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.

Making a Case for Rationality in [Renewable] Energy Deployment

It has become increasingly evident that there is a serious need for some clear thinking in the energy debate. As I have often said, the sum total of all of the vested interests (utilities, environmentalists, renewable energy advocates, etc., etc.) does not equate to the public interest. In an earlier blog on the Western Wind & Solar Integration Study, I noted that we are becoming increasingly adept at operating the electric grid with greater amounts of intermittent renewable resources. But there are many proponents who are becoming positively irrational about this. It seems that some of the policy makers who are closest to the problem are the farthest from reality. To some I would grant the benefit of the doubt and suggest that they simply know no better. Other proponents would clearly subjugate the public interest to their own economic and/or political self interest. Unfortunately, the result is the same.

As anyone familiar with this field knows, California's renewable standard will likely soon require major utilities to provide one-third of their energy from renewable resources by 2020. It seems to matter little whether or not this is an attainable goal. And, I used to think that California was on the right track in requiring that these renewables actually deliver renewable power into the state in order to qualify. But as the likelihood of meeting this ambitious goal becomes increasingly problematic, the policy makers and stakeholders seem willing to make tradeoffs that will dilute the effectiveness of the goal.

Let's start with an article in the Sacramento Bee describing how the various stakeholders are debating the sourcing requirements for renewable energy to comply with the standard (see Utilities, groups at odds over sources for renewable energy). Utilities are now claiming -- perhaps rightfully so -- that they cannot meet this aggressive standard unless they are allowed to procure resources from out of state, and a California PUC analysis supports this contention. So, if you were in California, which would you find to be the more rational approach: a standard that cannot be met and which encourages utilities to procure out-of-state resources, often at exorbitant costs, or a more reasonable ramp-up in renewables that fosters in-state development at reasonable cost? Would California ratepayers benefit more from sending their utility dollars out of state to essentially purchase RECs or keep that money in state to develop local projects? They may as well propose to get solar energy from a satellite! Oh, sorry, they're proposing that too. And then everyone laments the high contract failure rate in renewable energy.

The lesson seems to be: Set a standard that you cannot achieve and then simply change the way you measure compliance to make it appear that you did. This situation has become so bizarre that Colorado's major utility has now hatched a scheme to combine brown power from unspecified sources with its excess RECs and sell the bundle to California utilities as green power to comply with the standard that they cannot otherwise meet. Of course, the Colorado utility in question hopes to profit handsomely from the sale of these RECs which, incidentally, were already paid for by Colorado ratepayers. What makes this possible from the Colorado utility's perspective is that it has acquired too many RECs, too soon, at too high a cost. This is beginning to look like a zero-sum game. The same amount of renewables will ultimately be developed, the only question is where? Call me old fashioned but how about a scenario in which each utility develops its own renewable resources to serve its own local needs?

I mentioned that the Colorado utility had acquired too many RECs, too soon, at too high a cost. I made this comment back in 2007 when I showed that the utility proposed to purchase more solar RECs than it needed for compliance in an environment where solar costs were projected to diminish rapidly, thereby saddling ratepayers with higher costs than they would otherwise have to pay. This prevented the utility from taking advantage of the inevitable cost reductions that were sure to result from technological advance and deployment experience. But it is this myopic belief that if some is good, more must be better that is responsible for the irrational behavior that is inflicting policy makers with regard to renewable energy. As stated in a recent op-ed piece on cap-and-trade by Paul Gerlach in the South Florida Sun-Sentinel, this "preoccupation with setting unrealistic targets for renewable sources has blinded policy makers to the almost unlimited opportunities for technological breakthroughs in the production and use of conventional fuels..." and, I might add, in the deployment of renewable energy technologies.