, application, location, or resource intensity. For example, solar photovoltaics (PV) integrated into a building receives one tariff, panels installed on the roof receive another tariff, and those installed on the ground might receive a third tariff. Tariff Differentiation by Application Tariffs are thus used not only to reflect the costs of generation but also to fulfill other societal objectives. For example, German tariffs are higher for solar panels on the roofs than for those on the ground, to encourage people to put the panels on the roofs of their homes, barns, and factories rather than taking up valuable land in the densely populated country. German solar PV tariffs are an example of tariffs differentiated by application.
 Tariff Differentiation by Size Likewise, tariffs often vary by project size to reflect expected economies of scale. In France, biogas generation receives a declining tariff as project size increases above 150 kW. Biogas tariffs in Germany similarly decline with increasing project size.
Tariff Differentiation by Location Tariffs for wind energy in Germany and France, for example, also vary whether the wind turbines are installed on land or offshore. Likewise, French tariffs for all technologies differ according to whether the project is located in continental France (Metropole), on Corsica, or in its former colonies (DOM-TOM). Greece similarly differentiates its tariffs according to whether the project is located on the mainland or on the Greek islands.
Tariff Differentiation by Resource Intensity In the case of wind energy, tariffs vary by resource intensity or location in Germany, France, and now Switzerland. The tariffs vary by the productivity of the wind turbine. This is a surrogate for wind resource intensity (power density). The objective is twofold: to lessen development pressure on the windiest sites by enabling development in other, less windy sites; and to provide siting flexibility. Programs in both France and Germany have been successful in spreading or distributing development across the landscape in each country. While development still favors the windiest regions, development is not solely concentrated in the windiest regions. Nearly 60% of German wind development is now in the interior of the country and has moved away from the coastline, as a result of the German policy. Germany and France each use a different mechanism for determining site productivity. However, both use a trial period after which the productivity and the subsequent tariff are determined. Until mid 2006, both countries used a five-year test period. (France recently extended its trial period from five to ten years.) During this period, all wind turbines are paid the same tariff. After five years, the average productivity is calculated and this value determines the tariff that will be paid during the years remaining under the contract. Thus, the maximum tariff is fixed to provide a targeted profitability at the targeted sites, but the final tariff paid for more productive sites declines on a sliding scale as a function of productivity.
Because this concept has yet to be used in an anglophone country, there is no consensus on what to call this feature in English. The Ontario Sustainable Energy Association has previously used the term "tiered" tariffs, though "differentiated tariffs" may be more descriptive. Differentiated tariffs for wind energy are essential for distributing wind development across the landscape. Differentiated tariffs
Tariffs differentiated by site productivity can be a powerful tool to encourage wind development where it is wanted or needed most. For example, if generation is needed near the load centers of large urban areas, but the winds are lower than elsewhere, differentiated tariffs make development possible. With low productivity, a higher tariff is necessary to develop a profitable project than at windier sites which may be a long way from the load. In Germany, France, and Spain, tariffs are determined by an estimate of the cost of generation and an allowance for a reasonable profit. Tariffs are ultimately determined by a political process. In Germany, the government hires consultants to conduct cost studies. The studies are then presented to stakeholder groups. Ultimately, parliament (the Bundestag) makes a determination and the tariffs are written into revisions of the Renewable Energy Sources Act (EEG). In France, ADEME, the French agency for energy management, proposes revisions to the tariffs, as do stakeholders. The elected government seeks guidance from the Regie, the equivalent of national regulatory commission, then makes its determination. This is an oversimplification as the give-and-take of the politcal-regulatory process can take months. In Spain, the process is similar, though the government reserves the right to act if it believes there is an overriding public need. Following revisions to the tariffs in 2007 with increased tariffs for solar PV, there was a rush for contracts. The government feared that consumers would overpay for solar PV and in 2008 reopened discussion of the solar PV tariffs. This action, while within the purview of any government, has thrown the market into disarray. It should be noted, though, that the possible revisions to the tariffs in Spain, a country with 40 million inhabitants, publicly vetted are signficantly higher than anywhere in North America and that the revised solar PV cap would exceed any cumulative installation in North America today. Few appreciate the powerful influence inflation has on eroding the profitability of investments in long-lived, capital-intensive technologies such as renewable generation. If productivity is determined by the resource, and all other factors remain the same, then profitability is determined by the tariff and the inflation adjustment. To improve profitability, the price can be increased, or the inflation adjustment can be increased, or some combination of the two can be used. In no case can the tariff be lowered and the inflation index lowered at the same time without hurting profitability. To maintain profitability when the tariff is lowered, the inflation index must be increased to compensate. Programs in Germany and Spain represent two extremes in how they respond to inflation. Germany's EEG does not account for inflation. For wind and solar PV there is an annual degression in the tariff for new projects. In Spain, until recently, tariffs increased annually 100% with the inflation in electricity prices under the fixed-tariff option. This feature was built into the program because Spanish renewable tariffs were calculated as a fixed percentage of the "Average Electricity Tariff" determined annually. (This system has since been changed.) France includes both an adjustment in the base tariff for inflation, and, within a contract, an adjustment of the contracted tariff. Most significantly, tariffs for each technology posted in 2006 increase with inflation. Thus, the biogas tariff of Euro 0.09/kWh in 2006 increases to Euro 0.0927/kWh in 2007 if inflation is 3%. That is, a biogas project built in 2007 will sell electricity for Euro 0.0927/kWh in year one of the contract. Once the contract has begun, the tariff paid increases with 70% of inflation. After 2008, there is a degression in the French wind tariff of 2% annually, but this is on the inflated base tariff. Within a contract for wind energy or solar PV, the French tariff is adjusted annually to 60% of inflation. For biogas, the adjustment within a contract is 70% of inflation.
The term of contracts for renewable tariffs vary from country to country. They can range from as little as seven years in Turkey to 25 plus years in Spain. Shorter contracts require higher tariffs to deliver a sufficient stream of revenues to make projects profitable, causing more resistance to the program's cost. Shorter contracts also negate much of the hedging benefits that fixed-price contracts offer consumers relative to volatile fossil fuel prices. Most programs offer contacts 15-20 years in length. Spain is unique in offering contracts with two periods. The first period is 25 years. The second period provides lower tariffs, but the tariffs are valid for the life of the project.
For technologies with rapidly falling costs, such as solar PV, tariff degression offers authorities a means for stimulating development while warding against potentially overpaying for the technology. Though not a universal provision of all programs using renewable tariffs, the French and German programs incorporate tariffs with price degression in each succeeding year of the program. That is, each project receives the same price from one year to the next after the project is connected, but each succeeding year new projects receive a lower price. For example, solar tariffs in the German program start with the highest price and degress or decrease the most rapidly. Tariffs for solar PV decrease 5% per year in the German program. In 2004 Germany paid Euro 0.574/kWh for solar PV; in 2005 it paid Euro 0.545/kWh; and by 2007 it was paying only Euro 0.492/kWh. Similarly, German wind energy tariffs decrease 2% annually as does those in France. The revised French tariffs have eliminated the degression for technologies other than wind energy.
There is no need for a degression if the program review is short enough. For programs in North America where the proposed review period is two years or less, prices for new contacts can be adjusted quickly enough to avoid significant overpayments without resorting to an artificial degression rate. Degression has also proved problematic where costs have increased rather than decreased as expected. Consequently, degression is not advised for initial programs in North America. Successful programs have either no cap on the program size (Germany), or such a high cap (France and Spain) that there is little fear of reaching the cap in the early years of the program. This discourages gaming and hoarding of contracts.
 Another distinguishing element of successful programs is a method of paying for the tariffs that does not rely upon either taxpayers or a limited pool of funds from ratepayers. In principle, consumers of electricity should pay for renewable tariffs. Consumers who use more electricity should pay more for developing renewable energy. This is more equitable than having taxpayers bear the program's financial burden. Further, programs reliant on tax revenues are dependent upon periodic budgetary review, and other exigencies may take precedence over paying for renewable energy out of the jurisidiction's general fund. Programs reliant on Systems Benefits Charges or Public Goods Charges are often effectively capped by a limited pool of funds. The successful programs in Germany, Spain, and France, on the other hand, simply pass the cost of Renewable Energy Payments directly on to ratepayers. Rather than limiting the programs by limiting the pool of funds available, these countries place limits--where limits exist--on the amount of capacity that can be installed. In jurisdictions with a diverse electricity market, such as Germany, there is also a need for a "balancing account" to spread program costs across all utilities. These balancing accounts are the mechanism for ensuring that all ratepayers share equally in the cost of the program and that no region is unfairly burdened for a program that benefits everyone equally. Successful programs of Advanced Renewable Tariffs are reviewed on a regular cycle. This can be as short as two years (Ontario, Canada) or as long as five years (Germany). Periodic, scheduled reviews assure investors in new projects and manufacturers that there will be no abrupt changes in the program in response to changing political winds. Shorter review periods early in a program's launch allow all parties to become familiar with the process, comfortable with the pace of development, and aware of the remaining barriers. Reviews after a few years of operation also allow all participants to more accurately estimate the costs of the program to ratepayers. As programs evolve, review periods can be extended. Germany is now on a five-year cycle. New tariffs in Germany go into effect in 2009 and include higher payments for wind energy (both on land and offshore), biomass, and geothermal, and lower payments for solar PV. Spain's last changes went into effect in 2007, and France's in 2006. All programs should be monitored to determine if the growth in renewable generation is sufficiently robust to meet the government's targets. Further, the review should determine if development is being overly concentrated in certain areas to the exclusion of others, and if opportunity of ownership is equitably available to all citizens. To gauge the success of any program of Advanced Renewable Tariffs, a number of factors should be monitored.
To monitor a program's strides toward public policy objectives, there should be some mechanism for data reporting, collection, and analysis. At a minimum, all participants in a system of Advanced Renewable Tariffs should be required to report data on the size of the installation in units appropriate for the technology (that is, rotor swept area for wind turbines), annual generation, and the total cost of the installation. This information is important in determining future tariffs as well as in gauging success of the program. During the early 1980s California's state legislature required all wind projects installed in the state to participate in the Wind Project Performance Reporting System. All operators had to report quarterly on the number of existing and new installations, the capacity installed, the model, size, and swept area of the turbines used, and the actual generation in kilowatt-hours for each project. This information was compiled by the California Energy Commission, which then published a report not only on state and regional aggregations of turbines but also on project by project performance. California's WPPRS was not only instrumental in proving that modern wind energy could deliver significant amounts of renewable electricity, but also proved invaluable in tracking the technology's progress. Since then, most countries using systems of Advanced Renewable Tariffs have implemented some form of data collection and analysis. MichiganRepresentative Kathleen Law introduced HB 5218 (2007), the Michigan Renewable Energy Sources Act, on September 17, 2007 in Michigan's House of Representatives. The draft bill, as noted on the first page, was taken directly from Germany's Renewable Energy Sources Act. The tariffs included in the bill are the German tariffs for 2007 at the exchange rate in effect in late spring 2007. The German text was substantially edited to reflect the situation in the United States and experience with a related program in nearby Ontario, Canada. The bill as introduced differs slightly from the version here. The introduced bill was to include a specific tariff for small wind turbines of $0.25/kWh that was not in the original draft. The small wind tariff in HB 5218, as introduced, of $0.025/kWh is an editing error. There is no small wind tariff in Germany, though there is now a small tariff in Switzerland of $0.20/kWh. Small wind turbines were defined as those that swept less than 2,000 square feet. The draft of HB 5218 stipulates that those who use the tariffs in the program forego any other federal or state subsidies. (The tariffs in the German system are designed to pay for development without additional subsidies.) The draft proposes that the state's Public Service Commission derive a parallel set of lower tariffs to use alongside federal subsidies, such as the Production Tax Credit and the Solar Investment Tax Credit. The Michigan bill stipulates that parallel tariffs and all future tariffs be determined by the cost of generation plus a fair profit. The bill describes how to calculate a fair profit by the use of the Profitability Index Method. While well known among economists, this method is not widely known in business, industry, and government administration in North America. Following the introduction of HB 5218, the "Michigan model" was used as the starting point for similar bills in other Midwestern states, such as Illinois and Minnesota.
MinnesotaIn the spring of 2008, Representative David Bly introduced HF 3537, patterned after Michigan's HB 5218. Unlike other states considering feed-in tariffs, Minnesota's proposed law limits feed-in tariffs to "community-based" projects connected at distribution voltages. Nevertheless, the definition of what constitutes a community-based project is broad, and can include projects with outside ownership up to 49% of the equity. As in the Michigan bill, the HF 3537 includes a tariff for small wind turbines. However, small wind turbines are defined as those with a rotor swept area of less than 1,000 square feet. HF 3537 specifies that the provisions are intended to help the state meet its Renewable Portfolio Standard. Thus, the RPS becomes the cap on the program's maximum size. After grappling with how best to define a "fair and reasonable profit," Representative Bly chose a 10% rate of return. In the Minnesota bill, tariffs are reviewed every two years and there are specific provisions for transparency, reporting, and the issuance of regular progress reports.
CaliforniaAn important distinction between the proposed California Renewable Energy Sources Act (CalRESA) and the Michigan model is project size limits. CalRESA is written to reflect the recommendations of the California Energy Commission's 2007 IEPR. In this report, the CEC recommended that the state's Public Utility Commission implement feed-in tariffs for projects less than 20 MW. There are no project size limits in Germany and there are no project size limits in the Michigan bill and its descendants. The proposed California bill also limits the program's development to the targets in the state's RPS. Currently, the target is 20% by 2020 but Governor Schwarzenegger has proposed raising this to 33%. Importantly, CalRESA is intended to work alongside the California Solar Initiative (CSI) so that there is no hiatus between full implementation of CalRESA and the current CSI program.
MaineThe Maine Renewable Energy Sources Act is a stripped-down, clean version of the other bills. As such it is more straightforward and easy to understand. The bill, written by attorney Peter Drum, includes several unique provisions to encourage community- or muncipally-owned renewables. The bill can be downloaded directly as a MS World document that can be edited.
WFC's Feed-in Tariff Design GuideThe World Future Council's PACT pages begin with a good summary of the essential elements of a feed-in tariff policy: access, price (the tariffs), and what WFC calls supplementary objectives. "Access" includes connection to the grid, grid reinforcement, how the cost of interconnection is split between the utility and the developer, and transparency. "Price" includes the technologies governed, priority of purchase, how to determine the right price, and how to pay for it. The generic act that results from the PACT design site includes most elements of a modern system of Advanced Renewable Tariffs. There are several desirable elements in the design of the PACT draft document. First, it includes an appropriate preamble. Then, it describes the scope of the act. The tariffs are presented in the form of a table. This appears to be the easiest way to present this kind of information. The PACT site recommends using the "average cost of generation" for calculating specific tariffs, but a defect in the software doesn't allow this option to be selected. Again, the PACT site describes the French method for determining wind tariffs by location, but does not provide a means for selecting this provision. Surprisingly for an organization based in Hamburg, the PACT site does not describe the German system of determining wind tariffs by location.
This work was partially supported by the Jan & David Blittersdorf Foundation in cooperation with the Institute for Local Self Reliance, and the Sierra Club's Smart Energy Solutions Fund. The views expressed are those of Paul Gipe and are not necessarily those of the sponsors. -End- back to Archive of Articles |
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