Wednesday, July 21, 2010

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.

38 comments:

  1. I read your paper when I worked on the NREL paper on FIT and thought that it was really well done.

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  2. John (igo.john@gmail.com)August 2, 2010 at 4:10 PM

    Rich-

    It is SO refreshing to know that there are other people in the industry that get it. I think that one thing that isn't emphasized enough, though, is that the commissions should enforce viability of projects that are being proposed into RFPs that are meant to meet RPS needs. Too often the commission requires the utility focus on lowest cost only, and not the lowest cost VIABLE option. I think one way to fix this immediately is to require utilities to have a "money where your mouth is" policy: developers post a large security with bids, such that there is a price to pay if you don't deliver. The way it is currently (see all of the PPA's awarded in CA that aren't being built), things aren't being built and people point to the usual (incorrect) suspects: project financing is tight; we should have a FIT. Neither is true

    Keep teaching everyone the truth

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  3. Bruce Kruger of Denver, ColoradoNovember 9, 2010 at 10:21 PM

    I would like to discuss two aspects of good renewable energy policy not mentioned in Mr. Mignogna's piece and to suggest that perhaps there is room for a FIT in Colorado.

    Good policy, in general, should strive for simplicity. Good renewable energy policy, in particular, should aim to “internalize the externalities” so that a free market can operate based on the true costs of the competing sources of energy. A FIT can fulfill both of these objectives.

    FITs are simple. A fair price is determined for electricity and utilities are obligated to pay that price to any producer of electricity. While simplicity does not guarantee good policy, it goes a long way towards ensuring transparency which is a key ingredient of good policy.

    FIT payments can be adjusted to account for externalities. For example, in 2009, California’s FIT policy was amended so that FIT payments would reflect the valuable attributes of renewable technologies such as reduced environmental damage and a reduced need for additional transmission (see the text of Senate Bill 32 at www.leginfo.ca.gov). A study by the California Solar Energy Industries Association found that the value of renewable generation is 5 to 12 cents per kWh above the wholesale price of electricity from natural gas (www.calseia.org/feed-in-tariff-for-california.html). If the FIT payments are equal to the wholesale price of electricity plus this added value then a fair and free market will be established.

    Finally, I would like to propose that a FIT policy defined in this way is not a subsidy for emerging technologies. Instead, it represents a shift in philosophy – a shift to a more comprehensive view of the true costs of energy. From this perspective, concerns about the costs of the policy or increased rates become irrelevant since these costs are already being born in the externalities associated with burning coal and natural gas.

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  4. Bruce,

    Thanks for your comment concerning feed-in tariffs. I recognize that the position you express is one that is commonly held by proponents of FiTs. And, if simple capacity additions without consideration for cost effective expansion were the only figure of merit, then I would agree that FiTs may be superior. However, I must disagree with the assertion that one can simply come up with a dollar value for the cost of the externalities and build that into the cost of electricity and hence the FiT. First of all, the range of 5 to 12 cents that you cite is quite a wide range indeed. Is it 5 or is it 12? Perhaps not for Cali, but 12 cents is more than the base rate for electricity in Colorado. Moreover, all of these types of studies that I have seen -- and the one you cite is no exception -- have been conducted by advocacy groups with a pecuniary self interest... hardly an unbiased assessment in the public interest. But, even if one could agree on what the value should be, that would not rescue FiTs from their two most glaring deficiencies: 1) FiTs do not foster innovation and promote the most efficient and cost effective projects and 2) we are still faced with the issue of whether the intent of an incentive program is to guarantee a rate of return to a developer or to compensate a generator for the above market costs of doing the right thing. I remain convinced that the latter is more considerate of those who are paying the bill. -- Rich Mignogna

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  5. Jesse Capecelatro, PhD. Candidate Mech Engineering @ CU Boulder says: I think that the idea of a Feed-in-Tarrif is great, very simple and to the point. However, the implementation of such a policy, as you've mentioned, is where things fall apart. It seems that too many people are stuck with the idea: “We want more renewables, so let's enforce a policy that requires the implementation of x-amount of renewables.” If we look at some of the numbers I can see where people begin to think it is a reasonable policy for the US:

    FiTs are responsible for 75 percent of all solar photovoltaic (PV) and 45 percent of all wind development worldwide, according to a report from the National Renewable Energy Laboratory (NREL). FiTs have resulted in the deployment of 15,000 MW of solar PV, and 55,000 MW of wind power from 2000 – 2009 in the European Union (http://www.wind-works.org/FeedLaws/USA/NRELIssuesMassiveFeed-inTariffDesignGuideforUS.html).

    But like you said, when you start to consider cost and who pays, things get tricky. Colorado became the first US state to create an RPS under Amendment 37 in November 2004, and it seems we are doing just fine with the implementation of solar and wind. It would be nice to see more states pushing for a successful RPS.

    But then you have people like Lyle Rawlings, President of the Mid-Atlantic Solar Energy Industries Association, say: “In New Jersey, the second-largest solar market in the U.S., a tradable market commodity system of incentives was adopted that has driven up the cost of solar power to more than double the cost that a Feed-in Tariff would produce, while falling about 50% short of the legislated goals for solar.” I am not sure where he got these numbers, but I think this just emphasizes a need for a better implemented tradable market commodity. (http://coloradoenergynews.com/2010/07/are-feed-in-tariffs-part-of-colorados-solar-future/)

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  6. Rich- Thanks for your insights into FITs. I, too, have concerns about feed-in tariffs in regards to their impact on the ratepayer— especially those ratepayers who aren’t in a position to install rooftop PV— however I propose that RPS and FIT policies need not be mutually exclusive policies, which you make them out to be in your post. Rickerson et. al points out that FITs for PV, wind and biogas have been implemented in a handful of states that have an RPS in effect, such as Minnesota and Wisconsin.
    In Colorado, rather than Xcel providing upfront rebates to customers installing PV, I think it would be more effective if the incentive were performance-based, through a FIT policy, to ensure that systems are performing over their lifetime and incentivize O&M. In order to minimize costs to the ratepayer, the FIT would need to be flexible. For example, reducing the tariff incentive as Xcel gets closer to its RPS requirement and capping the number of installations that get the FIT would minimize costs to the ratepayer.

    Rickerson, Wilson H et. al. "If the Shoe FITs: Using Feed-in Tariffs to Meet U.S. Renewable Electricity Targets." The Electricity Journal (2007).

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  7. As has already been stated here, a FIT is not an optimal policy strategy for developing the most competitive forms of renewable energy. A FIT is certainly good at getting a large amount of renewable energy installed if we are not concerned with efficiency. Most would probably agree that it doesn’t make a lot of sense to create a policy that artificially bolsters the installation tidal turbine farms without regard to an area’s tidal power. However, this is to some extent what has happened in Germany; despite not being the sunniest place in the world (map: http://www.meteonorm.com/media/maps_online/world_global_8100.png), it has seen an explosion of PV installations thanks to its FIT.

    Beyond the inherent caveats of using this type of forced market mechanism versus a free market for an industry and product development, there is also the issue of potentially building a political snowball. An analogue of this can be seen in the ethanol industry. The Energy Independence and Security Act of 2007 (link: http://energy.senate.gov/public/_files/KeyFacts_EnergyBill.pdf) mandated the increase in supply of biofuels from 9 billion gallons in 2009 to 36 billion gallons in 2022. In support of this objective there are substantial subsidies for ethanol production and the U.S. imposes a hefty tariff on cellulosic ethanol from Brazil, which costs much less to produce than corn based ethanol. As time passes however, more and more doubt has been cast on ethanol as an optimal alternative fuel (e.g. see “A Growing Disaster” NYT 2009: http://www.nytimes.com/2009/11/28/opinion/28harding.html). The actual net energy gain due to the ethanol production process has been debated, and though most agree it is positive the margin is very slim.

    Despite the evidence that ethanol may not be an optimal alternative fuel, it continues to receive huge incentives. An EIA report indicated that Ethanol received $3.2 billion in subsidies and support in 2007, out weighing all other renewables used for electricity production combined (“Federal Financial Interventions and Subsidies in Energy Markets 2007”, Energy Information Administration link: http://www.eia.doe.gov/oiaf/servicerpt/subsidy2/pdf/execsum.pdf). So why does this financing trend continue? The ethanol industry has gained some extraordinary political weight. Not to mention the fact that top producing ethanol states include Iowa and Ohio. A presidential candidate would face a significant challenge entering the Iowa caucuses if there was any thought he or she may dial back the ethanol subsidies which so many in the state rely upon.

    This is not to say that PV, for example, will necessarily have the same fate as ethanol. Rather, the anecdote is to illustrate the unintentional and potentially undesirable consequences a unilateral political decision can have on the evolution of a technology that would be better served by the competitive forces of open markets.

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  8. Jesse and John,

    If I may, I'd like to close the loop on a couple of items mentioned in your recent comments. First, Jesse, you mention that Colorado "became the first US state to create an RPS under Amendment 37..." I suspect that you likely just misstated this and really meant that Colorado became the first state to create an RPS via a ballot initiative. Several other states preceded Colorado with an RPS generally. While the NREL report you cite does note that FiTs are responsible for the majority of PV development worldwide, you really need to delve into this in greater detail.

    FiTs have been the mechanism of choice for deploying PV in most of Europe, but there are (at least) two important distinctions between Europe and the US. The first is that the European markets do not have an RPS. The second is that the retail price of electricity to a consumer is 3 to 4 times that which we pay in the US, so a FiT of 40 to 50 cents is not so far out of line. But with that said, as I noted in the original article, FiTs have had a decidedly checkered history wherever they have been implemented. The case in Spain is well documented and often discussed. Even Germany, which has spent billions on its FiT and is widely touted as a success story, gets only 1% of its electricity from PV... not a very good bang for your deutschmark (or euro). And, the European FiT programs have not gone all that smoothly. Without going into all the details, if you haven't done so already I will strongly suggest that you read the in depth study that the PUC conducted in 2009 and for which a link is provided above.

    John, I believe that you may have misinterpreted the the way I characterize the relationship between an RPS and a FiT. I have never said that they are mutually exclusive. What I have said is that it is extraordinarily difficult to determine an appropriate FiT rate under an RPS that also provides for rebates, tax credits, depreciation, etc. without overcompensating developers. Even if all the other incentives that we have in Colorado did not exist, we would still be faced with the nearly impossible task of forecasting cost reductions so that a rational degression schedule could be developed. Why not just let a competitive market-based approach select the most cost-effective projects? With that said, John, I should note that Xcel's PV programs for over 10kW systems are on a pay for performance basis. It has been only the small (under 10kW) systems that have enjoyed an up-front payment. So, the small and mid-size projects that are based on a standard offer share some commonalities with a FiT.

    Last, the problem of New Jersey results from a combination of a restrictive solar carve out combined with an extraordinarily high alternative compliance payment (ACP). When solar RECs are in short supply, the market price floats to just under the ACP. But, the NJ incentive program, like a European FiT, has run out of funds on more than one occasion and needed to be temporarily suspended.

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  9. Nat Sobin - UCB Grad StudentNovember 12, 2010 at 2:53 PM

    It seems to me that FITs are a great way to over/under estimate the energy price that should be paid and are therefore not a great means for achieving grid or cost parity. While it is true that the avoidance costs could be designed to compensate for the benefits of decreased environmental damage (as discussed by Bruce above), there are really no great ways to do this. The range of costs associated with environmental damages is largely dependent on personal perception, and consequently often uses contingent valuation as a method for acquiring values for these damages. As is discussed by Diamond and Hausman (1994), contingent valuation is a fairly inaccurate way for trying to arrive at a value for such broad and personally sensitive topics. This has been well demonstrated by the large range of values associated with environmental damages, the “true” cost of oil, etc. In addition, the economic penalty for over/under estimating the avoidance cost of a FIT is high, especially considering the long duration of the typical FIT. Underestimating the avoidance cost (the subsidy) could lead to a little market interest in the subsidized technology and would likely result in a very high cost per unit of emissions avoided due to a low level of total emissions avoided. Overestimating the avoidance cost likely leads to windfall profits for manufacturers and installers, innovation deterrence, and technologically inappropriate installations (installing technologies in places where they are not overly efficient – e.g. solar in the shade).
    Both the RPS and the FIT approaches “pick winners” (formally define which technology shall be used) which isn’t necessarily bad. However, perhaps a better way to use a FIT is to make it purely performance based where essentially it “picks losers” and use it in conjunction with an RPS (similar to but different from what John has described above). The RPS would handle the more proven technologies (wind and solar) by mandating future quantities to be produced with a customer price cap. This encourages energy producers and manufacturers to make their technology more cost and production efficient and helps ensure diffusion of an already proven technology. Conversely, the FIT could be applied solely towards new innovation where utilities might pay a higher fixed rate for technologies not covered in the RPS. The FIT would not specify any technology, but simply require a certain level of emissions reductions per unit of energy produced below traditional sources (coal and natural gas) and with a required minimum energy production limit (e.g. minimum annual production). Assuming the set limits are stringent, the FIT would then stimulate new technology innovation from the state level of government. This could help ensure that the technology is appropriate given the specific geographic and resource constraints of the specific state. Assuming the terms of the FIT were long enough, unproven technologies could gain the chance for real market demonstration through an increased likelihood of receiving loans given the set energy payment rate for a set period of time. It also encourages immediate relationships between technology developers and utilities given that the utility is the immediate payment source. The set cost and quantity defined by the FIT also sets a price cap on what ratepayers will pay for innovation. The higher cost paid by utilities (and ultimately rate payers) could be justified under the premise that new technologies cost more (which they typically do). In conclusion, FITs may not be necessarily bad, just ineffective at achieving grid and market parity (what they are currently designed to do). If implemented solely in the context of innovation, FITs could be an effective means of stimulating region specific innovation and building new alliances between technology developers and utilities.

    References
    Diamond P.A. and Hausman, J.A. (1994). Contingent Valuation: Is Some Number Better than No Number. Journal of Economic Perspectives, Vol. 8, No. 4, pp.45-64.

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  10. Thanks, Rich, for this assessment of a FiT’s ability to serves Colorado’s needs.

    You point out a number of reasons why FiTs are poor policy for achieving a sustainable renewable energy sector in the long-term, and I would like to add one more. We are talking about Colorado’s energy policy, but of course, renewable energy technologies are sourced from around the country and internationally. The cost of renewable energy technologies, and the learning that goes into reducing those cost, is hardly determined within Colorado’s boarders. A Colorado FiT could be good at getting more renewables deployed in Colorado in the short term, but a Colorado FiT is unlikely to move renewables significantly closer to cost-parity with traditional energy sources overall.

    One important benefit of FiTs that you implied, but did not discuss, is that the guaranteed return on investment makes an otherwise risky investment more attractive to financers. And securing investment is certainly an important part of achieving the long-term goal of reducing costs. I wonder what the proper scale would be for trying to making renewable energy a more attractive investment, and thereby accelerate technology learning curves, whether by a FiT or other means? An August 2010 Reuters article, suggests that lack of strong national commitments to fostering renewable energy development is already driving big investment bucks from the U.S. to Western Europe and Asia, where some governments have made significant commitments to renewable energy, including feed-in-tariffs. Further evidence that a Colorado FiT would not significantly move the needle on renewable energy costs?

    Cowan, Richard. “Deutsche Bank spurns U.S. for climate investment” Reuters. Aug 11, 2010.
    http://www.reuters.com/article/idUSTRE67A3JK20100811?pageNumber=1

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  11. Rich, thanks for the great post. I agree that a FIT puts the burden of cost on rate payers and that a FIT might not create a sustainable industry but I believe that an RPS leads to the same issues. FITs may have a bad rep compared with RPS because commonly cited examples were overly aggressive and poorly planned. It is difficult to compare a national FIT and a state RPS; if Germany had chosen to create an RPS that required 1% generation from solar PV within the same time frame, the issues would have been the same. An aggressive FIT and an aggressive RPS are going to have the same effect. For both, the goal (which is rarely openly stated) is to artificially inflate markets. A FIT directly inflates price while a RPS inflates the market size which then inflates price. The big question differentiating the two seems to be, should we determine how much renewable energy we should generate (RPS) or how much renewable energy is worth (FIT)?

    I would argue that a well-structured FIT could drive cost improvements in technologies. For example, if there were a FIT, I would want to choose the cheapest option if I were constructing a project, assuming both generated equal amounts of electricity. With an RPS that has rebates and uses PTCs, the cost to build is reduced and I will be less concerned with maximizing the productivity of my unit. Additionally, determining a PPA can be costly which will eventually be incurred by the rate payers and RFPs can bias away from the best market choice. An RPS can limit competition; the overall market structure that results from a competitive bidding framework limits the investor pool and can lead to a less-dynamic market (Dinica 2006). Under a well-designed FIT, renewable energy development and financing can happen more quickly and often more cost-effectively than under competitive solicitations and the guaranteed contract terms enable projects developers to finance a larger proportion of the project with debt financing, as opposed to equity, which puts further downward pressure on the cost of capital.(Cory 2009)

    I agree that when FITs are extremely high, there is a reduced incentive to minimize levelized costs. For example, if a FIT was 40 cents per kWh, and one PV unit cost 10 cents/kWh but produced half as much energy as one that cost 15 cents/kWh, I would want the more expensive one. Even though I would be making 5 cents less per kWh, I could produce double the energy and make 67% more money. This leads to limitless explosion of installs yet if there were an RPS that required adding 2% solar within 5 years, anyone putting solar on their roof could name their price to Xcel. People who want either a FIT or RPS see a value in renewable energy. If the goal is to create an “honest” market, the goal is to make the value of renewable energy transparent. A REC tries to do this but the RPS system of bidding distorts the value of renewable energy because it does not create a market for the qualities of renewable energy, it creates a market to reach quotas. The value to most isn’t just the renewable energy necessarily but the value of replacing fossil fuels. If we determined an incremental value of replacement, innovations that reduce the cost of renewables would be rewarded as they would be capable of exceeding higher pricing hurdles. Of course determining the value of incremental replacement would be a nightmare to determine but probably no more difficult than an RPS or FIT.

    Dinica, V, (2006) “Support systems for the diffusion of renewable energy technologies - an investor perspective,” Energy Policy Vol. 34, No. 4, pp 461-480 (Referenced within Cory, 2009)

    Cory, Karlynn, Kreycik, Claire Couture, Toby. "A Policymaker's Guide to Feed-in Tariff Policy Design" NREL March 2009

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  12. Wow, can I charge you guys by the word? How about we quote publications a little less and give me more of your own thoughts? So, let me make a couple of observations about Alexandra's and Matt's recent posts.

    First of all, a FiT by itself does not "make an otherwise risky investment more attractive to financiers." The banker or equity investor looks first for two things: 1) a PPA with an investment grade utility, and 2) a project that is likely to work as advertised. Technology risk is a serious issue for them.

    Both of the recent comments confuse the RPS with the incentive mechanism chosen to encourage developers. Once again, the issue is not RPS or FiT because, theoretically, you could have both. The issue is whether a FiT or a competitive solicitation process yields the better result for society. Matt, I disagree that the competitive process (what you refer to as the RPS system) distorts the market. Rather, it is the fixed price of a FiT that distorts the market mechanisms and may provide exceptional returns to developers. The examples you cite are what some authors posit "could" happen but that is not what we're seeing in the real market, at least not in Colorado. Setting a ridiculously high FiT or ACP distorts the market.

    If renewable energy generation is the ultimate goal, which approach is more likely to yield the greater amount for a given budget? If I have a budget of a million dollars and a FiT at a fixed rate of say, $250/MWh, I will get no more than 4,000 MWh of generation paid to the first projects that walk in the door. However, if projects are selected according to a competitive solicitation that causes all bidders to sharpen their pencils and yields an average rate of $225/MWh, I can afford to fund 4,444 MWh of generation.

    It is also worth noting that the Solar Energy Industries Association rankings place Colorado 4th in the nation in installed PV as of the end of 2009. Certainly, we are nowhere near the 4th most populous state and we did this without a FiT. Rather, except for the small solar program, all of the acquisitions have been by competitive solicitation. Moreover, we have been largely spared from the excessive contract failure rate that has plagued other jurisdictions. In fact, Colorado has been so successful that the state's major utility is generating more RECs than needed for compliance and is now looking to sell its excess RECs to... California! Go figure.

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  13. Rich – Thanks for your insight into this matter.

    You mentioned above that FiTs do not foster innovation or cost reduction for renewable technologies. I believe that alternate pricing structures for FiTs could mitigate these concerns.

    My home state of Vermont recently enacted a FiT which uses a technology-specific FiT pricing scheme. For instance solar PV currently gets 24 cents/kwh and farm methane gets 13.6 cents/kwh. The Vermont Department of Public Service released a report examining the economic impacts of the FiT. They determined that ratepayers pay significantly more money for a given amount of renewable energy than is strictly necessary due to the difference in tariffs received by the renewable resources. For instance, if the goal is 20 MW of renewable energy, why should ratepayers pay for expensive solar PV over cheaper biomass with the same end net result of 20 MW of renewable energy?

    As this is a result of the pricing scheme, I believe a FiT should be provided at fixed rate for all types of eligible technologies. This retains the incentive for renewable technologies to innovate and become price-competitive, and would keep rate impacts manageable as the least-cost renewable resource will be the main rescoure available to the utility. This forces renewables to compete with each other instead of with conventional energy sources.

    What are your thoughts of a fixed-price FiT versus a technology depended priced FiT?

    Thanks for your time.

    - Paul Vallett

    Link to VT report: http://publicservice.vermont.gov/planning/DPS%20White%20Paper%20Feed%20in%20Tariff.pdf

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  14. Jim Martin writes (use this one as I a not sure how to post)

    Thanks Rich for your blog on feed-in-tariffs:

    I agree with you that we cannot build a sustainable energy infrastructure on a foundation of unsustainable economics. (1) Feed-in-tariffs subsidies are probably not sustainable over the long haul. To achieve maximum reliance on sustainable efficient renewable energy in Colorado in the future, we should consider a policy that combines a hybrid of feed-in-traffics and renewable portfolio standards.

    As we know Colorado’s commitment to the reductions of green house gases, and dependence on non-renewable sources has two major “potential” incentive compliance mechanisms, (not including pending Federal RPS Legislation): renewable energy portfolio standards (RPS), and feed-in-tariffs (FITs)

    Some of the important differences between Fit and Rps 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 potential legal restrictions. (2)
    While both public policies have been subject to their successes globally and nationally, I would advocate for a combination of the two policies. Lets call it (RPS-FIT). The combination of the two polices would incorporate the best of both policies. The RPS standards would apply to utilities that are interested in signing contracts for renewable projects over a certain MW size to be determined by statute. The feed-in-tariffs would apply to long-term contracts for renewable energy generation from sources smaller than a statutory MW minimum size. (3))

    An RPS can work cooperatively with a FIT depending upon how compliance with the RPS is defined. As an example net metering, is a policy which likely conflicts with a FIT, but which could be used in a hybrid system for those net-metered systems not included within the FIT. Other financial incentives a renewable system owner may receive, such as rebates or tax credits, should offset the FIT rate offered to prevent double compensation. (4)

    The state’s renewable energy policy should balance and incorporate innovation, a fair return on investment dollars, and the growth of an economically sustainable renewable energy industry. Integrating feed-in-tariffs and renewable portfolio standards under the same policy directives.

    What do you think?

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  15. In your post, you mention that “if capacity expansion were the only figure of merit, FiTs would be the incentive of choice.” Do you think that simple capacity expansion may ever be a positive thing? I agree that on the long term FiTs are not a sustainable policy mechanism for encouraging the renewable energy industry. However, it seems that a short term FiT could increase capacity rapidly, perhaps to the point of encouraging enough competition between manufacturers to bring the price (if not to grid parity), at least down. Combined with an RPS, it seems that this mechanism could be a useful catalyst for promoting technologies such as solar, which have a long way to go before they are economical.

    Additionally, a short term FiT would not necessarily dissuade efficiency improvements as developers would not be able to count on FiT money over an extended period. Take Spain, for example. The initial FiT price only had a guaranteed duration of 1 year (and the policy has been significantly reduced over the past couple of years). However, many solar developers were drawn to the country and a substantial solar industry was built up relatively rapidly. Of course, some of these companies will likely leave with the reduction in the FiT, but probably not all of them. And some of the projects – such as the CSP plants in the south – will continue to put energy onto the grid with or without the tariff.

    “Feed in Systems in Germany and Spain and a Comparison.” Fraunhofer Institute for Systems and Innovative Research. Energy Economics Group. Dr. Mario Ragwitz and Dr. Claus Huber. 2005.

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  16. I see three main problems that are being discussed about Feed-in Tariffs: 1. Ratepayer impact; 2. Market responsiveness; and 3. Failure to motivate technological advance. As I read this blog and comments, it occurred to me that, similar to California’s Renewable Auction Mechanism, what if we started making a feed-in tariff look more like a market-based mechanism in order to solve these three problems? It would work something like this: A bi-annual auction would be held by utilities where renewable projects bid in based on price. The utilities would then pick projects based on the cheapest project bid. These projects are contracted out with the utility and are given a FiT based on the price that they bid in the auction. The auction is limited on the basis of a set amount of megawatts, such that project managers have an incentive to innovate in order to make their project the cheapest and also to be “truer” to the market. Ratepayer impact is limited by choosing the most cost-effective and viable projects. I like this idea in that the externalities of traditional generation are somehow mitigated by getting more renewable energy on the grid, but the costs of the process are limited because it looks more like a market mechanism than a traditional FiT. Thoughts?

    California’s proposal: California PUC, System-Side Renewable Distributed Generation Pricing Proposal (Aug. 26, 2009), available at http://docs.cpuc.ca.gov/efile/RULINGS/106275.pdf.

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  17. Penny Cole, UC Boulder Grad StudentNovember 14, 2010 at 10:22 AM

    Thank you Rich for your comments on FIT policy.
    I am not personally a fan of feed-in tariffs as a policy mechanism, and I think that my primary objection to them is the removal of market effects, and minimizing the motivation for generators and manufacturers to reduce their costs – why would you knowing someone will continue giving you money anyway.

    I was interested to see that the German FIT actually now (since 2004) includes a yearly degression of tariffs which, according to a report from the Fraunhofer Institute is designed to “retain the incentive for manufacturers to systematically reduce production costs and to offer more efficient products each year.” This is a wonderful goal, and one that if effective would certainly make the policy more palatable, however the tone of the report itself was distinctly pro-FIT so I would like to see evidence showing that this degression of tariffs is actually working in terms of making the generation cheaper before getting too excited and changing my mind about the future of FITs. At this point the RPS seems to be fairly successfully promoting renewables development in Colorado with less complications than are being seen by some of FIT participants, and I don’t see that adding a FIT to the RPS would do anything other than make things unnecessarily complicated.

    However it would seem that FIT non-believers are in the minority in the world, as new policies are being implemented still – 45 countries and 18 provinces at the last count I could find, with the UK just implementing a new FIT policy this year.

    “Feed-In Systems in Germany and Spain and a Comparison”, Dr. Mario Ragwitz, Dr. Claus Huber, Fraunhofer Institute for Systems and Innovation Research

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  18. It is possible that feed-in-tariffs may not be the best way drive renewable energy development, but it is one way to do so. The previous instances that have failed (Spain and Gainesville in particular) are simply examples of poor execution – not reasons to dismiss the idea. Had they created much lower tariffs that were substantially more sustainable, they would have been far more successful in the long-term.

    Your bottom-line message of “you cannot build a sustainable energy infrastructure on a foundation of unsustainable economics” suggests that we should immediately give up on solar photovoltaic power until independent researchers create a product that is four to five times more efficient (or cheaper) than current technology (thus making it cost competitive). Subsidies (such as a FiT) are created for multiple reasons, but oftentimes are created to spur innovation and maintain a market until new technologies emerge where government intervention is no longer needed. Forty years ago, solar panels were selling at $150 per watt. Today, panels are readily available at under $2.00 per watt (a 98.7% decrease). With increase economies of scale and a dispersion of solar demand, that price is sure to fall considerably in the future.

    I realize your blog is not condemning the general idea of providing government subsidies to foster renewable energy growth, but I think feed-in-tariffs need to be part of the discussion – if not the final solution.

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  19. Gabriella StockmayerNovember 14, 2010 at 4:45 PM

    Rich,

    I am neither a fan nor an enemy of the FIT. I am, however, a fan of more renewable in Colorado. Many of the modern policies designed to incentivize renewables often are hybrids of market-based, tariff, and quota mechanisms, designed to balance the need for both long-term market certainty and competition. One commenter’s suggestion for an auction-based FIT system provides one example of a hybrid mechanism. The California PUC actually proposed such a “reverse auction market” feed-in tariff in August 2009. (CPUC, 2009). The new and improved distributed generation requirement in HB10-1001 seems to me to be more of a hybrid mechanism, as well: 3% DG by 2020 overall, divided between wholesale and retail resources, and further segmented between residents and the commercial sector. This DG carve-out does not just set a quota and leave the utilities to fill it most efficiently through the bidding process; it requires utilities to acquire power from sources that would otherwise slip through a traditional RPS’s cracks.

    I raise this issue here because your discussion of the recent FERC decision to overturn a California FIT policy (AB 1613) begs the question: can Colorado’s DG carve-out overcome any potential federal legal road blocks that it may face? Whereas opponents of the California FIT argued that the FIT violated federal energy statutes (Federal Power Act and PURPA), opponents of the carve-out could challenge Colorado’s policy on constitutional grounds: a violation of the Commerce Clause. This clause of the constitution leaves interstate commerce – which would include sale of electricity - to Congress and restricts states from unjustifiably discriminating against the flow of commerce. The retail component of the new DG carve-out likely discriminates against out of state generation because it requires customer (and therefore in-state) siting. If interpreted as facially or per se discriminatory, the law would be struck down as unconstitutional unless there was no alternative means for the state to accomplish its goals. One legal analyst suggests that a DG carve out constitutes a necessary means to accomplish the goals of “getting DG and reliability benefits.” (Elefant, 2010). Although I agree that the grid-reliability argument is a strong one, “getting DG” is likely not as compelling. It looks more grounded in economics than the traditionally acceptable state interests of health, environment, and safety.

    The bottom line is that these arguments need to be strengthened now before the DG carve-out, as well as other provisions in Colorado’s RPS, are challenged. I am not yet sure whether a creative FIT or RPS carve-out is most efficient at encouraging distributed, emerging technologies in the state. A finding of unconstitutionality for a carve-out, however, may be harder to overcome than statutory violations under a FIT. Congress is unlikely to amend the Constitution any time soon.

    References:
    CPUC Staff Proposal, System Side Renewable Distributed Generation Pricing Proposal, Rulemaking (R.) 08-08-009 (Aug. 26, 2009).

    Carolyn Elefant, Commerce Clause Issues Raised in State RPS (Oct. 21, 2010), available at http://www.cleanenergystates.org/JointProjects/RPS/2010_Summit/Holt_Elefant_Summit2010.pdf.

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  20. Terese Decker says...
    Rich, I agree with you that a FIT is not right for Colorado because it would not be a sustainable way to further renewable technologies. Sustainability is a big factor in the entire motivation for adapting renewables and should be considered for aspects of the problem. Pete has a great point that it is possible to devise a sustainable FIT, but I don’t think it is the particular answer for Colorado right now.
    Because Colorado already has an RPS in place that seems to be working to get renewables deployed, I think it would be generally redundant and unnecessary to have a FIT on top of it. That being said, one place a FIT may be effective for Colorado is to assist in reaching the distributed generation allotment of the RPS. In this case, only solar PV and small wind installations would qualify for the FIT. The price would have to be carefully thought out so as to give an adequate incentive but still not create a false competition in the market between solar PV and large-scale wind, since those two technologies are aiming to satisfy two different aspects of the RPS. Hopefully this would encourage buyers to install renewable systems (not limited to solar PV) on a small scale at their home – which have still not reached a reasonable price for most consumers.
    The Sacramento Municipal Utility District (SMUD) adopted a FIT last year partially for this reason. The SMUD FIT is based on avoided cost of electricity and applies to both renewable and fossil-fuel cogeneration. It sets higher prices for power produced from renewable sources like solar and biogas. The program has received both praise and concern. It is too early to tell if it has proven to achieve the desired goal or create true sustainability, but it is an interesting example of a program that may be very promising for reaching a specific goal in an area that needs a boost.
    Source: Couture, Toby D., Karlynn Cory, Claire Kreydk, and Emily Williams. "A Policy Maker's Guide to Feed-in Tariff Policy Design." NREL/TP-6A2-44849 . July 2010. .

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  21. Melissa Nigro - PhD candidate Univ of ColoradoNovember 14, 2010 at 6:26 PM

    Rich,

    Thank you for your insightful comments on the feasibility of a FIT in Colorado. I agree that requiring utilities to pay a set amount for renewable energy is not the most efficient way to bring cost competitive renewable energy to the market. This is especially true, when we have seen many of the recent FIT programs go bankrupt. Although, I do wonder if a FIT used in the right scenario can have the ability to provide renewable energy at a reasonable cost and increase the amount of deployment. I read an interesting article, Comparison of feed-in tariff, quota and auction mechanisms to support wind power development by Lucy Butler and Karsten Neuhoff, comparing the FIT policy used by Germany and the Non-Fossil Fuel Obligation (NFFO) policy used by the UK. The study compared the cost to consumers and the amount of deployment for wind energy in the two countries. Using a few normalizing factors to account for different wind regimes in the two countries, it was determined that the FIT reduced prices and resulted in a larger wind energy deployment than the NFFO. The article argues that the FIT drove competition between project developers to obtain the best site locations for their projects. This causes the chosen sites to provide the most efficient wind energy to the consumers. Additionally, for wind energy the majority of the cost is in the production of the turbine and the construction of the site (versus fuel costs for other energy types). Under a FIT policy, these services are still market competitive. In the end, I do not think that these results indicate that Colorado should implement a FIT policy, but it shows that we should keep an open mind about how markets, even under a FIT policy, can drive competition.


    Butler, Lucy and Karsten Neuhoff. Comparison of feed-in tariff, quota and auction mechanisms to support wind power development. Renewable Energy. vol 33, issue 8, August 2008, pg 1854-1867.

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  22. Tyler Hammer, Leeds MBA studentNovember 14, 2010 at 6:29 PM

    The number one issue to me regarding Feed-in Tariffs (FiT) has always been the legality of state-set prices for electricity. Given the Federal Powers Act and PURPA, FiTs seemed to always have been on thin ice in America. Rich notes the July 2010 FERC ruling that effectively limited CA to a FiT price at avoided cost (usually equal to natural gas generation). It appears, however, that requested clarifications by California into this ruling have opened the door again to state mandated FiT policies.

    The October 2010 FERC order (http://www.ferc.gov/whats-new/comm-meet/2010/102110/E-2.pdf) states, “... the concept of a multi-tiered avoided cost rate structure is consistent with the avoided cost requirements set forth in section 210 of PURPA” and in FERC regulations. Essentially the ruling provides states the flexibility to develop more than one avoided cost rate based on generation technologies that account for environmental externalities. It seems now that Colorado does have the legal authority to mandate a feed-in tariff price.

    With state-mandated FiTs above traditional avoided cost apparently legal in the U.S. the biggest question to me now is the argument of innovation suppression. Intuitively it makes sense that by taking away the incentive to reduce costs through a state-set guaranteed price would suppress innovation. If FiTs are shown to do this, then I’m all for not implementing the policy. But I would like to see evidence to support this claim (a quick google search brought up none). As Pete mentions, the evidence I have seen is that as more PV has been installed, prices have declined significantly. Generally speaking, for every doubling of installations of PV, price comes down about 20%.

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  23. Sydney Kaufman - UC - Boulder PhD CandidateNovember 14, 2010 at 7:11 PM

    Rich – Thank you for your insightful post. In researching the feed-in tariff, I was surprised by the wealth of information available in support of the tariff while very little explores the negative repercussions. I was especially struck by a report by a 2009 Deutsche Bank report (http://www.dbcca.com/dbcca/EN/_media/An_Investors_Summary_Assessment_1009.pdf) outlining how feed-in tariffs spur growth in renewable energy and lower risk for investors. At first blush, it’s hard to see this as problem, if increasing the amount of renewable energy capacity is one’s goal, but upon inspection, there is a downside. If we increase the number of investors, increase the number of projects, someone has to pay; that someone is the end user. So, while investors make money with minimal risk, it is everyday people who are paying to reduce that risk. If prices are too high, no matter the benefits, public support for renewable energy will dwindle. I would put forth that, while I think the risk associated with investing in renewable energy is too high in this country, a little risk is probably a good thing. Risk ensures that only the very best and most promising projects are built. If there is no impediments and investors are assured that project will make money, capacity may grow dramatically, but the cost per kilowatt hour may not go down much. Renewable energy capacity is certainly commendable, but it does not power iPods or run refrigerators. It seems that the cost to ratepayers’ per kilowatt hour is a much more important bench mark. In the end, no feed-in tariff will last forever and the only way we can ensure that renewable energy pervades in 50 or 100 years is to ensure only the best and most cost-effective project are built, projects that can sustain themselves without hugely inflated subsidies.

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  24. Rich:
    It seems clear that RPS’s do work at creating additional renewable energy however it is my contention that they don’t do it fast enough. The IPCC has recommended greenhouse gas reductions of 20-40% below 1990 levels by 2020 and from my understanding we are barely on track to stabilize emissions, not reduce them. The IPCC projects an increase in greenhouse gas emissions between 25 and 90 percent by 2030. I believe it’s in our best interest to get renewable in ground, not develop a renewable industry.
    Protecting rate-payers from lining someone else’s pockets can be done through intelligent rate making. A very aggressive (small) ROI will make renewable economical, but not profitable. Even if a homeowner installs PV and makes a profit—is that wrong? It seems to me they are doing something worthwhile for everyone and should be rewarded.
    I realize that a FiT would likely increase the rate-payers bills slightly but I also don’t take issue with that. Increasing the cost of energy creates an incentive to conserve which is absolutely necessary, and not there now. While an interest in energy conservation is coming about, the economics are sometimes hard to justify. Nine cents a kWh isn’t enough for many people to care one way or the other.
    Core Writing Team, Pachauri, R.K. and Reisinger, A. (Eds.) IPCC Fourth Assessment Report: Climate Change IPCC, Geneva, Switzerland. 2007

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  25. Colorado has excellent potential for solar PV and other renewable technologies; if renewables can become competitive anywhere, surely it can happen in Colorado. It would seem, then, that encouraging development of renewable capacity, while keeping market distortion to a minimum, would be the best balance to pursue - allowing market mechanisms to play as large a part as possible while still supporting those technologies that require it. Given that FiT programs around the world have resulted in unintended and serious consequences, it would be wise to approach the concept with caution, if at all. Colorado’s current RPS and Community Solar Garden legislation will likely support significant renewable energy generation in Colorado, and perhaps that is enough.

    However, recent developments could provide guidance for future FiT programs.
    A recent ruling by Federal Regulators on October 21, 2010 (also mentioned above) clarified and expanded the definition of “avoided costs” related to California’s FiT program, which can be used as the basis for FiT payments; it also ruled that California may require its utilities to pay these avoided-cost-based rates to renewable energy producers.

    The definition of avoided costs was changed from the lowest estimated cost of energy from a new natural gas-fired power plant, to the lowest estimated costs from a comparable resource. The ruling also legally recognized “locational benefits” of some projects, which avoid transmission/distribution costs when the power is consumed very near where it is generated. These changes provide a basis for FiT payments that lean more toward reflecting market conditions (‘comparable resources’), and the reality of reduced transmission costs. A FiT program that reflects more realistic assumptions has a better chance of minimizing market distortion and allowing for the growth of a viable renewable industry.

    Green Tech Solar, Herman K Trabish, October 28, 2010
    http://www.greentechmedia.com/articles/read/ferc-decision-boosts-renewables/
    Last accessed 11/14/2010

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  26. I disagree that FiTs have to “foster innovation” or to “compensate a generator for the above market costs of doing the right thing”. Neither does the current system of regulated electrical monopolies but it certainly guarantees the utility a Rate of Return. That is the price the public has agreed to pay for reliable supply and stable, though not the lowest, price. Similarly, FiTs can be seen as an outcome of the public desire to wholly supplant fossil generation with renewable sources. The need can be argued from geopolitical, sustainability or climate change platforms.

    The relative success of Colorado RPS is disputable as the 20% goal falls far short of long-term sustainability. RPS mandated rebates constitute a de facto FiT for distributed (solar) generation effectively paying out the “net present value” of expected future generation. Furthermore, the RPS is effectively subsidized by the FiT-like federal PTC. All this makes it a hybrid policy at best and not a clean example of a successful market driven device. One can also bring up the example of UK’s policy that is similar to RPS and failed to create substantial renewable capacity (Butler and Neuhoff, 2004). Success of RPS policies throughout the US is also uneven.
    Finally, the difficulty of pricing externalities should not prevent policymakers from “internalizing” them as they become more defined. Even a 5¢/kWh FiT, a lower limit of what was mentioned above, would overshadow the PTC. Incidentally, this is the levelized cost of health impacts of mercury emissions from coal plants as presented by the Sierra Club (Lomborg and Pope 2010).

    Lomborg, B., Pope, C., (2010) “The Skeptical Environmentalist and The Sierra Club: Lomborg and Pope Tackle Climate Change” http://www.youtube.com/watch?v=FsEFHkPsyBM

    Butler, L., Neuhoff, K., (2004) “Comparison of Feed in Tariff, Quota and Auction Mechanisms to Support Wind Power Development”. Cambridge Working Papers in Economics, University of Cambridge http://www.econ.cam.ac.uk/electricity/publications/wp/ep70.pdf

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  27. Hi Richard,
    Although I agree with most of your beliefs against FITs, I still believe that if conceived correctly with a sustainable long term approach, it is a very powerful mechanism to incentivize renewable energy generation and its industry, which has to be taken into consideration.

    From my point of view, which ever supporting mechanism has the renewables on a certain country/state, will have a direct relation with the development of the renewable energy industry, and the development of the industry can benefit the country/state.

    Feed in Tariffs have proved to be one of the most successful mechanisms for incentivizing the generation of renewable energy, because it reduces uncertainty on the revenues for a renewable energy generator. On the other hand, Green Certificates (similar to RECs) have not proved to be a successful mechanism in countries such as Sweden due to its price uncertainty over time. This being said, I believe that an aggressive RPS will incentivize the renewable industry in the state, as has happened in CA & CO, however, it is still more uncertain than an “equivalent” FIT, so if an investor has to invest in a project with FIT or RPS, I would say he will invest in the FIT project, and those funds will help to build up the industry and will indirectly benefit the state/country of the project.

    Big Companies such as Vestas in Denmark, or smaller such as Centroplan in Germany, have benefited in growth due to FITs incentives in their countries and now have expanded around the world, employing more people and benefiting their respective governments with tax payments.

    FITs may not be the best supporting mechanism, but reduces volatility to the revenues of projects, attracts investments and consequently makes the industry grow.

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  28. Rich, let’s hypothetically assume that Colorado did not have an RPS as we currently do. If a FiT were introduced with varying payment rates for different technologies pegged to the price of natural gas, couldn’t that be an efficient way to introduce more renewable energy to the grid? If the price of natural gas spiked, and was higher than say the price of wind energy, no tariff would be needed. If the price of natural gas fell, as it has in recent years, then the FiT payment would kick in. The technologies that are not as mature would be capped on an annual basis until their average price per kWh was in a range more reflective of natural gas prices. This would serve to ensure the different technologies continue to improve from a technological standpoint, while promoting those technologies that are currently more cost competitive.

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  29. Jonathan Miller, MBA/MS Environmental Studies candidate at the University of Colorado at Boulder said…

    Rich, to ad to your critique of a FiT program in Colorado, I would like to include the business manager’s perspective. It seems that when we talk about FiTs, it is often assumed that they are an efficient technique to support capacity expansions of renewables. This is true, in part, but I would posit that a FiT would be considerably less efficient policy in the US. Rich mentioned both the checkered history of European FiTs and Dr. Konttinen’s observation that FiTs “create false and unsustainable markets vulnerable to speculators.” From a business manager’s viewpoint these are not very encouraging words.

    Let’s look at this as lessons learned from the European markets. Lesson 1: Spain and Germany offered overly generous FiTs that were ultimately unsustainable and had to be cut back (up to 45%*1). The US is now likely to implement a far more conservative tariff. Lesson 2: European FiT incentives have been subject to rather sudden changes. Thus, it is likely that a smart business manager won’t count on a FiT as a stable incentive for future planning.

    Spain and Germany provided a FiT program that was so generous, that the RoR merited being opportunistic in the short term. However, a more conservative US FiT will likely deter opportunistic investment based around fickle policy.

    An RPS, on the other hand, is much more attractive to a business manager. It creates long-term goals that must be met. Has the goal been met yet? If not, they can make reasonable inferences about the market opportunity. They can also look at the trends, where RPS regulations have moved towards higher standards*2. These are two stable and very important market dynamics that I believe will provide a far greater incentive for US investors than what we have seen with FiT programs.


    1: Solar Feed In Tariff, August 17, 2010 http://solarfeedintariff.co.uk/2010/08/spanish-government-announces-tariff-cut-backs/ Last accessed 11/15/10.
    2: Emerging Energy Research: US RPS Markets and Utility Strategies: 2010-2025 (June 2010 Market Study Excerpt), available at www.emerging-energy.com/.../Excerpt---US-RPS-Markets-and-Utility-Strategies-2010-2025.pdf

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  30. If the goal is to reduce GHG emissions and insulate Colorado’s energy economy from shocks due to volatile and dwindling fossil fuel resources, stronger policy mechanisms need to be utilized. The current RPS/REC/PPA bundle basically performs the same function as a FIT, but according to Deutsche Bank Group, it doesn’t provide the transparent PPA process that would create more competition and reduce uncertainty for project developers and financiers. Formal offers or auction mechanisms (as described above by a few of my classmates) would create competition, ensuring that the most efficient projects get long term guarantees, while sending market price signals to investors, developers, and equipment manufacturers. Also, I think it’s important that distributed generation be a part of any clean energy policy. We need generation at the point of demand to help create system balance and perhaps increase the adoption of energy efficiency measures. Up to this point, we have relied on individuals and businesses with the ability and willingness to support renewable energy. However, by limiting on-site generation to 120% of annual use and offering wholesale purchase prices, we are reducing the effectiveness of the only segment of the market that is leading the charge for DG. Force the utilities to purchase excess power at an avoided cost for smaller systems and let’s utilize every rooftop we have before we start covering our open space with panels.


    DB Climate Change Advisors. (2009). Paying for Renewable Energy: TLC at the Right Price. New York: Deutsche Bank Group.

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  31. Thanks to Rich for the original post. I believe that the goal of creating a sustainable market for renewable energy generation is imperative in order to have a sustainable energy future. Whether this goal can be reached using a FiT in Colorado, however, is questionable. My biggest problem with a FiT in Colorado is that it will likely have a particular focus on solar PV, as stated previously, which is only one piece of the renewable energy generation spectrum. Why should this technology receive special treatment, especially since it has been around for over 50 years [1]? You would think that by this point it would have enough R&D invested to become economically competitive on its own. I acknowledge that there are still innovative advances for solar PV currently being made, such as the new Solyndra system [2], but those advances are being made now without a FiT. If ensuring that solar PV is included in the generation mix of utilities is a concern, I believe that a carve-out similar to Colorado’s DG requirement in its RPS is the optimal way to do it. This leaves the responsibilities of optimal siting and system design to utilities, who want to provide cheap and reliable electricity to their customers. This way any increases in electricity rates will be kept to a minimum.
    [1] The History of PV. http://photochemistry.epfl.ch/EDEY/PV_history.pdf
    [2] Solyndra: The new shape of solar. http://www.solyndra.com/

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  32. Just as a clarification, by "equivalent" projects, I mean equivalent Internal Rate of Return and/or Net Present Value.

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  33. Rich, Thank you for your comments on FiTs. I think that one of the main points that you bring up that has been lost in this discussion is the “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 am inclined to agree with you, that the latter approach is more considerate, however one must also determine if the goal of the incentive program is to add Renewables or to create an industry.
    If the goal of the incentive program is to simply get renewables onto the grid, FiTs do it, and they do it well. They do it at large costs to rate payers and markets, but they get the job done. As a policy mechanism, FiTs seem to create unsustainable markets and result in boom-bust cycles as you mentioned. If this is deemed to be an ok price to pay for the inclusion of more renewables, then I think that FiTs are the answer. I agree with many of the previous comments that new market driven rate structures may help to avoid these costs, but there have been no concrete examples of such a structure’s continued success. It seems that proponents of FiTs consider them successful if the result is more renewables no matter the cost. If this is the goal, they are successful. In my opinion this should not be the only goal of a policy.

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  34. Blake, a UCB PhD graduate student said...
    Rich, thanks for your thoughts on FiT in general and implementing FiTs in Colorado, specifically.

    I agree with Rich that the goal of renewable energy policy should be to increase renewable energy generation by creating a sustainable energy infrastructure. Renewable energy policy implemented thus far seem to emphasis the first aspect of this goal, which one might argue is the more important aspect, perhaps partially due to the changeability of politics and policies. As demonstrated by the wind industry development from 1999-2004, Federal Production Tax Credits (PTC) that expired on three occasions lead to a boom and bust cycle of wind development in the US (AWEA 2008 annual report). Not so sustainable.

    I think the Renewable Energy Portfolio (RPS) approach gets it right by clearly outlining how much renewable energy generation Colorado wants as well as creating specific dates by which a certain amount of renewable energy should be added. By specifying goal dates over a longer term, renewable energy generation increases are achieved over a course of years allowing for flexibly and for market-based energy development. As mentioned before, FiTs and RPS are not mutually exclusive ways of achieving this goal and FiTs could play a role in framing this renewable energy development.

    But are FiTs an appropriate way to incentivize renewable energy developers in a regulated utility system? I would argue no. One of the motivations of implementing FiTs in Europe was to make renewable energy technology less risky for investors by providing a guaranteed price ($/kWh) for electricity output for a guaranteed period of time. In our regulated market this guarantee to investors is already made through a PPA where an electricity price is set based on current market prices. Yes, perhaps there is more red tape associated with procuring a PPA. However, under an RPS, a PPA system ultimately allows for a more accurate valuation of new renewable energy generation, fostering increased renewable energy generation while accounting for ratepayer impacts. Thoughts?

    AWEA 2008 annual wind industry report. http://www.awea.org/documents/reports/AWEA-Annual-Wind-Report-2009.pdf

    Cory, K., Couture, T., Kreycik, C. “Feed-in Tariff Policy” NREL technical report, 2009.

    USEPA “Solar Power Purchase Agreements” http://www.epa.gov/greenpower/buygp/solarpower.htm

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  35. Thanks, Rich, for your thoughts on this issue, and thanks to Tyler and Jeanne for shedding more light on the legal issues. Based on the documents and articles you both posted, I believe that legal obstacles, or at least legal complications persist for a FIT in Colorado, or any state for that matter.

    First, FERC’s October 21 decision (posted by Tyler: http://www.ferc.gov/whats-new/comm-meet/2010/102110/E-2.pdf) specifically discusses combined heat and power (CHP) generators, not small PV arrays on customers’ roofs. I believe that it is also fair to say that PURPA was also not written with small, customer-sited PV panels in mind. Given that both PURPA and the recent FERC decision conspicuously do not mention customer-sited PV, it is dangerous to say that this new decision paves the way for a FIT.

    The most significant part of the FERC decision is that it allows utilities to create a mulit-tiered avoided cost rate structure. That is, a state is not required to set avoided cost exactly at the next cheapest cost of energy, but can include considerations of whether the QF is located in a transmission-constrained area, the QF’s ability to produce during peak demand, and statutory restrictions on the utility’s ability to purchase electricity (e.g. an RPS). All of these considerations must be balanced with the need to create an avoided cost rate that is just and reasonable to consumers.

    Further, qualifying facilities are “qualifying” by meeting federal standards (§292.203 and §292.204, available at: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=5517216c22de672592192e81dcc97726&rgn=div5&view=text&node=18:1.0.1.11.58&idno=18#18:1.0.1.11.58.2.27.6). Most customer-sited PV systems should meet these requirements, but they still have to file a form with the FERC (according to §292.207, available at: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=5517216c22de672592192e81dcc97726&rgn=div5&view=text&node=18:1.0.1.11.58&idno=18#18:1.0.1.11.58.2.27.6). This form, Form 556 (available at: https://www.ferc.gov/docs-filing/forms/form-556/form-556.pdf) is 19 pages long and looks to me like something that an average homeowner would not be able to complete on his or her own. Approval of the form (which happens if FERC does not reply to a homeowners’ application) can take up to 3 months.

    All of this is to say that a state-mandated FIT in Colorado or any other state in the US would not to have the wonderful simplicity that many FIT advocates point to. Colorado would not be able to set the tariff rate at whatever level it feels like – instead, there would be a big fight in which the PUC would have to balance many ambiguous factors, all while protecting ratepayers. Also, FERC would have some jurisdiction over the solar panels on homeowners’ roofs, and in a libertarian state like Colorado, I cannot imagine that going over well. For all its shortcomings, I think that the CO RPS does a fine job of encouraging more renewables in Colorado and does so just as, if not more, elegantly and efficiently than a FIT could do.

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  36. Thanks, Rich, for your thoughts on this issue, and thanks to Tyler and Jeanne for shedding more light on the legal issues. Based on the documents and articles you both posted, I believe that legal obstacles, or at least legal complications persist for a FIT in Colorado, or any state for that matter.

    First, FERC’s October 21 decision (posted by Tyler: http://www.ferc.gov/whats-new/comm-meet/2010/102110/E-2.pdf) specifically discusses combined heat and power (CHP) generators, not small PV arrays on customers’ roofs. I believe that it is also fair to say that PURPA was also not written with small, customer-sited PV panels in mind. Given that both PURPA and the recent FERC decision conspicuously do not mention customer-sited PV, it is dangerous to say that this new decision paves the way for a FIT.

    The most significant part of the FERC decision is that it allows utilities to create a mulit-tiered avoided cost rate structure. That is, a state is not required to set avoided cost exactly at the next cheapest cost of energy, but can include considerations of whether the QF is located in a transmission-constrained area, the QF’s ability to produce during peak demand, and statutory restrictions on the utility’s ability to purchase electricity (e.g. an RPS). All of these considerations must be balanced with the need to create an avoided cost rate that is just and reasonable to consumers.

    Further, qualifying facilities are “qualifying” by meeting federal standards (§292.203 and §292.204, available at: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=5517216c22de672592192e81dcc97726&rgn=div5&view=text&node=18:1.0.1.11.58&idno=18#18:1.0.1.11.58.2.27.6). Most customer-sited PV systems should meet these requirements, but they still have to file a form with the FERC (according to §292.207, available at: http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=5517216c22de672592192e81dcc97726&rgn=div5&view=text&node=18:1.0.1.11.58&idno=18#18:1.0.1.11.58.2.27.6). This form, Form 556 (available at: https://www.ferc.gov/docs-filing/forms/form-556/form-556.pdf) is 19 pages long and looks to me like something that an average homeowner would not be able to complete on his or her own. Approval of the form (which happens if FERC does not reply to a homeowners’ application) can take up to 3 months.

    All of this is to say that a state-mandated FIT in Colorado or any other state in the US would not have the wonderful simplicity that many FIT advocates point to. Colorado would not be able to set the tariff rate at whatever level it feels like – instead, there would be a big fight in which the PUC would have to balance many ambiguous factors, all while protecting ratepayers. Also, FERC would have some jurisdiction over the solar panels on homeowners’ roofs, and in a libertarian state like Colorado, I cannot imagine that going over well. For all its shortcomings, I think that the CO RPS does a fine job of encouraging more renewables in Colorado and does so just as, if not more, elegantly and efficiently than a FIT could do.

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  37. FiTs seems to have a polarizing effect on the general public. Depending on whom you ask, the implementation of them can be deemed a smashing success or an utter failure. With current states' holding the decision-making power to implement an RES/RPS and the passing of a federal renewable portfolio standard in the near future questionable, FiTs do not seem to be an appealing "quick-fix" solution to encouraging more development of renewable energy.

    On a federal level, the 2008 FiT bill backed by Congressmen Inslee proposed that FERC and the states would be required to implement the following conditions within their own areas of jurisdiction: 1) guaranteed interconnection to the grid, 2) mandatory purchase requirement through 20-year fixed contracts, and 3)rate recovery through a "national system benefits charge".

    As many others have stated, putting more renewable sources to use can benefit multiple stakeholders and help diversify our energy supply. Yet when wholesale providers are forced to add intermittent sources to their supply mix and most likely pass along the cost of doing so to rate-payers, the idea of adding more renewables somewhat forcefully through a FiT has me doubt its end goal. Yes, it is encouraging that long-term contracts would stimulate a more sustainable option than some tax incentives if the federal bill had passed, but with FERC lacking the capacity to really enforce any nationwide FiT and all the administration that would accompany it, and states being forced to resolve any interconnection obstacles, the idea of mandating this on a federal and state level seems too daunting of a task.

    For now, I see the need for states to focus on meeting their own RPS as it pertains to the energy supply available to them geographically and economically. Applying a FiT approach seems to add more trouble than its worth, both to state PUCs and rate-payers.

    Bosselman, F. Energy, Economics and the Environment: Cases and Materials. 2010 p. 908-909

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  38. Paul ScharfenbergerNovember 15, 2010 at 3:36 PM

    Three problems associated with implementing a FiT are offered in your blog: they have legality issues surrounding them; they are only effective in promoting capacity expansion (with little regard to ratepayer impacts); and they hinder technological advancement. I respectfully argue that your statements pertaining to these three areas are inaccurate and distort the comparison between FiTs and RPSs that you offer because RPSs face many of the same challenges. There is no conclusive evidence that either policy measure is superior. However, there is evidence that both policies can produce negative economic and societal impacts if structured improperly; design determines effectiveness.

    Legality Issues
    FiTs do face legality issues, but so do RPSs. Many RPSs encourage and reward in-state renewable energy (RE) generation while others go so far as to require a certain percentage of RE generation from in-state sources as a means of meeting RPS requirements. This is discriminatory and could be seen as placing a burden on interstate trade which is in violation of the Commerce Clause of the Constitution.

    Effective Policy Measure
    It has been argued that by establishing a fixed, long-term revenue stream for RE projects, FiTs make it easier for RE projects to obtain financing, including debt financing, which reduces the cost of capital associated with the projects which in turn reduces the economic burden placed on ratepayers. Further, it has been argued that RPSs increase the transaction costs associated with deploying RE projects. As Toby Cuture of NREL stated, “Feed-in tariffs have consistently proven to be cheaper for consumers.”

    Hinders Technological Advancement
    Picking “winners” and “losers” does hinder technological advancement, but this problem is not unique to FiTs. Many RPSs have carve-outs for specific technologies (i.e. Colorado’s 3% carve-out for solar). These carve-outs also pick “winners” and hinder technological advancement.

    Cory et al., Feed-in Tariff Policy: Design, Implementation, and RPS Policy Interactions. NREL technical Report, 2009.

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