Why Feed-In Tariffs are Not FiT for Colorado

It seems that the renewable energy literature lately has been replete with calls for feed-in tariffs (FiT) to promote renewables, in general, and solar PV, in particular. It is as though because feed-in tariffs have been the incentive of choice to promote renewables in many European countries, we necessarily should adopt them here too. It is true that, if capacity expansion were the only figure of merit, FiTs would be the incentive of choice. But cost, and who pays, is an issue that advocates seem totally unconcerned with. And, serious students of renewable energy generation understand that FiTs have had a decidedly checkered history virtually everywhere they have been adopted. Spain nearly bankrupted its energy infrastructure with an overly generous and poorly conceived FiT and even Germany, often touted as a model of support for solar PV capacity incentives, recently recognized that it was overcompensating developers and quickly moved to reduce its feed-in tariff compensation.

In contrast, the renewable portfolio standard (RPS) approach adopted by many states in the US offers an alternative mechanism for supporting renewable energy capacity expansion that is better suited our regulatory structure. Through market-based REC prices, it also does a better job of recognizing the economic burden that high cost renewables place on ratepayers. An in depth comparison of the two incentive structures would take more space than we have available here, but suffice it to say that some of the important differences concern ratepayer impact, the difficulty of developing a tariff structure that incentivizes generation while not overcompensating developers, market responsiveness (or lack thereof), consideration of cost reductions due to technological advance, and legal restrictions.

In the summer and fall of 2009, the Colorado PUC conducted a comprehensive survey and analysis of existing and proposed feed-in tariffs around the world. Our conclusion was that FiTs were problematic due to the concerns expressed above. It also questioned whether a FiT would prove superior to the very successful renewable and solar programs that Colorado has implemented under its RPS. That study, entitled The Application of Feed-In Tariffs and Other Incentives to Promote Renewable Energy in Colorado can be downloaded from the PUC website. Our investigation into FITs continued this summer with our own internal analysis of the legality of statewide FiTs based on FERC preemption concerns and PURPA restrictions. That analysis concluded that there are very limited circumstances under which a statewide FiT may be implemented by a state regulatory body or legislature. And, some of those circumstances are even more problematic in Colorado due to the Colorado Taxpayer Bill of Rights commonly known as the TABOR amendment. I should point out that individual utilities as well as coops and muni utilities are free to implement a FiT as they desire. What is at issue here is whether or not a state body may order a FiT for any class of utilities. Our assessment of a state's limited authority to implement a FiT was, coincidentally, affirmed by a recent FERC decision pursuant to a California PUC case. A fact sheet describing the essential elements of that case is available here.

Perhaps more important than the legality of FiTs is whether or not they are the most effective and efficient way of fostering renewable energy generation. It is clear to me that they are not. Aside from the concerns with ratepayer impact and market responsiveness already discussed, markets in which they have been implemented have been subjected to boom and bust cycles (the highly touted Gainesville, FL program is a prime example). FiTs are simply not the way to develop a sustainable renewable industry. From a policy perspective, one must determine if the goal of an incentive program is to guarantee a rate of return to a generator (as with FiT programs) or to simply compensate renewable generators for their above market costs of doing the right thing. I would argue that the latter approach is more considerate of the additional costs being shouldered by ratepayers.

It is also clear that the guaranteed RoR provided by a FiT fails to motivate the technological advance needed to bring renewables to grid parity and economic sustainability. And I am not alone in this belief. Tech entrepreneur and Sun Microsystems cofounder Vinod Khosla writes:

"Every time there is a carve-out for some technology or deployment method, a market is being warped, and suddenly the chosen technology doesn’t need to compete and minimize cost in order to ‘win’ (case in point, solar feed-in tariffs in Europe, and more recently, Oregon). Consumers lose and excluded technology development slows down.” (Greentech Media, 16Jul2010)

Dr. Petri Konttinen also writes that FiTs are “successful in the short term but risk creating false and unsustainable markets vulnerable to speculators.” (07Jun2010)

The bottom line in this message should be that you cannot build a sustainable energy infrastructure on a foundation of unsustainable economics.

Unfortunately, proponents of FiTs seem totally unconcerned with any of the difficulties I've discussed. I was recently invited to participate in a panel discussion of feed-in tariffs to be held in Boulder, Colorado on July 22 organized by a California based advocacy group called the FIT Coalition. Though initially reluctant, I was convinced to participate by the panel moderator because he felt that I could bring some balance to the discussion, particularly with regard to the regulatory and legal considerations. It turns out that my initial reluctance was well founded as the workshop organizers ordered the moderator to "uninvite" me because they did not want an opposing viewpoint. The FiT intelligentsia, it seems, can be every bit as despotic as the antirenewable orthodoxy they condemn. Whether they simply fear alternative viewpoints or are defending a pecuniary interest, I'm not sure. Probably both. So, given that I won't have an opportunity to give the brief presentation I developed, I am posting the slide presentation here for you to view. Of course, you won't have the benefit of the comments that expand on the bullet points, but for the most part you can probably read between the lines.

Colorado's Tiered Electric Rates

Since the start of the summer when Xcel's new two-tiered rate scheme went into effect in Colorado, the PUC customer complaint line has been ringing off the hook. And, really, it's no wonder to anyone who has given this rate structure more than a modicum of thought. In the PUC propaganda promoting its decision approving the two-tiered rates, the PUC Chairman proclaimed that "For years, consumers have advocated 'the more you use, the more you pay' for electricity." Really? I wonder what consumers he's been talking to?

But, truthfully, this is a serious topic and those who complain about the tiered rate schedule are not all wrong, even though some may not artfully express their dissatisfaction. I agree with the sentiment that those who impose the greatest load during peak times should perhaps shoulder the greater incremental cost. But, if the average use is, as Xcel noted, 657 kWh per month, then the 500 kWh threshold at which the higher rate goes into effect seems exceedingly low. Does that imply that the average user is wasteful? What about the unfortunate person who is on an oxygen generator that by itself consumes over 300 kWh per month? Or the person who installed a ground source heat pump in the name of efficiency and is now being penalized because the electric pumps for those systems run much more often. And, those respondents who noted that Denver water users were so successful in heeding the Water Board's call for conservation that rates had to increase because revenues fell so drastically expressed a very valid concern. So much for the argument about efficiency saving consumers money. The same could easily happen here.

From a societal standpoint, I am not convinced that average rates (what we have traditionally had) are not in the best interests of the community as a whole. After all, we're not talking about a luxury here but a necessity. And, that is why the monopolist is regulated. If you want to place a luxury tax on the commodity, then increase the threshold for the more expensive tier to something that is truly reflective of luxury use rather than necessary use. Moreover, Xcel's two-tier rates for June-September don't seem particularly targeted at peak loads, just aggregate demand by individual users. If we want to fiddle with rates to promote energy conservation, then TOU rates would be better than a naive two-tier rate that does not provide adequate discrimination between uses. TOU rates would at least allow many of the consumers who have a valid use to shift it to lower cost times. We need a tool that can be applied with more precision than a sledge hammer.

Of course, TOU rates would require new, so-called "smart meters" which Xcel would be only too happy to foist on ratepayers. But the problem there is that the PUC and Colorado legislature seem only too happy to jump into palliative, partial solutions without considering all of their ramifications. While the PUC does have open a couple of "investigatory dockets" into matters such as data privacy and cyber security, one would think that it would address those issues before entertaining utility applications for cost recovery of its Boulder Smart Grid City experiment.

It seems a particularly perverse notion of technological innovation in which the goal is to increase the cost of a commodity necessity to the end user. If the computer industry had adopted this model of innovation you'd still be reading your morning paper on newsprint and blogs would be handed out on street corners as they were in colonial days. Rather than coercing users to use less of what has been called the "master resource," shouldn't the focus be on making its production more efficient, with less environmental impact, AND at lower cost?