17.02.2011
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FITs needed after grid parity

A few weeks ago, US solar market analyst Paula Mints published an article essentially arguing that solar is about to reach an "un-incentivized future" – meaning that photovoltaics will finally no longer be policy-dependent. Don't hold your breath.

There can be no doubt that photovoltaics has depended upon governmental support. In particular, where proper feed-in tariffs have been offered, photovoltaics has done well – and where such policies were quickly discontinued, markets have collapsed. This story is basically told in two ways: it either proves that feed-in tariffs are successful – after all, there have been no PV booms without feed-in tariffs yet; or it proves that feed-in tariffs are hard to get right so we are better off without them. Mints apparently belongs in the latter camp (you may have guessed I am in the former).

 - This image from Fraunhofer shows that FITs are behind almost all installed renewable capacity in the EU --- and practically 100% of PV.
This image from Fraunhofer shows that FITs are behind almost all installed renewable capacity in the EU --- and practically 100% of PV.

She speaks of the period from 2004-2008 as the "beginning of the FiT phase of PV industry history" when PV prices increased. Journals like the Economist claimed during those years that German feed-in tariffs were raising the price of photovoltaics for sunny countries, but those journalists do not specialize in photovoltaics, so I do not expect better from them. But Mints merely points out that “in 2009, manufacturers from China and Taiwan priced technology aggressively to gain share.” Surely she knows that Asian manufacturers did that with production lines largely purchased in Germany, and companies like Gebr. Schmid, Roth & Rau, and Centrotherm were only able to come up with turnkey production lines because markets like Germany and Spain had feed-in tariffs that created enough demand.

In other words, the thing that finally brought prices down was that PV production became open to all investors; you didn't need special expertise to put together a customized production line. If you had the cash, you could hire a knowledgeable CTO and buy the production plant off the shelf. With exception of Suntech, which got a lot of its expertise from the quite knowledgeable Australian Martin Green, most Asian success stories are mainly based on German production lines brought about by German and Spanish feed-in tariffs (Australia adopted feed-in tariffs after the Chinese began using Green's ideas). Without Spain and Germany’s FITs, no cheap PV from Asia.

Many FIT markets didn’t fail

Mints proposes a 12-step program to "recover from incentives." The problem, as she puts it, is that the solar industry remains dependent upon policy, and the era of feed-in tariffs is coming to an end: "it is time to call off the hunt for the next big incentive." For instance, one of her steps is for a manufacturing consortium to "discuss how most FiT markets were destroyed." She sums up the past few years on PV markets as, "Demand boomed, and most FiT markets crashed."

In fact, every gigawatt market in the world for PV was driven by feed-in tariffs. Mints is right that some of these markets have gone bust, but do the other markets (like Germany) that haven't gone bust not show us how to do it right? I can't say that of other PV policies (think of the US or pre-FIT Britain).

Can we agree that solar feed-in tariffs have not failed in "most" countries – and that no non-solar FIT market has undegone boom-and-bust anywhere? A more accurate description would be that feed-in tariffs are the only policy that has led to major success stories for solar, but that some incompetent governments threw in the towel when they saw the price tag. Mints writes, “Here's the golden rule of incentives: they are expensive, and someone has to pay the bill.” Actually, it's photovoltaics that's expensive, not feed-in tariffs. Studies have repeatedly found that feed-in tariffs are the least expensive way to promote renewables. And some subsidies actually have net benefits.

More importantly, feed-in tariffs have actually been less prone to boom and bust than other policies. The production tax credit for wind power in the US was repeatedly not renewed in time during the Clinton/Gore administration, but even when it had been seamlessly extended under Bush/Cheney the policy nonetheless proved ineffective during the financial crisis. The Stimulus Package under Obama tried to remedy the situation – when no profits are posted, there is little tax to write off – by offering upfront bonuses to cover the purchase price, but in 2010 the US wind market nonetheless was cut in half. While they did struggle to get financing, markets with feed-in tariffs fared much better than the US wind market in 2010, though statistics are not generally in yet for installed PV capacity in 2010. (The US doesn't have accurate figures for PV installations, by the way, mainly for lack of national policy; no single organization is in charge of the tally. So get a national FIT.)

FITs already generally below retail rate

Mints' main contention – that solar will be better off when it can do without incentives altogether – seems logical at first glance, but don't hold your breath. FITs for wind and biomass have generally always been below the retail power rate, so why should anything change when solar is no longer the exception? As Mints herself points out, conventional energy sectors also continue to be subsidized. Why should the situation ever be any different for photovoltaics? But the main problem is a different one that she – like others who think that grid parity will make a difference – ignores.

Imagine that photovoltaics starts to drop below the retail rate. It is happening now in sunny places with relatively high retail rates, but the areas will spread, and in all likelihood solar will continue to get cheaper, while retail rates will continue to rise.

Under those circumstances, who would not put solar on their (unshaded) roof? If solar power only costs you 15 cents per kilowatt-hour from your roof, and power from your socket costs you 16.5 cents, you already have a 10 percent profit, and that profit margin will only increase.

If nothing is done, there will be a rush to put photovoltaics on roofs. Demand will initially be higher than supply, so installers will make a nice profit; after all, if solar could be 30 percent cheaper than retail power, people will still be satisfied with 15 percent, and installers can pocket the other 15. Where else can you get a 15 percent return? Without feed-in tariffs, what will keep the price of solar down? (It is worth noting that the average installed kilowatt price in the US is already at least 60 percent higher than in Germany thanks to feed-in tariffs – so much for feed-in tariffs keeping prices up...)

With all of that solar power going online, utilities will have a problem. Germany will have it first. It is likely to have had 18 gigawatts of installed photovoltaics as of the end of 2010, and power demand in the summer generally peaks at around 60 gigawatts. If Germany continues to install 3.5 gigawatts (as the current governing coalition plans), its installed photovoltaic capacity will roughly match peak summer demand by the end of this decade, at which point the country may nonetheless still "only" be getting around six percent of its electricity from photovoltaics (it got around two percent from 18 gigawatts last year).

Power companies that operate nuclear and coal plants will have to respond by ramping down these baseload plants during sunny days, which will make a kilowatt-hour from central plants more costly, which will then make investments in photovoltaics even more profitable – and so on. It's a vicious cycle.

In Germany, the answer is not quite clear yet, but we do know that it has not yet thrown out feed-in tariffs. One reason is because they can actually keep the profit margin for photovoltaics at 5-7 percent once the cost of photovoltaics stops plummeting faster than planned decreases in feed-in tariffs, which is inevitable. In other words, after grid parity, feed-in tariffs will help make photovoltaics cheaper than the technology would be under pure net-metering.

FITs never the same

As Mints points out, "FiTs are a-changin'" – but if she means there was ever a point where they were “a-saming”, she's wrong. The “proto FITs” under PURPA were not exactly the same as Germany's first feed-in tariffs from 1990 (where 80 percent and 90 percent of the retail rate was paid for wind power and photovoltaics, respectively), and those tariffs changed dramatically in 2000 (when the retail rate became irrelevant). Other countries have offered feed-in rates with a premium based on what the grid needs (such as for wind power in Spain), while others still are adjusted for inflation (such as in France).

Like Mints, a lot of Germans are also talking about an incentiveless future. But what we probably need over the long run are feed-in tariffs that pay for power production from intermittent sources (especially solar and wind) with a fluctuating premium based on power demand; when renewable power production approaches or exceeds demand too often, the premium will not be paid, and investments in such technologies will not pay for themselves as quickly. The floating cap will find itself, so to speak.

The kind of upfront bonuses to finance equipment purchases (a common practice for solar and wind in the US) should be reserved for power sources that can be ramped up and down as need be to accommodate for shortfalls in intermittent renewable power (I am thinking here especially of biomass and natural gas turbines). In other words, we would pay for solar and wind by the kilowatt-hour and biomass/gas (and possibly nuclear and coal) at least partly by the kilowatt. And we would continue to regulate new installations with specially designed incentives – just as we continue to subsidize coal and oil sectors, which have been profitable for 150 years now. (Craig Morris)

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