Happy birthday, feed-in tariffs!

10 years ago today, Germany adopted its Renewable Energy Act, which for the first time starting on April 1, 2000 ensured the profitability of properly installed renewable energy systems. Up to then, the rates offered were linked to power prices, and generally only that one price applied to all types of generators of renewable electricity -- a policy currently still used in parts of North America, where politicians and proponents of renewables have yet to fully understand what makes current German feed-in tariffs (FITs) successful.

But while North Americans struggle to get their heads around the policy, feed-in tariffs have practically taken over the world. According to the World Future Council's Miguel Mendonça, some 50 countries around the world will have implemented FITs by the end of this year. More importantly, no other policy has proven anywhere near as successful in ramping up the deployment of renewable energy systems. As I have written elsewhere, an overwhelming number of policy-neutral studies have found that FITs are the most effective and least expensive way of promoting the large-scale deployment of renewables -- from Sir Nicholas Stern in his Review on the Economics of Climate Change to the International Solar Energy Society. And the number of such studies continues to grow, as the SEMI PV Group’s Policy Principles and Recommended Best Practices for Solar Feed-in Tariffs demonstrates.

Inexpensive? The German government has repeatedly published data showing that expenditures for FITs are far below savings from offset energy imports, lower carbon emissions, and the tax revenue from the domestic market generated. Just this week, the head of Masdar PV estimated that the 4.8 billion euros for feed-in compensation in 2009 led to 6.4 billion euros in savings.

So how do FITs work? On a recent visit to Washington DC, I had lunch with a lawyer involved in the design of Renewable Portfolio Standards in a number of US states. He asked me how I would describe FITs in one sentence. I told him I could do it in one word: democracy. That word, of course, necessitated quite a long discussion, the gist of which was that FITs allow common citizenry to become profitable power generators on an eye-to-eye level with both municipal and investor-owned utilities. In other words, consumers become producers, a fact that goes a long way toward explaining why Germany's Energy Consumer Association (ECA) supports FITs even though they raise the retail electricity rate slightly. The ECA is happy nonetheless because the consumers it represents can become profitable producers.

That is the outcome of FITs, but the explanation still does not tell us how they work. In a sentence: the government calculates a rate of compensation (tariff) for a kilowatt-hour of electricity from a specific type of renewable generator (biomass, wind, solar, etc.) and system size (power from larger systems generally costs slightly less than power from small systems) at a level needed to give such generators a reasonable ROI, and then forces grid operators to pay those rates for all renewable power, with the cost being spread across all power consumers in the country (not just power consumers within that grid). Okay, so the sentence is a bit long, and I kinda cheated with the parentheticals. Sometimes my Bachelor’s in English does come in handy.

I have probably also disgruntled the average American reader; after all, in the above paragraph I say that we should actually pay more for less efficient (small) systems, and we should guarantee profits, both of which seem anathema to free-market economies. And I would actually agree but for one thing: the rest of the energy sector has also always enjoyed guaranteed profits and subsidies for less efficient systems. FITs just let renewables take part in the scheme.

Last month, I was reading up on how biogas could be sold to natural gas pipelines in Germany. Because the price of natural gas fluctuates, but the price of biogas under FITs is fixed, the natural gas network operators proposed that they be able to pass on losses to their consumer base if they had to sell the mixture of natural gas and biogas at a price slightly below that of biogas -- but now get this: if they could sell the mixture at a profit, they wanted to keep all the money.

The situation is no different in any other energy sector in any other country. Indeed, the power grid in the United States was built up around the concept of natural monopolies; it does not make a lot of sense to have separate power companies set up competing grids in one area. So power companies have long been regulated in the US to prevent price gouging, but in the process they are also essentially guaranteed a profit. (See Power Struggle: the hundred-year war over electricity by Rudolph and Ridley.)

FITs open up that option to everyone, from businesses large and small to communities and homeowners, though a paradigm shift is involved: the profit margin is no longer based on the investing entity, but rather on the type of generator. In the US, power companies are guaranteed a profit (and do not compete with each other), but gas has to compete with coal and nuclear - so granting profits to solar, wind, and biomass as FITs do is a new approach in that respect. But FITs fit in well with our historic way of protecting the profitability of energy producers.

What about subsidizing inefficient systems? Well, carbon capture and storage (CCS) would reduce the efficiency of coal plants even if it works, and we are still pushing for that. Moreover, the US government (and the same holds for the EU) continues to dump billions on the coal industry -- 3.4 billion dollars in the stimulus package alone over 10 years -- although the coal sector has been profitable now for some 200 years. Peabody Energy, the largest privately owned coal company in the US (it claims to make up some 10 percent of electricity generation in the US), posted an EBITDA of 1.29 billion in 2009 on revenues of 6.01 billion US dollars. I'm not an economist, but that sure looks like a 22 percent profit margin to me. (If so, then you know why conventional power companies are not interested in renewables, where the profit margin is below 10 percent even under FITs.) More importantly, this single company's profits are roughly four times greater than the money for the entire coal sector in the stimulus package per year.

What on earth are we subsidizing them for at all then? The same holds true for the oil industry and the nuclear industry -- but I'll spare you the details. My point is that the very companies that oppose guaranteed profits for renewables already get much greater profits on the current market and are still subsidized. These guys could fund CCS and other research out of their pocket money – and CCS might never work.

We already know that – and how – lots of types of renewable energy work, with wind power being the cheapest, but the most intermittent, and solar (intermittent, but generally with peak production coinciding with early afternoon peak demand) being the most expensive, though solar prices continue to plummet with no end in sight. We also already know what the best way of getting more of these generators on the ground is: feed-in tariffs. At least, most of us know that in countries ranging from Slovenia and the Netherlands in Europe to Argentina and Brazil in South America, China and India in Asia, and Algeria and Kenya in Africa – and as of April 1, 2010, the UK.

Is the US not the leader in solar and wind without FITs? In solar, no -- at the end of 2008, the United States had approximately 25 percent less photovoltaics installed than the tiny, cloudy German state of Baden-Württemberg (approximately as large as Connecticut and probably just as sunny…), and Bavaria has even more solar than Baden-Württemberg. In wind, the US is the clear global leader, though only in terms of absolute installed capacity. As a percentage of its electricity supply the US may not catch up with places like Germany and Denmark for decades. The US currently gets some 1.5 percent of its electricity from wind power, compared to around 7.5 percent in Germany and 20 percent in Denmark. The US goal is currently 20 percent wind powered by 2030.

But there is one other thing that makes the US renewables market fundamentally different. Almost all of those wind turbines are owned by power companies, not citizens. Wind farms with hundreds of megawatts of capacity are put up in the US, and they are generally owned by a single company, such as the Horse Hollow Projects or Shepherds Flat, which will be the largest in the world when it is built. The situation is no different for solar, with US power companies planning to put up individual projects with hundreds of megawatts. US policy shuts out the little guy.

Meanwhile, in Germany most large wind farms onshore have a splintered ownership structure, with shares held by a number of companies and countless local citizens. And the lions' share of installed photovoltaic capacity is spread across countless small roof systems financed by homeowners themselves. FITs guarantee them a 5-7 percent ROI if their systems are installed and serviced properly. If you are in the US, go ahead and find out if you can install a photovoltaic array on your home and turn a profit on it. If you can’t, demand FITs.

If you are in California, you may be told that the state has feed-in tariffs. In a way, that is true, but they are similar to the ones that Germany had in the 1990s, and they proved ineffective for solar. The rate was linked to power prices and not differentiated according to the specific needs of a particular type of generator. The mistake is being repeated elsewhere, such as in New Brunswick.

Ten years ago, Germany saw the shortcomings of such approaches and revamped its policy considerably, with proper FITs for solar being added in 2004. Since then, dozens of other countries have further tweaked the policy. Some included FITs for small wind turbines, which Germany only recently added. Germany now seems to have decided that it does not want photovoltaic arrays on farmland, a move that even a lot of people in the solar sector applaud. France likes solar arrays that are the roof themselves, rather than just on top of the roof. Perhaps the most important revision has been adjustments that take account of inflation, an important change in these days when governments might be tempted to combat debt with high rates of inflation.

The evolution of feed-in tariffs is by no means over, and they will continue to be crucial to the success of renewables for the foreseeable future. After all, while some believe that no policy at all will be needed once grid parity has been reached -- the point where solar power costs the same as retail electricity -- such people fail to understand that feed-in rates for biomass, wind, etc. have always been below the retail rate. So once solar becomes cheaper than retail electricity, we will need properly designed FITs to ensure a proper ROI even as we prevent price gouging -- just as US regulators continue to do with monopoly power companies.