Feed-in Tariffs
From the regulator’s perspective, merchant projects do not provide any price protection for consumers even though their cost base is fixed – renewables projects will make “super profits” during price spikes. But they appear to be “subsidy-free”.
And if they lead to PPA-backed structures, the benefits of the fixed price will go to the buyer – which these days is most likely to be one of the GAFAs (Google, Microsoft, Amazon). Thus relying on PPAs rather than CfDs is akin to indirectly giving subsidies to some of the richest corporates on earth…
Overall, we believe that this handful of relatively straightforward measures could materially enhance the transition towards a low-carbon Electricity System at low cost. The Energiewende gets a bad rap in the English-language press, even though it has helped create a competitive renewable energy industry from scratch – something the whole world benefits from, even though mostly German ratepayers pay for it. Our proposed reforms would help reduce that last item.
Offshore wind projects incur up to 90% of lifetime cost upfront and have very low operational costs. To finance the high upfront capital needs, projects typically take on long-term loans with heavy debt-service commitments. The economic viability of these projects hinges on stable, long-term revenues – but markets cannot deliver those, because of their volatile nature and limited hedging options.
Governments procure renewables through a variety of mechanisms. Contracts for difference (CfDs) have been used for more than 50% of the global offshore wind supply. The payments awarded through CfDs are sometimes labelled subsidies, suggesting that they support uneconomic activity. Here, we argue that the primary role of CfDs is rather risk management by creating a market for electricity supply at stable long-term prices. Similar to its use in other sectors of the economy, this contract type transforms a variable to a fixed price to reallocate volatility risks. Such long-term contracts are often necessary for renewables financing due to limited hedging options in existing markets.
To triple or more the annual levels of renewable energy deployment, all countries need to play a part. A mix of technologies will be required beyond solar, including both onshore and offshore wind, geothermal, wave and tidal power, as well as biogas, depending on the local context, and local resource availability. To absorb the growing volumes of low-cost renewables, the “electrification of everything” needs to broaden, and deepen, powering a growing share of heating and cooling demand (= ca. 50% of global energy demand) as well as a growing share of transportation-related energy demand (= ca. 30% of global energy demand).
Oscar Wilde famously wrote that people “know the price of everything and the value of nothing” suggesting there is a difference between the two concepts of price and value. In the power market, due to some of its structural features, it is even more confusing as you also need to deal with the cost of power, which may again be different.
The below, derived from an article I wrote almost 15 years ago, tries to make sense of the differences between the 3, and how these are ultimately decided by political choices.
Hungary could start accepting household applications to join the country’s feed-in tariff scheme again “as soon as this year,” Minister of Energy Affairs Csaba Lantos said in an interview published in the latest issue of weekly Mandiner.
After decades of ideological mismanagement of the blocs’ electricity market policy, change may be on the horizon. The EU’s policy has nearly obliterated the continent’s renewable energy industry, leading to the easily predictable–and predicted–dependence on Russian gas and oil. It took the invasion of Ukraine and skyrocketing energy prices for the EU to ask “how did we get it so wrong.”
A “subsidy” is a straightforward allocation of taxpayer money by a public authority to prop up the production of a good or service by the private sector, used to offset market failures and externalities for a greater good. A CfD, however, is a contract whereby one party (public or private) trades a volatile price for a good against a fixed price for the same good, and another party takes the symmetrical position. They are obviously different things.
