Overpaying for Green Power

Americans adopt personal subsidies just as Europeans are abandoning them.

"How can California encourage investors to generate renewable electricity?" asks Ray Pingle of the Sierra Club. "How about a guarantee that if they generate the power, they'll be paid at a good price?"

Fair enough. But the price proposed by the Sierra Club and its allies in government is three to five times the current average price of electricity.

Green power advocates in the United States have started pushing for a 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. The government would require utilities to pay high above-market rates for the power.

These "feed-in tariffs" were first devised in Germany in the early 1990s, and they have been adopted by nearly 20 other countries since then. If encouraging the installation of renewable energy capacity is the chief goal, feed-in tariffs do work. As a result of its program, Germany has the world's second largest installed wind capacity (behind the United States) and the world's largest installed solar photovoltaic capacity.

If you consider other goals, however, the idea has drawbacks. A recent report by RWI, an independent German economics think tank, noted that the solar electricity feed-in tariff'"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. But even with that dramatic subsidy, solar panels provide very little of Germany's power.

As the report notes, "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 hydropower. Meanwhile, "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."

Consumers foot the bill. In 2008, green energy subsidies accounted for about 7.5 percent of average household electricity costs. 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 municipal electric utility in Gainesville, Florida, adopted a feed-in tariff scheme last year as well, guaranteeing solar energy generators 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 say feed-in tariffs cut greenhouse gas emissions. But they're an absurdly expensive way to do this. According to RWI, the German feed-in tariffs for solar energy reduce carbon dioxide emissions at a cost of more than $1,000 per ton. (The wind power subsidy was better, coming to 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," the report notes.

Advocates also claim that increasing the market for renewable sources of energy will eventually drive down their prices so 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. Yet the RWI report found that feed-in tariffs create perverse incentives to lock in existing high-cost technologies. The tariffs function like old-fashioned cost-plus utility rate-setting, since they guarantee cost recovery plus a set profit margin. So the incentive is to install costly equipment before the subsidy declines.

Last October a report by Deutsche Bank and the Earth Institute of Columbia University concluded, to quote the summary on the New York Times blog Green, Inc., that countries with 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.

A footnote buried deep in the report briefly noted a potential problem: "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." In other words, the new German government was perhaps going to cut back more dramatically than anticipated on the money doled out to participants in the program.

In January, 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," said German Environment Minister Norbert Roettgen. "It'll be a boost for technology." So much for safe investment harbors. As one analyst told Reuters, the German solar market will likely shrink by at least 25 percent in volume and 40 percent in revenue in 2010.

Other European countries are cutting their feed-in tariffs as well. France announced it would cut its subsidies for rooftop solar photovoltaic systems by 24 percent, from 78 cents to 60 cents per kilowatt-hour. The average price for electricity in France is 18 cents per kilowatt-hour. Live by the government subsidy, die by the withdrawal of the 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. Yet American states and municipalities appear to be adopting this failed renewable energy strategy just as the Europeans who invented it are scaling it back.