Opinion

The Great Debate

Renewables roll-out needs price guarantees

May 13, 2009

John Kemp Great Debate– John Kemp is a Reuters columnist. The views expressed are his own –

Power generation from renewable sources such as wind turbines, solar cells and biomass plays a small but important part in satisfying total electricity demand around the world, and is growing at an exponential rate thanks to generous public subsidies and government support.

Renewable sources have increased their share of worldwide generation from just 0.4 percent in 1980 and 1.1 percent to 2.3 percent in 2006. In its “World Energy Outlook 2008″, The International Energy Agency (IEA) projects their share will double to 4.9 percent by 2015, and then almost double again to 8.7 percent by 2030. Click here for PDF.

Policymakers are relying heavily on renewable generation to meet projected growth in the electricity demand over the next 20 years while limiting growth in the emission of greenhouse gases.

Unlike reserves of oil and gas, which may be exhausted within the next 70 years, renewables will remain a source of power indefinitely. Much the same could be said of coal, but renewables do not contribute to increased carbon dioxin concentrations in the atmosphere.

But with renewable sources still costing more per kilowatt hour than conventional power from nuclear or fossil fuel plants burning gas and coal, renewables have not yet reached “grid parity” with other power producers and are struggling to penetrate the power market.

Market penetration depends on subsidies, price support and quota schemes mandating power suppliers buy a minimum share of their electricity from renewable. But widespread variations between countries and even within them suggest uptake is sensitive to the form in which support is offered. In particular, guaranteed prices for renewable producers have been more effective than quota systems in encouraging widespread development of wind and solar power.

RENEWABLES PENETRATION

Since all OECD governments are committed to increasing the share of renewables in total output, it makes sense to rank policy effectiveness in terms of market share rather than absolute watt hours generated.

On this measure, penetration ranges from 25 percent in Iceland, 20 percent in Denmark and 9 percent in both Germany and Spain, to 1.6 percent in the United Kingdom, 1.3 percent in Sweden and 0.6 percent in Japan.

In absolute terms, the United States is the world’s largest producer of renewable energy with 72,000 gigwatt hours (GWh) last year. Only Germany (60,000 GWh) and Spain (27,000 GWh) are comparable. But it is also by far the world’s largest producer and consumer of non-renewable power (more than 3.7 million GWh). The share of renewable generation in the total was actually rather small (just 1.7 percent) and puts it in the middle of the international spectrum.

Some country-to-country variability can be explained as the result of past policy choices and natural resource endowments. Iceland’s high share is based on its abundant geothermal resources. France’s low one the fact nuclear plants provide three quarters of the country’s total power output, leaving little demand for renewables or power from any other source.

But historic policies and natural resources cannot explain why Denmark, Germany and Spain generate six times more renewable power (proportionately) than the United Kingdom, the United States and Sweden.

PRICE GUARANTEES OR QUOTAS

The main factor determining policy success is the structure of the program. Price-support systems (used in Denmark, Germany and Spain) have been more effective than quota-based systems (used in the United Kingdom, Sweden and parts of the United States):

(1) Price-based feed-in-tariffs (FITs) guarantee renewable power producers the right to sell electricity into the grid at a fixed rate set by law, or in some variants at a premium over the peak market price or some average of the prices in a previous period:

* FITs guarantee priority access to the network (grid managers must buy power offered by renewable producers first at the agreed price, even when competing conventional generators offer power more cheaply).

* The grid pays a premium for renewable power (allowing renewable generators to recover the higher costs associated with their generation).

* In the most successful schemes this price is reasonably predictable (it is either fixed in cents per kilowatt or linked to an annual average) to make it easier for renewable producers to obtain project financing.

(2) In contrast, renewable obligation certificates (ROCs) and renewable portfolio standards (RPS) are quota systems. They require power sellers to buy a minimum number of megawatt hours (MWh) or a minimum percentage of total sales from renewable sources. Power sellers receive credits for every MW of renewable power they buy and must acquire a set number of credits by the end of the compliance period, buy surplus credits from others, or pay a financial penalty.

Quotas have been adopted by the United Kingdom, Sweden and most state-level governments in the United States that have set renewable targets. Favored by economists as the most efficient way to produce a given volume of renewable energy, since they encourage lowest-cost options to be developed first, they are seen as “market friendly”, technology neutral, and more compatible with integrating renewable output into the wider power system. In theory, the target volume of renewable power is guaranteed because tradable creditable prices will rise until enough renewable generation is incentivised.

Because quota systems do not guarantee a price for the power being sold to the grid, prices remain highly variable, determined by supply and demand in the wider power market, which can make it hard to obtain project financing.

Uncertainty can prove fatal to projects involving with high upfront capital costs (such as solar and offshore wind farms), long payback times (7-10 years), or where developers are small technology-driven companies relying on bank-based lending rather than established power utilities which can finance projects on their balance sheets. Quota systems have not tended to encourage innovation.

In contrast, price-based FITs have proved extremely successful in encouraging widespread installation of wind turbines (Denmark and Germany) and solar cells (Germany and Spain). Because they guarantee prices and revenues for an extended period, up to 20 years in some cases, loan finance is readily available, even for projects on a fairly small scale. In Germany and Spain, banks will provide loans for solar cells at household level.

TILTING THE PLAYING FIELD

The most common objection is that FITs may not be efficient because they do not promote the sequential uptake of lowest-cost options first. Most FITs are designed so higher-cost forms of renewable generation receive higher guaranteed prices to encourage the uptake of a diverse range of technologies. But there is a risk that power consumers can be forced to pay high prices for extended periods even if the generation cost eventually declines.

Most FITs have some flexibility built into them. While prices for existing producers of renewable energy are guaranteed for the lifetime of the FIT, the terms on which new FITs are offered to new projects can be adjusted periodically in response to changes in uptake rates and costs. In Germany, increases in uptake and cost reductions result in “degression” — a cut in the guaranteed price offered to new producers once certain target levels are met (previous guaranteed tariffs are not altered).

The objection remains that FITs involve the government picking winners rather than allowing technologies to emerge through market-based competition. But the need to recover high upfront capital costs over long timescales in volatile power markets means that large-scale renewable power generation may not be consistent with private financing unless some form of price support is forthcoming.

If policymakers want to encourage it, with all the associated costs, recent experience suggests feed in tariffs and price guarantees will prove far more effective than the quota systems favored so far in the United States and United Kingdom.

Comments
14 comments so far | RSS Comments RSS

A small note on ‘renewable’ resources: while the sources of energy are clearly renewable, the materials used in the current methods of recovery are not. Quite frankly, those materials are extremely rare and in VERY short supply as a finite component in the Earth’ crust. Simply closing one’s eyes and hoping that solar and wind power will save the day if only people jumped on the bandwagon is ludicrous because it simply is not possible to build nearly enough solar panels/wind turbines to harness enough energy to meet even 5% of our current needs. And what’s more, these panels/engines don’t last forever – quite the contrary. Average life of a solar panel = 8 years; average life of a wind turbine = 11 years. And, as an added bonus, with all the rare earth’s going to create these renewable harvesters, none is left over to build the batteries in hybrid vehicles or TV screens (and computer screens for that matter.)

It’s great that people are becoming more environmentally aware, and it’s certainly true that using coal to produce electricity takes a horrific toll on the planet, but renewables in their current and next generation form are not the answer. I think people really need to wake up to next generation nuclear generation, with reactors that eat what’s now considered waste and produce only fractional amounts of short-lived waste. And to the opponents of uranium mining , it should also be noted that one coal plant spews more nuclear dust out from the ash waste than all the uranium mines in America combined on a year/year basis. Just something to think about…

Posted by Richard | Report as abusive
 

Richard, you facts are off the mark. How can a windmill made of metal be in limited supply? Silicon is the most abundant resource on Earth. Uranium on the other hand is in short supply. Not to mention the metal and concrete needed to build a plant.

It is clear this argument cannot be settled through blogging, but at the very least a multi-prong approach can be agreed. A mix of renewable, nuclear, clean-coal, natural gas, etc. will be the realty. With this mix and the correct mix of incentives, whether the author’s or some variant, we can begin to solve the problem.

Posted by Matt T | Report as abusive
 

It’s not the structure of the windmills that require rare elements, it’s the components that make the magnets in the turbines (where the energy is converted into usable form) that require hundreds of pounds of rare earth.

And yes, silicon is the most abundant element in the Earth’s crust, but you must be kidding if you think that is all that a solar cell is composed of. Actually, many of the rare elements in a solar cell are highly toxic.

If you believe concrete and steel are rare and difficult to manufacture… and next generation nuclear does not use uranium as a primary fuel. Check YOUR facts my friend.

Posted by Richard | Report as abusive
 

This green revolution is really different than in past decades. There is much less hype and more substance. I’m not a fan of nuclear power because it requires fresh water and the continued use of the grid system. You need fleets of service vehicles, expanses of land for transmission lines and all sorts of control stations. There is a perpetual decomissioning cost after the reactor is closes down.

I guess the radioactive waste is an afterthought. Three-mile Island and Chernobyl are afterthoughts. But you know for most people these issues are actually the most important. For me nuclear power is directly in conflict with principles of decentralized power. Decentralization is green. It holds the greatest promise of scientific development, economic growth and independence from foreign sources.

Now let’s say for a moment we just ignore everything I just said and we focus on the cost – the real cost – of nuclear power. If a company wants to propose a nuclear power project, they better not ask for a single dollar of public funding. Also we should not buy anything from France. The French are a bunch of Communists. They created the idea of global warming to sell more nuclear reactors. I can’t be sure of this. But who cares. Just don’t buy stuff like that from the French.

The green revolution this time around is really building up to something awesome. Building automation and computer modeling for HVAC systems will boost science in a big way. It’s a natural evolution for us as a society to start looking at buildings as systems – the same way organismic theorists view ecosystems. One of the main reasons we can’t build colonies in space is that we have no idea how. So as we work on energy efficiency, air quality, security, we increase the likelihood our species will survive.

So if we look at nuclear energy, we’re beating a dead horse. Believe me. We have people in little towns in the U.S. fumbling around with kerosene and propane heaters and installing wood-burning units. We need less central power. Transmission lines are incredibly expensive. What we have was built with old money. The tax base isn’t large enough to support further development. We have to stop thinking about mega projects and instead move towards home and community energy systems.

Posted by Don | Report as abusive
 

Richard, both you and Lifton (who I guess you’re thinking of) are wrong – there are no rare earth metals in large wind turbines: they use wound copper magnets, not neodymium ones – check out the LCA on the Vestas website for more info.

So, there are no material shortages for either wind turbines or standard silicon panels (we really do have an awful lot of silicon available).

The lifetime of a wind turbine is around 20 years, after which almost all of its components can be recycled into the next generation of turbines.

The lifetime of a monocrystalline solar panel is around 25 years, after which the low-cost encapsulation can be replaced, and the monocrystalline cells reused in the next panel.

Posted by LPF | Report as abusive
 

Here’s an idea. Maybe those companies and government agencies involved in getting our green infrastructure in place should simply focus on getting it done at cost. If the focus is getting the green infrastructure in place then profit should not be considered. If everyone is focused on getting it done instead of profit, the contributions of those most able can be brought to bear with ease.

Supposedly government and business care about the future of this country. Pay attention to what the “problems” are. Most, if not all, can be traced back to someone wanting money. No money, no public good. And the flow of this needed money is controlled by a few people who want to make sure their interests are maintained.

That is to say. The problems concerning getting the green movement going revolve around maintaining a system of control that keeps the powers that be at the center, either by finance or direct control of resources.

Look at the big picture. I’m sure that to some I must sound ridiculous. But in order for the public to truly benefit, from this movement, it must be started with the common citizen in mind.

If the money problem is solved. This green problem will no longer be a problem.

 

Personally I think the “problem” isn’t lack of money but lack of precedence. It’s a new industry without and adequate framework for municipalities to approve permits. Photo-voltaics and wind-turbines for instance can contribute to decentralized power generation. But the safety industry is largely self-regulating. People are reluctant to embrace technologies for which they have little or no experience.

It is expensive, time-consuming and always a little bit risky for experts to get into a new area of development. If you were involved in codes for fuel cells, who is responsible if the practices resulting from those codes lead to accidents? How about if a strong gust of wind comes along and blows those panels away resulting in destruction of property or injury? We need to know how the panels should be mounted, what types of foundation are acceptable, the solar-tracking capabilities that still work if there is a build-up of snow, ice or sand.

So right now we are very much at the conceptual stage. The only area were we are making reasonable progress by nature of the products is in building upgrades and automation. Even in a house we don’t need windows that open if there are redundant mechanical ventilation systems and specially designed air ducts. We can cut heat loss by a third in the winter. That’s a lot of energy for a home wind turbine to produce.

Posted by Don | Report as abusive
 

Thanks LPF. I am no expert, but having worked on mechanical objects for many years one truism usually holds: simple engineering goes a long way in complex systems. Richard’s rigid thinking is why discussions on renewables continue to be taken off topic. There is no single answer. The solution will be multi-prong on both engineering and policy.

Posted by Matt T | Report as abusive
 

What will governments do if they lose the tax revenues from so many people generating their own electricity or people feeding extra capacity into the grid for which they will be paid? Do you think EDF or Centrica are going to say, fine ladies and gentlemen, what a great idea. This is why governments nor big industry will ever truly back eco-friendly power generation in a distributed model, whatever their platitudes and fine words for political consumption. Why have tax on any of the products used to generate energy via solar, wind, etc? The loss of revenue would be just too much to absorb. Hence be cynical my fellow readers or if you prefer, just be plain skeptical about governments and power generation companies.

Posted by David Seymour | Report as abusive
 

Here in the desert, the power company has invested in solar but in spite of an abundant supply of sun, it’s growth will always be limited. The most obvious limitation is that it doesn’t produce electricity in the dark – when everyone will be charging their electric/hybrid cars and running the A/C. The next is, that it is the desert for a reason – lack of water. All large capacity generation requires a great deal of water to turn the turbines. The most recent and somewhat surprising obstacle is the Environmental lobby itself. Finding land that doesn’t impact some endangered animal or isn’t Federally owned is difficult. And private land is leased at a premium.

Practicality and wisdom seems to be the first victims of those pressuring for green power transitions. Whatever method(s) is finally agreed upon, the technology does not yet meet the vision requirements without penalizing those that can provide more power for less cost and in the end, the consumer. Simply put, there is no regulation that doesn’t cost the consumer to whom all costs are passed on.

Finally, many naive people are striving like never before to discover the “holy grail” of power generation thinking they will get rich with their invention or innovation. Unfortunately, you can be sure it will go the way of GM and be taken control of by this administration. After all, “it wouldn’t be right for a few to profit from the many.” Let’s hope they all keep that in mind.

Posted by Mark L. | Report as abusive
 

Price guarantees as they stand may be the single largest root cause of the notable deficit in innovation which continues to plague western nations’ energy policies.

The dominant supply oligarchy continually seeks guarantees that they will make absurd amounts of money purveying power generated and distributed via the most bizarre array of Jurassic-grade technology imaginable, with absolutely zero incentive to honestly innovate.

There is something inherently Third-World about the way the West’s energy experts conduct their business in general. Actually, that’s doing the Third World an injustice. The system here is really no more evolved than any other Jurassic beast.

There should be no guarantee that dinosaurs of industry continue to roam and roast the earth. Darwinism is the rule, and the energy sector should be no exception.

“Want of care does more damage than want of knowledge” – Poor Richard, (Illustrated)

It can’t be lack of knowledge that plagues proponents of nuclear power – because it would be really hard not to know that the problems the nuclear industry causes are beyond monetary calculus in terms of their magnitude and devastation potential. Therefore, it appears they simply must not care.

No nuclear power plant runs at a profit. Period. No nuclear power plant has ever been sustained or decommissioned out of its own budget. Period. There is no net benefit in nuclear energy the way it is presently organized. Period.

With DoE sitting on triple-digit millions of tons of Depleted Uranium, a hideously noxious substance with a half-life longer than the life-span of our solar system, and nowhere to dump it once our planet’s supplies of innocent women and children as well as archaeological treasure troves have been destroyed under tonnage of the stuff dropped there in wars instigated (prolonged and profiteered from) by the very same people who manufacture and peddle nuclear technology – it would be fair to say that nuclear energy creates more problems than it solves, and has nothing to recommend it whatsoever in either the cost OR integrity departments.

If (to some) the only alternative to nuclear wallow-cost appears to be fossil-fuel burning, then only because there is (by such individuals) no energy being put into really examining how people distant from the dubious benefits of energy oligarchy manage to survive at all – yet somehow they do. Lessons to be learned? Yes, indeed. Discussed in the above article? Nope.

Actually, price guarantees do provide Sons Of Enron with one incentive: namely, the incentive to stretch for as long as humanly possible (and longer than humanly tolerable) their tabloid-level diatribe against renewability and devolution in energy production and supply. Meanwhile, they want paid and that’s all they really care about.

With energy providers like these, who needs Dark Ages?

Posted by The Bell | Report as abusive
 

I really enjoyed your article John. It was great to read something that actually explains what FIT’s are, and clarifies the government policy differences for renewable energy promotion around the world. I also enjoyed Richard’s comments as they raise a very important point about solar production, as in crystalline silicon harvesting and processing. I just wanted to add that there is a lot of R&D going into solar presently and I would direct anyone interested in what to watch, to Zenith Solar in Israel. The CSP tech, or concentrated solar power, they are using is blowing everything else solar out of the water and without government subsidies. Cost parity, and energy efficiency way above what we have so far with solar, at a fraction of the cost. Rather than describe this in a limited space, it would be more effective to simply check them out online, for those interested. Don’t throw the baby out with the bath water on solar. Thanks again for the great article.

 

Hi, I didn\’t want my comment submitted as it was, but I hit the submit accidently. Can you simply delete the comment as I wasn\’t finished editing and saying all that I wanted to.

Thanks very much
Anja Atkinson

Posted by Anja Atkinson | Report as abusive
 
 

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