11 June 2012
The feed-in tariff (FiT) has been responsible for the rapid growth in solar capacity in much of Europe, but with the global financial crisis the FiT has lost favour leaving the future growth of solar energy unsure.
The FiT is a financial mechanism to encourage renewable energy projects. Renewable energy project owners are paid a set price per kWh produced and guaranteed access to the grid. It allows countries to determine the price that increasing renewable energy on the grid is worth to them—a back door way to put a price on carbon , and it allows them to plan their growth.
Many clean energy advocates all over the world have pushed for FiTs, but the full picture is still not clear.
Rate payers who install renewable energy are ensured a steady payback on their investment for as long as the FiT is in place. Because of its prevalence and success—it was described in a 2008 European Commission report as “the most efficient and effective support schemes for promoting renewable electricity” –many clean energy advocates all over the world have pushed for FiTs, but the full picture is still not clear.
The German example
Germany is perhaps the most dramatic case study in the promise and pitfalls of the FiT. The project started modestly in the 1990s, ensuring renewable energy installers access to the grid and a pay-back rate of 90% of the current cost of electricity. The tariff was reformed in 2000 to its present structure. It was adjusted based on the form of electricity—different prices for different forms of generation-- the tariff was guaranteed for 20 years, slowly decline to match presumed increases in technology leading to lower costs, and most dramatically, utilities were allowed to participate. Beginning in 2009, Germany offered additional benefits for electricity consumed onsite rather than supplied to the grid, hoping to alleviate some of the intermittency of solar on the grid.
Since 2000, German PV installation has exploded from 76MW to 24.8GW as of 2010. Solar panel installation proliferated and the skyrocketing demand created a bubble. Other countries had trouble competing with Germany’s demand. As of early this year, cuts to the German FiT of up to 30% were passed only to have the cuts overturned by the German Parliament.
Phasing out nuclear
Germany still gets much of its energy from nuclear, but Chancellor Merkel has said they plan to phase out nuclear power by 2020 in response to increasingly negative public opinion following the Fukushima disaster. To provide energy to its many industries, they will have to rely more heavily on coal or natural gas (which means rapidly fluctuating energy prices). It’s hard to predict exactly where the German market will go in light of cuts to the FiT, but Germans have likely kept an anxious eye on the unfolding situation that has befallen Spain in the last few years.
Spain began offering a FiT in 2004, along with many other financial incentives for renewable energy. The result of these has been a huge growth in Spain’s solar energy industry. Unfortunately, Spain’s generous subsidies for renewable energy may have led in part to its financial demise, leading to an energy deficit of $31. In 2008, Spain reduced its FiT and in of January of this year the country said it was suspending new tariffs for all renewable energy projects.
Since then, Spain has fallen from the largest solar energy market in the world to the eighth largest. Spain’s generous subsidies built up an industry that the budget couldn’t support and the sudden removal of those subsidies led to a crash, leaving owners and operators of solar projects reeling.
At this time, most of the European countries that have employed a FiT scheme have cut or are considering cuts to their programs.
A call for consistency
The market is beginning to correct itself, perhaps painfully, by reducing supply through bankruptcy and consolidation.
A report entitled “Reconsidering the Economics of Photovoltaic Power” from Bloomberg New Energy Finance describes how FiTs in Europe artificially inflated the price of solar modules even as technology and manufacturing improvements meant lower module costs. From 2003 to 2008, the price of PV hardly dropped at all, then dropped dramatically when Spain repealed its FiT, resulting in a dearth of demand. Manufacturers were left to try and make solar cost competitive with traditional forms of electricity, exacerbated by the low cost of natural gas. It seems that now, the market is beginning to correct itself, perhaps painfully, by reducing supply through bankruptcy and consolidation.
Proponents say that the FiT is a way for government to incentivize renewable energy or monetize its environmental and societal benefits. Opponents say that it artificially inflates the value of renewable and forces all rate payers to subsidize those who can afford to install renewable. Austerity has hit the FiT hard and its future is unsure. In the end, whether it is a FiT or other incentive mechanism, adoption of renewable technologies will require policy consistency more than anything else, and these growing pains will result in a stronger, leaner solar industry ready to make a run at grid parity.
Written by Sydney Kaufman, Contributing Editor, Solar Novus Today