An Argument for State Solar Feed-in Tariffs

by James Huff, abakus solar AG

Over the years, renewable energy resources have made enemies. Established utilities, nonrenewable suppliers and political parties opposed to technologies that threaten those establishments stand arm in arm opposing renewable resources.

The reasoning behind this opposition must be re-examined and revised. The upstart renewable industry and nonrenewable energy industry establishment are at war. Eventually a truce must be reached to benefit both parties equally and their customers and investors. This is how to build that alliance.

State Feed-in Tariffs

Do not confuse a tariff with a tax. Feed-in tariff means that when someone constructs a renewable energy power plant, the utility must purchase the power produced by that power plant. The funding mechanism for this program can be referred to as a Renewable Energy Initialization Fund (REIF). An REIF uses the collective power of the end customer to provide a utility with the ability to provide feed-in tariff policies for anyone who wants to build a renewable energy (solar) power plant.

Feed-in tariffs have proven successful in Germany and Spain, rapidly expanding the use of solar energy provided to the national grid. This has specific benefits for every party in the energy value chain. The structure of the feed-in tariff, however, must be designed correctly for the program to be successful and sustainable long term. This can be achieved several ways.

The first common sense method is to add a flat charge to each customer’s monthly bill. This is advantageous for utility providers who manage the feed-in tariff programs because the market cap can be determined quickly and easily while the cost of the entire program is carried by each customer equally with no cost to the utility (aside from administration costs taken from the additional charge). Even with a modest addition to monthly bills, the program uses the cumulative power of the entire customer base to spread the program’s cost so the addition is hardly felt.

Any state or city, including residential, industrial, commercial and municipal customers, is capable of placing a reasonable market cap at no cost to the utility. Residential customers carry most of the total cost for this type of scheme because it is based on individual customers, not energy usage, which is more beneficial to business interests.

This type of scheme benefits the utility because it receives free power at peak hours of energy use (when electricity is most expensive for the utility) to support the grid. The addition to monthly bills pays for the energy, where the utility collects on sold energy, which is provided free to it. The introduction of a feed-in tariff also boosts the utility’s image as a responsible corporate citizen investing in a clean-power future.

The second method of structuring a feed-in tariff that spreads the cost over all utility customers is to add a small charge to each kilowatt-hour of energy the utility sells. This spreads cost according to actual energy use. Heavy users of electricity will pay more into the feed-in tariff scheme; more conservative customers will pay less. This further incentivizes heavy users to become more efficient and install their own solar power plants to decrease operational costs. The utility can calculate caps based on actual annual energy sold rather than the number of customers.

The flat charge per kilowatt-hour is far less than 1 cent, and the price of electricity is low per kilowatt-hour in the example. Yet, the cap dramatically increases when the tariff is calculated using actual energy use (averaged out per customer). The incentive is clear, and the program cost is divided among those who will benefit most from adding solar energy to the power mix: customers.

Benefits also stand out to investors, who provide the capital for building photovoltaic (PV) projects and collect the feed-in tariff for a set time in return. Currently, the standard term is around 20 years. PV installations continue working 25-30 years. The technology is not old enough to determine the life of a project, but because there are no moving parts, installations could function much longer, provided that inverters are changed appropriately. Estimates are around 50 years for high-quality modules.

One major problem with previous schemes is that utility providers have no interest in the installation’s continuing to function. Perhaps giving the utility a stake in the installation is the way to go.

For example, an investor purchases a 1MWp free-field solar power plant. He collects the feed-in tariff for 20 years and earns his return on investment plus profit. He pays for the construction, maintenance, monitoring and infrastructure to connect this power plant to the grid. All work is done. After 20 years, the investor has little interest in keeping the power plant in operation because it is neither connected to his home or business nor provides direct offset to his costs. It is only a cost to him without further power purchase agreements.

Here is Where it Gets Interesting

If the investor agrees to take his return through feed-in tariffs for 20 years, then at the end of the 20th year he assigns ownership to the utility, it would be able to add the power plant to its portfolio for at least five to 10 years with required maintenance. The life of the power plant could be extended much longer than five to 10 years with proper maintenance. This type of ownership transfer to the utility gives the incentive to promote alternative energy feed-in tariffs.

They pay no acquisition costs, no costs for grid expansion, nothing for construction. The investor pays for all of this, then hands it over when he is done. The utility adds it to its production and renewable portfolio at zero cost, and it maintains it at roughly $15 a year per kilowatt-peak unit. Because the utility pays nothing for the extra power being supplied to the grid, it is possible for it to lower energy prices for end customers in proportion to the renewable power generation capacity.

Each customer would see a decrease in his or her electric bill or that costs are not rising as quickly. Because not all investors build projects large enough to interest a utility, smaller private installations–let’s say less than 100kWp on a private property–may keep the installation after 20 years and offset their electricity use.

Pairing either scheme of spreading the cost of the feed-in tariff (flat rate per customer or flat rate per kilowatt-hour) with the transfer of ownership and control, the scales tilt heavily toward utility’s profit margins. If the utility is bound by rules that govern the acquisition of assets according to capital investment, the utility may offer a portion of the capital to establish an interest in the project from the beginning.

Who benefits most from this? According to common sense economics, everyone.

The investor builds the project and benefits from the feed-in tariff for 20 years. The utility adds the project to its power cocktail at zero cost and enjoys the full benefit of its production after the feed-in tariff expiration. And the public–end customers–pay little in addition to current energy costs for clean, reliable, renewable energy. And their electricity costs stabilize.

Two additional parties benefit: the political establishment and nonrenewable suppliers.

It would be hard to find a voter who would argue against having clean, renewable energy in the energy mix that powers his or her home. Politicians who enact legislation that brings these technologies into daily lives will be rewarded through job approval and re-election. One of the largest obstacles for alternative energies is political campaign donations from coal, nuclear, oil and other easily demonized special interests. If politicians were to combine these industries’ interests with those of the public and renewable energy, the same campaign cash in opposition to renewable resources quickly would transform into cash supporting those technologies. To discuss how that is possible, one needs to look only at the supply and demand principles of the market, which brings us to the second party: nonrenewable suppliers.

Coal has been king for a long time. It is abundant, cheap, access is controllable, and it contains more energy per pound than most other combustible energy sources. It’s also dirty and destructive. Methods for extraction and burning it are catastrophic to the environment. No technology exists to make coal clean; this sad pipe dream has been infused artificially into the public sphere. Making coal “clean” by pumping emissions into the ground or other nonsensical methods is extremely costly and a dangerously false premise. Further discussion should be rejected as nonsense. Coal will defend its kingdom against upstarts such as renewable energy, but what if it were possible to give coal a stake in the renewable revolution?

In general, the coal industry possesses massive capital resource strength. This capital can be redirected and invested in renewable technology manufacturing capacity. To capitalize on the expanding demand for renewable energy, the existing coal industry must adapt and diversify to survive the changing energy market. Coal will remain a commodity for a long time, it is required in many industrial processes, and it might retain a standing as a baseload electricity production material. Burning coal for electricity generation, however, will continue to shrink as public demand for clean energy increases. The coal industry’s direct investment in renewable manufacturing is in the interest of shareholders and incentivizes expanding use of renewable technology, as well as supporting popular policy through its political influence. If major coal producers were to invest in silicon and solar cell manufacturing–industrial processes that require large amounts of capital investment–the added capacity would help push prices closer to grid parity. With existing capital, coal interests would control a portion of the renewable energy market, thereby developing a relationship based on mutual success and shareholders’ wallets.

Mining technology developed for the past couple of centuries and improvements in the cost per unit of coal harvested have resulted only in mass pollution, disappearing mountains and irreparable environmental damage through strip mining and mountaintop removal. One point made against scaling back coal production is that miners will lose their jobs. This argument is improbable. Mining only has been harmed by practices such as strip mining and mountaintop removal. Nobody cares for mountains more than miners. Seeing their beloved mountains disappear is more heartbreaking to a miner than one can imagine. Setting forth the plan to decrease production, specifically for practices such as mountaintop removal, ensures that mining jobs will be more secure by returning to actual mining, rather than blowing mountains on which they depend. And these proud men may again refer to themselves as miners rather than demolitionists. The overall impact of such policies creates renewable jobs and protects coal production jobs.

In addition to coal, natural gas has an important energy production role. This resource, however, can be viewed as renewable, or at least obtainable through nondisruptive practices. All agricultural and municipal entities must expand and capitalize on natural gas recovery techniques from sources such as livestock and landfills. The fuel source can provide significant support to current heat and baseload energy production. With small amounts of capital investment, returns quickly can add to the agricultural industry’s bottom line and the budgets of municipal governments charged with landfill management.

The current rate of energy cost increases to the public is about 3 percent. The cost for each kilowatt-hour of solar energy, once installed, begins to fall the first day. When the cost-decrease curve for solar energy is considered over 30 years compared with current energy methodologies, the trends become clear. Look at energy cost increases for Nashville, Tenn., which has an average energy cost of around $0.0935 per kilowatt-hour today. Over 30 years, the costs increase rapidly.

If a homeowner installs a 1kWp solar installation on his roof, he can expect to pay around $3,400. Initially at the average radiation values of the preceding tables (the radiation values determine what energy production is possible in the region), the homeowner will not see a profit (without the feed-in tariff), yet as the system progresses over the lifetime of 30 years as outlined, it becomes cheaper than the actual rates per kilowatt-hour. Remember, after the 20th year the small-scale installation offsets energy costs the customer pays. In the case of the investor, the utility owns the installation after 20 years and may use the installation to add to its generation capacity.

When compared, these figures allow us to see the relationship of these cost structures.

The Tennessee example is one of the worst-case scenarios for comparison because of the extremely low cost of electricity in that region. Any utility interests, commercial customers, industrial customers or homeowners, however, can see the relationship developing between current energy production methods and the solar energy industry. The decentralized production that solar energy provides allows for energy cost reduction over time and increased efficiency per kilowatt-hour because of onsite production during peak hours and reduced transmission costs.

The time has come to wave the flags of truce. All parties can come to the tent and draft the most beautiful alliance the world has seen. Investors, utilities, suppliers, customers and politicians can benefit from a common sense package that places energy and resource conservative values in the forefront of a clean, intelligent energy policy.

James Huff is director of business development at abakus solar AG and the creator and director of


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