Tiered Pricing of Renewable Tariffs for Wind Energy

By Paul Gipe


One of the continuing problems with wind energy has been the rush to windy sites. This was as true under the StrEG (stromeinspeisungsgesetz or German feed law) as it was under Britain’s NFFO or its current Renewable Obligation. This “wind rush” creates two enduring problems: it uses the best sites first, often with the least developed technology, and it creates wind ghettoes-large concentrations of turbines in windy areas. The latter often results in a backlash against wind energy of the type, “Why should we have all the turbines here?”


German Reference Yield Method

In Germany, sites for wind turbines along the North Sea coast were being quickly exhausted in the mid-1990s. Consequently, the Germans wanted to encourage development in the less windy interior away from the coast. To do so they needed a policy instrument that made it possible to earn a profit from the less windy sites in the interior, the binnenland. One fixed price like that under the old StrEG suitable for windy sites on the coast was insufficient to drive development at lower wind sites in the interior.

Their solution was as simple as it was innovative: a two-tiered tariff system that paid more for wind energy where it was less windy.

Tiered tariffs encourage the distribution of wind generation across a political jurisdiction. They do not prevent or prohibit development in the windiest locales. Instead, they encourage development in less windy areas. This has had a profound effect on wind development in Germany. More than half of all operating wind capacity and much of the new installations have been developed away from the coast.

The challenge for the Germans was how to determine the wind energy content of the site. They could have chosen to use wind speed measured by an anemometer. But anyone who has worked with wind resource assessment knows that this approach would be problematic. Again, the solution was elegant: actual wind generation from turbines on the site.

Thus, all wind turbines are paid the same tariff, T1, for the first five years of operation. After the first five years, a determination is made of the wind resource at the site by use of what the Germans call the Reference Yield Method (Referenzertrag). They average production over the five-year period and compare that of the same model of wind turbine with the projected generation at a hypothetical site with a wind speed of 5.5 m/s at a height of 30 meters. This comparison is then used to determine how many months beyond the initial five-year period a wind generator will be paid the premium or T1 tariff. For an operator at a windy site that produces 150% of the Reference Yield at the end of the five-year period, the tariff falls to the second tier or tariff T2 for the years 6-20. The lower tariff is then paid for generation from years 6 through 20. For those at less windy sites, the premium payment is extended a number of months as function of the site’s productivity.

In practice, the German system is less complicated than it sounds. However, the German system does require a sophisticated market where developers, consultants, and regulators thoroughly understand wind energy. Information on standard turbine models and their Reference Yields are posted on the web and openly accessible to everyone from meteorological consultants to farmers.

Though shown here in a table format, the number of months the premium price is extended is a continuum. The formula for determining how many months the premium price is extended is written into the Renewable Energy Sources Act, the EEG.


French Full-Load Hours System

France uses a similar approach but handles the problem differently. As in the German system, all wind turbines are paid the same T1 tariff for the first five years. At the end of five years, the highest and lowest production figures are discarded (to avoid gaming) and the remaining three years’ production figures are used to find the average productivity of the site. Productivity is determined by the number of full-load hours, continental Europe’s measure of capacity factor. Productivity is then used to determine the tariff on a sliding scale. Turbines at sites with any more productivity than the base wind site will see their T2 tariff reduced for years 6 through 15. Though shown here in a table format, tariffs in the second tier, T2, are on a continuum.

The French system uses full-load hours. Like capacity factor, full-load hours is subject to gaming and this is occurring in France.

To avoid gaming, ADEME’s Bernard Chabot proposed the use of annual specific yield, the wind industry’s metric for productivity, to the Irish government. (For an explanation of how capacity factor is misleading measure of productivity, see .) Annual specific yield only requires the swept area of the wind turbine and the turbines generation in kWh.


OSEA’s Proposed Annual Specific Yield System

The Ontario Sustainable Energy Association proposed to the Ontario Ministry of Energy that the Canadian province should also use annual specific yield to determine tariff T2 in its Standard Offer Contracts. (Ontario opted to offer a flat tariff instead of tiered tariffs.)

Here’s how the Ontario system would have worked. Three years of production/three years = average annual generation in kWh. Annual generation is then divided by the area (in square meters) swept by the wind turbine rotor.

Here’s an example of how the system would have worked.

One Vestas V80 (a 2 MW wind turbine) sweeps 5,000 square meters of the wind. The turbine has operated for five years at a windy site on the shore of Lake Huron. After discarding the high year and the low year, the turbine produced a total of 15 million kWh. For the remaining three years the turbine generated 5 million kWh per year. The rotor sweeps 5,000 square meters. Therefore the average annual yield over three years is 1,000 kWh/m2/yr (5,000,000 kWh/5,000 m2).

The yield of 1,000 kWh/m2 would then be used to determine tariff T2. OSEA’s calculated that the price necessary for tariff T2 to produce a profitability index from 0.35 to 0.45 for the assumed costs was $0.083 CAD/kWh. Tariff T2 would then be paid from year 6 through year 20. The average price during the 20-year contract period.

Below are some of the reasons OSEA chose tiered tariffs for its program.


  • Distributed Benefits only Accrue if There’s Distributed Generation
  • RFPs Deliver only Centralized Generation-Not Distributed Generation
  • Tiered Tariffs Distribute Wind Development Across Ontario
  • Reduce (but not eliminate) Pressure on Windiest Sites
  • Reduce (but not eliminate) NIMBYism by Spreading Development Among Many Sites
  • Increase Program Flexibility by Lessening Pressure to Get Prices Exactly Right the First Time
  • Reduce Development (Wind & Technology) Risk by Determining Final (T2) Price After 5 Years of Operation
  • Most Importantly-Spread Opportunity to All Not Just to Those Living Near the Lakes or in the Highlands
  • Fair Profits at Medium Wind Sites No “Excessive Profits” at High Wind Sites


Tiered Tariffs, Complexity, and Demands on Staff

Some critics have charged that determining wind tariffs after a five-year test period is too complex and too demanding of staff time and that a flat tariff is easier to implement than tiered tariffs.

Both Germany and France use a five-year test period to determine total payments for wind contracts. In Germany, the test period is used to determine the amount of time in months the initial price is continued until it drops to the lower tariff or T2. In France, the test period is used to determine the actual tariff, T2, paid during the second period, years 6-15. Neither country has encountered any difficulty in doing this or required the creation of any new bureaucracy.

According to Deutsche Windguard, a consulting company in Germany, the Local Distribution Company processes contracts and determines the payment stream. Windguard’s Gerhard Gerdes believes this is done automatically as part of the normal billing cycle and doesn’t expect much direct human intervention. The only data required are the actual production and the type of wind turbine. Simple look-up tables (a spreadsheet function) are then used to determine whether the payment is made under T1 or under T2.

In France, ADEME’s Bernard Chabot explains that EDF Distribution (the state utility’s local or regional distribution offices) processes contracts and payments. The only data required are average production and the wind turbine’s rotor diameter or more specifically its swept area. From this a linear interpretation is made to determine the price paid under tariff T2. This too can be automated.

In both cases the question of complexity and staff time required perplex both Gerdes and Chabot. In all the criticisms of either system this has never been an issue. In fact, one of the merits of the Advanced Renewable Tariff system is its simplicity and ease of administration. Using tiered tariffs for wind projects does not compromise this advantage.


Tiered Tariffs and Financing

Chabot argues in the accompanying paper that tiered tariffs provide greater certainty and greater risk reduction for the financial community than flat tariffs. By offering a higher tariff in the early years with the prospect for reducing the tariff in later years at sites where the additional revenues are not needed, equity and debt can more easily be raised than otherwise. Because a tiered tariff system is adaptable to the uncertainties in wind resource estimation, the financial community has a cushion to reduce the risk of overestimating the wind at a site. (It is common in new markets for inexperienced developers to overestimate the wind resource.)

As Chabot explains, if the wind resource and hence the productivity of the wind turbine is less than projected, the wind turbine receives a proportionally higher tariff in later years than otherwise. This provides the revenues needed for profitability that the financial community requires.

The fundamental principle of Chabot’s Profitability model, and that in the German system as well, is that projects receive the revenues they need for sufficient profitability to attract capital-and nothing more. Tiered tariffs are designed to attract capital, and reward it, but not to overpay for it. This is in the best interest of developers, the financial community, and ratepayers.