Why a Smart FIT is Not Very Smart Policy at All

By Paul Gipe

Parsing a Proposed Solution to a Hypothetical Problem with Feed-in Tariffs

An article that appeared in SolarToday, the house organ of the American Solar Energy Society (ASES), purports to show how to design a feed-in tariff policy that’s smarter than all others. By implication, other policies are not-so-smart or, shall we say, dumb. Nothing can be further from the truth.

While the title is a clever play on a policy favored by North American electric utilities, “smart” grids, the article’s premise remains fundamentally flawed–that a “value” driven rather than a “cost of generation” driven model will enable more solar development at the least cost to society and with the least political opposition.

I don’t comment on all the articles about renewable energy or feed-in tariffs that appear in the press or popular journals. Some I simply link to and leave it to informed readers to make their own judgments. Many I just ignore. Sometimes I resist pressure from my peers to comment on articles they think I should weigh in on. And sometimes, as in this case, I feel compelled to join the debate.

The article Why a Smart FIT is Smart Policy begins on page 18 of ASES January/February issue. It was written by a committee of solar industry veterans in New York state. Several of authors have made significant contributions to the solar industry in North America during the past decades. They were struggling with the fundamental dilemma that advocates across the continent face: how to move solar into the mainstream. However, their suggested route won’t take us there and in their proposal they lay bare some of the misconceptions and biases that dog the policy discussion in the US.

Solar Dominates ASES

But first, a little background. The American Solar Energy Society, as the name implies, is an institution that has struggled for decades about what to do with the “other” renewables. While many renewables advocates use the world “solar” to imply all renewables, the sad fact is that most in the “solar industry” in the US don’t. To them, and to the majority of ASES’ members, solar means just solar, and for most that really means solar photovoltaics (solar PV).

ASES, as an organization, has never been particularly fond of feed-in tariffs. In the mid-2000s several of ASES’ national conferences included forums on feed-in tariff policy organized by feed-in tariff (FIT) advocates themselves. Feed-in tariffs were never a part of the mainstream conference program. The forums were always an addendum. ASES itself never took a position in support of FITs and most FIT advocates folded up their tents and moved their advocacy to other venues long ago.

So it is to ASES and the authors’ credit that the topic of FITs rated a four-page spread in SolarToday. That’s no small accomplishment in the US where both the mainstream and industry media still think Germans have a Renewable Portfolio Standard (they don’t) and they subsidize renewables (they don’t).

Further, the authors correctly introduce FITs to SolarToday readers as the world’s most successful policy mechanism for deploying renewables at scale. For this, the authors and ASES deserve our applause.

FITs are Not “Incentives”

Nevertheless, the article gets off to a bad start by being misidentified under the category “incentivizing solar development”. Feed-in tariffs are not “incentives”. They are payment for generation. This was the cornerstone of regulatory policy in North America until deregulatory fever swept the country in the 1980s. One can fairly call tax credits, capital grants, buy downs, and other euphemisms for subsidies as “incentives, but not so feed-in tariffs.

Why do we want to “incentivize” solar? Isn’t what we really want to do is to be allowed to connect and to be paid a “fair price” for our generation? Is that such a difficult concept to grasp?

Do we want to go hat-in-hand to the US Congress—to this US Congress–and ask for “incentives”? No. We want the right to connect and the right to be paid a fair price for our electricity. It’s as simple as that. We don’t want “subsidies”, we don’t want “incentives”, we want paid!

And if solar is more expensive than wind, then it should be paid more than wind, or coal, or natural gas. That’s not such a radical idea. That’s exactly what we did in Canada and the US for decades. We paid owners of coal-fired power plants one price, and owners of nuclear plants another. We may have grumbled over the price that each received but there was a consensus that this made sense and that as long as a competent regulator insured there was no gouging we felt it was a fair transaction.

Revenue Not Guaranteed

Unfortunately, there are other errors in the body of the article itself. The authors incorrectly explain that one of the key elements of a FIT is a “contracted long-term revenue guarantee.” This statement is wrong and perpetuates one of the many myths about FITs in North America.

FITs don’t guarantee revenue, profits, or profitability. FITs only guarantee payment for a kilowatt-hour of generation over a fixed period of time. From this revenues are “predictable” but never guaranteed. If you put your windmill in a cave, or your solar panel in the shade, you are going to lose your shirt, pure and simple.

In this regard, FITs differ from past regulatory practice in North America. In most cases in the past, if a utility had cost overruns or encountered “unexpected” costs in operating a plant, notably volatile fossil fuel costs in the 1980s, regulators raised their compensation. In many states, regulators approved fossil-fuel adjustment clauses that automatically raised rates as the cost of fossil fuels climbed. Regulators in some states, such as recently in Florida, awarded rates based on construction work in progress for plants that were not even built. There were some notable exceptions to this policy and a few—but only a few—utilities went bankrupt after huge cost overruns for failed nuclear projects.

Owners of FIT contracts don’t receive such largesse. Their payment is fixed, with the exception of modest increases in the tariff for inflation. The Germans don’t even do that. You get what’s posted and that’s it.

This raises the question that if the authors are unclear on what is a fundamental characteristic of a FIT, then they may not be able to determine what is a smart FIT or a dumb FIT.

Solar PV Only

Nevertheless, the most serious charge against the article is that it only focuses on solar, and solar PV at that. One of the great weaknesses of American renewable energy policy is that it is a hodgepodge of piecemeal programs. Tax subsidies here, net-metering there, with capital grants and federally-insured loans thrown in for good measure.

For any country, region, or continent to make the transition from fossil and nuclear fuels to renewables, it is necessary to develop all renewables, not just a technology favored by one industry.

We can’t move to 100% renewables with solar PV alone. We need a mix of renewables. And a mix means some solar PV, some wind, some hydro, some biogas and biomass, and some geothermal. We need them all for the system to work well and at least cost to society.

Studies by my French colleague Bernard Chabot has shown that for winter peaking systems, the optimum is about two-thirds of generation from wind with a third of generation from solar of various sorts, and topped off with biogas, biomass, hydro and geothermal. Others have since confirmed Chabot’s general observation. The mix will be slightly different for summer peaking systems, but the optimum will still be a mix, not 100% solar PV.

For some reason, solar PV proponents in the US can’t see this.

German feed-in tariff policy is not a solar policy–or a wind policy. The law that has made Germany the world leader in wind, solar, and biogas is called simply The Renewable Energy Sources Act in English.

So if the authors have a policy prescription for solar PV they believe works better than FITs elsewhere, they should also test it against existing FITs for wind, biogas, and geothermal. They didn’t.

Perpetuating Myths about Spain

The authors set up a straw man argument with Spain that allows them to propose their solution to the Spanish “problem”. In so doing they perpetuate some myths about the development of solar PV in Spain that has been fostered by anti-renewables think tanks, some of which have been funded by American conservatives.

The author’s argue, for example, that Spain had a “one-size fits all/no limit system”. It is true that Spain had limited differentiation among the solar PV tariffs but they never had “one-size”. There were always two tranches and later in the program there were three tranches for solar PV.

It is also true there were no limits on deployment. This was a laudatory feature of the Spanish policy and should be included in all programs, not suggested as a reason for alarm.

What the authors get right is that the Spanish program was “inflexible” and couldn’t respond to very clear signals from the marketplace that Spain was overpaying for solar PV. Interestingly, the authors, all proponents of solar PV, never come right out and say that Spain was overpaying for PV.

The solution of course is to pay less. That’s not difficult to grasp. If an industry analyst setting in California can tell that Spain was overpaying for PV in comparison to cloudy Germany, Spanish technocrats sitting in Madrid could just as well.

Spain’s program was inflexible because of the Spanish political system and how utilities were regulated. Solar PV was just a part, and as it turns out a small part, of a much bigger problem in how Spain paid for electricity from all sources, not just solar PV, and not just renewables.

The most telling reason why trying to use Spain as a bad policy example is misdirected is Spain’s overall success with renewables.

If Spain’s program was so flawed, why has wind been so successful. Wind generated nearly 50 TWh of electricity in 2012—or almost one-fifth of consumption? And in contrast to solar PV, Spain was paying a price for wind that was competitive with that in Germany and neighboring France.

No, with the exception of overpaying for solar PV and not reacting quickly to the resulting boom, the Spanish renewable program has been a remarkable success.

New renewables in Spain provided one-quarter—26%–of electricity consumption. Throw in old hydro and Spain produced one-third of its electricity from renewables in 2012.

 Spanish Renewable Generation 2012

For comparison, total renewables contribution to US electricity consumption increased less than 1% in thirty years to 12% and only 4% for new renewables.

No, the problem in Spain was the lack of political will to correct the “problem,” as some saw it, and reacting in panic. The result was the opposite of the policy consistency we’ve seen in Germany. There’s no argument there.

As Americans we certainly know all about policy inconsistency. We’ve lived through such inconsistency in renewable energy policy for the past three decades: on and off, boom and bust. Witness our reliance on Congressional approval of tax credits. Sometimes we have them, sometimes we don’t. While the solar PV industry has been less frequently affected by this boom and bust reliance on federal tax subsidies, the wind industry has periodically been devastated.

And yet the authors take the Spanish to task while basing their calculations on how to pay for solar with “value-based” tariffs that rely on the continuation of Congressional subsidies for solar PV.

For a more thorough explanation of what happened in Spain see the following articles.

  • Spanish FIT Update: “Temporary” Halt to New Renewable Energy Projects by Toby Couture, March 2012

Market Throttles

The authors use the Spanish example to argue that their proposed “market-controls” will prevent such “overheating” of solar markets in the future.

By market throttles, the authors propose a solution to control the volume of solar PV installed and the price paid for its generation. This isn’t unique to their proposal.

Modern feed-in tariff policies for solar PV include various forms of degression of the tariff paid to control volume. There are many approaches to choose from. The British use one version, the Germans use another. Both work when there’s the political will to make them work. That’s the key to any policy as we Americans know.

Surprisingly, the authors cite two examples of overheating the market that have nothing to do with FITs: the collapse of solar markets in New Jersey and Pennsylvania. Both markets are based on set asides in Renewable Portfolio Standards for solar PV and the creation of a market for Solar Renewable Energy Certificates or SRECs.

And of course these two cases are the best two examples we have of why you shouldn’t use “value” to determine tariffs. As volume increases, the value of the SRECs decline, and dramatically so. Value is extremely sensitive to volume, too sensitive to build a policy around.

To their credit, the authors put their finger on a feature of good policy that both Spain and the US would be well to emulate: stability. The authors call for “very long-term market controls”. This is saying in effect, long-term policy stability. Clearly both Spain and the US need to make the rapid development of renewable energy a policy priority for the coming decades, not just modest annual increments barely keeping pace with growth in consumption.

Value of Solar PV

Unfortunately, in making the segue to their preferred approach they adopt the frame or viewpoint of those who oppose paying for any renewables when natural gas-fired generation is so cheap in the US. The authors say, for example, that some question “preferentially subsidizing the most expensive technologies”. This statement is revealing. It implies that FITs are “subsidies” and, thus, we must make our subsidies “smarter”.

As explained previously, FITs are not subsidies. They are payment for generation. If you have a mix of resources, whether renewables or fossil-fired, you pay a different price or “tariff” for the generation from each. Each resource has its own cost structure and, as a consequence, a different price must be paid to each for the owner to make a profit. For more on this question see Are feed-in tariffs just another subsidy?

In the dark days before the modern FIT era, when solar PV was only found in a few “demonstration” projects, advocates grasped at any straw they could find to justify solar PV’s high cost.

In the US at the time, Pacific Gas & Electric (PG&E) had a research program looking at how solar PV could be used. Dan Shugar, an ambitious PG&E engineer, developed a demonstration of solar PV at one of the utility’s distribution stations. He found that solar PV provided grid support benefits that could negate the need for new distribution system upgrades. This savings equated to real “value” that the solar PV provided the system that wasn’t captured in the “market price” as it was then being determined.

This distributed generation value could be coupled with other “attributes” of solar, such as its environmental benefits to justify paying a higher price for solar than the wholesale price or the “avoided cost” of conventional generation.

Shugar parleyed his research into a career in the US solar industry and ever since solar proponents have been shouting “value” as the answer to solar’s problems in the US. Proponents believe “value” will deliver a higher price than they would earn in the “market” rather than question the “market” itself.

The prevailing conception of the “market” for electricity in the US is a relatively recent construct. Unfortunately, most of those in the North American solar industry began their careers when the current conception of an electricity market was already in place. They have no historical perspective. The conventional wisdom is that electricity must be traded on a market, like avocados or carrots.

This wasn’t always the case and in North America is seldom the case even today. Much of the electricity we rely on is from heritage resources or bilateral contracts. Only a small portion of the electricity we use is traded on the “market”.

Solar’s proponents have always dreamed that if they could just get the value right they would be paid enough to make solar profitable. Thus, proponents go through elaborate contortions to find the value that will justify what they need to be paid to make solar work.

The authors fundamentally misinterpret FITs by referring to them as “incentives” for solar PV and lumping them in with other “incentives,” such as federal subsidies (the ITC), capital grants (so-called “buy downs”), and net-metering.

Through the authors’ proposal, the tariff will always be less than the “value” of solar PV  to the system and, by their definition, not a subsidy. The converse then, is that they believe conventional FITs are subsidies. As explained previously, this is a misinterpretation of how feed-in tariffs work.

Again, the SolarToday authors have made a contribution by exposing readers to the concept of feed-in tariffs even if they get some of the details incorrect.

Our disagreement may be as much to do with different world views as with technical issues. We may be very well talking past each other. One group accepts unquestioningly the dominant paradigm in which they find themselves. The other chooses to change the paradigm and questions the assumptions on which the conventional wisdom is based. Alas, we don’t even use the same language because the meaning of key words in the discussion have been debased and co-opted by the prevailing philosophy.

Yet feed-in tariff advocates in North America must fight on to recapture the language, the debate, and in the end the ideas themselves. The alternative is another three decades of lackluster renewables development in the US and not the revolutionary change in the supply, ownership, and sustainability of our electricity system that is needed.