Overpaying for Green Power

Americans are adopting a failed type of clean energy subsidy-the feed-in tariff-just as Europeans are abandoning it.

"How can California encourage investors to generate renewable electricity? How about a guarantee that if they generate the power, they'll be paid at a good price?" suggests Ray Pingle of the Sierra Club. Fair enough. But the price proposed by the Sierra Club and some members of Congress is three to five times more than the current average price of electricity.

Green power advocates in the United States have started pushing for a European-style subsidy scheme in which homeowners or businesses that install solar panels or windmills can sell their excess power back to the grid at inflated prices. Utilities are required by the state to pay above-market rates for this environmentally-friendly power.

These so-called feed-in tariffs were first devised in Germany in the early 1990s and have been adopted by nearly 20 other countries since then as a way to boost the installation of renewable energy production. And if encouraging the installation of renewable energy capacity is the chief goal, feed-in tariffs do work. As the result of its feed-in tariff scheme, Germany has the world's second-largest installed wind capacity'"behind the United States'"and the largest installed solar photovoltaic capacity in the world.

However, a recent report by the independent German economics think tank, RWI, noted that the solar electricity feed-in tariff of 59 cents per kilowatt-hour in 2009 is more than eight times higher than the wholesale electricity price and more than four times the feed-in tariff paid for electricity produced by on-shore wind turbines.

And even with that dramatic subsidy, solar panels still provide very little of Germany's power. The report noted, "Installed capacity is not the same as production or contribution." In 2008, 6.3 percent of Germany's electricity production was from wind, followed by 3.6 percent from biomass and 3.1 percent from water. Meanwhile, the report notes, "The amount of electricity produced through solar photovoltaics was a negligible 0.6 percent despite being the most subsidized renewable energy, with a net cost of about €8.4 billion (US $12.4 billion) for 2008." German consumers foot that bill. In 2008, the price mark-up due to green energy subsidies amounted to 7.5 percent of average household electricity prices. Keep in mind that German residential electricity prices are already high at about 30 cents per kilowatt-hour. The average American pays about 12 cents per kilowatt-hour.

Last year Vermont adopted a feed-in tariff scheme, guaranteeing solar power 30 cents per kilowatt-hour for 20 years. The average price of electricity for residential users in Vermont is 15 cents per kilowatt hour. Legislators and utilities are anxious to keep this form of high cost renewable energy from significantly boosting the rates consumers pay, so they typically limit the amount of energy that can come from such projects. In Vermont, for example, no more than 50 megawatts of generation capacity can receive the feed-in tariff subsidies. Since total electric generation capacity in Vermont is currently 1,111 megawatts, this means that less than 5 percent of generation capacity will be eligible for feed-in tariffs.

The local municipal electric utility in Gainesville, Florida, adopted the first feed-in tariff scheme in the United States last year as well. Solar energy generators are guaranteed 32 cents per kilowatt-hour for the next 20 years. The current average cost of electricity in Florida is just over 12 cents per kilowatt-hour. But because the amount of energy that can come from subsidized solar power generators is capped, Gainesville consumers should see their electricity bills increase by less than 1 percent.

Advocates justify feed-in tariffs on two grounds. First, that they aim to cut greenhouse gas emissions. However, the RWI analysis found that the feed-in tariffs for solar electricity in Germany are equivalent to paying more than $1,000 per ton to reduce carbon dioxide emissions (the wind power subsidy from feed in tariffs was better at only $80 per ton). In late 2009, an emissions permit for a ton of carbon could be had for less than $20 on the European climate exchange. "Hence, the cost from emission reductions as determined by the market is about 53 times cheaper than employing [photovoltaics] and 4 times cheaper than using wind power," notes the report. Clearly, feed-in tariffs are an absurdly expensive way to cut carbon dioxide emissions.

Advocates also claim that increasing the market for renewable sources of energy will eventually drive down their prices so that they become as cheap as fossil fuels. In Germany, feed-in tariffs are supposed to decline 5 percent per year as renewable energy technologies become more efficient and cheaper. This digression in subsidy rates is also a feature of various feed-in tariff schemes adopted or being considered in the United States. However, the RWI report found instead that feed-in tariffs create perverse incentives to lock into existing high cost technologies. And why not? Feed-in tariffs function like old-fashioned cost-plus utility rate settings since they guarantee cost recovery plus a set profit margin. So the incentive is to install the high cost equipment before the subsidy declines.

In October 2009, the New York Times Green, Inc. blog summarized a report by Deutsche Bank and the Earth Institute of Columbia University by concluding that countries that adopted feed in tariffs are "the safest harbors for investors looking to finance clean energy ventures." After all, the feed-in tariffs are set based on recouping all costs plus a guaranteed profit margin.

However, a footnote buried deep in the report turned out to be prescient: "While the new German coalition is discussing accelerating the degression [sic] of feed-in tariffs, this is tied to declining cost for solar power. We believe that the investment climate in Germany remains strong." What the footnote meant is that the new German government was perhaps going to cut back more dramatically than anticipated on money doled out to participants in the feed-in program.

Last week, the German environment minister made good on that threat, announcing that feed-in tariffs for residential installations would be cut 15 percent and payments for installations on farmland would drop by 25 percent. "We want to introduce the free market and not provide existence guarantees for participants. It'll be a boost for technology," said German environment Minister Norbert Roettgen. So much for the safe investment harbors that feed-in tariffs supposedly create. As one analyst told Reuters, the German solar market will likely shrink by at least 25 percent in volumes and 40 percent in revenue in 2010.

Other European countries are cutting their feed-in tariffs as well. For example, France announced it would cut its feed-in tariffs for rooftop solar photovoltaic systems by 24 percent, from 78 cents to 60 cents per kilowatt hour. By the way, the average price for electricity in France is 18 cents per kilowatt hour. To live by government subsidy is to die by the withdrawal of government subsidy.

The evidence from Europe is in: Feed-in tariffs don't appreciably cut greenhouse gas emissions and are not very effective at accelerating energy innovation. The irony is that American states and municipalities appear to be adopting this failed renewable energy strategy just as the Europeans who invented it are scaling it back.

Ronald Bailey is Reason's science correspondent. His book Liberation Biology: The Scientific and Moral Case for the Biotech Revolution is available from Prometheus Books.