25.10.2012
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Energy policy

RFPs make renewables artificially expensive

Europeans call them "calls for tenders"; Americans, "requests for proposals" (RFPs). The generic term is "competitions" – and the word suggests that the best project wins. Proponents of RFPs therefore claim that this policy option is better than feed-in tariffs, though the statistics for the cost of deployment have never backed up the theoretical claim. Now, an industry insider who long denigrated feed-in tariffs confirms what proponents of feed-in tariffs have said all along – RPFs are manipulated.

The theoretical criticism of feed-in tariffs is not limited to the Anglo world. Rather, it is common among economists. For instance, a paper entitled "Promoting renewable electricity generation in emerging economies" (PDF) published in September by the German Development Institute recommends requests for proposals (the authors speak of "auction-based tariffs" or ABTs) for the developing world instead of feed-in tariffs, mainly because feed-in tariffs can cause a market to boom, and that boom can detrimentally affect the poor.

While it is true that the overall cost impact of feed-in tariffs can be greater than with ABTs, proponents of feed-in tariffs have long pointed out that feed-in tariffs are cheaper per installed watt. In other words, if you want to protect the poor in implementing the energy policy, you would want to put a ceiling on feed-in tariffs to prevent the market from installing too much. ABTs can also stop a market from growing beyond a certain point, but you will not get as much renewable capacity for the buck.

But even in theory, ABTs are not clearly the better idea. For instance, under feed-in tariffs every project that makes sense to an investor can go forward, whereas only the best projects picked by a small coterie of decision-makers (often politicians, not unbiased energy experts) move forward under ABTs. The result is a lot of winners with feed-in tariffs and a lot of losers in ABTs. And these losers will carry forward the overhead from lost bids in future bids, so all bids are higher than they need to be.

That's theory – what about practice?

Renewables International has written about this distinction in practice many times. The prices for bids in utility-scale projects in California were found to be far above what would've been expected under market rates two years ago, and last year small German solar roofs funded by feed-in tariffs turned out to be still 60% cheaper than utility-scale PV in the US. Up to now, there has only been evidence that unnecessary red tape – "soft costs" – in the US have driven up prices. RFPs, however, are closed processes; only the winning bid is made public (if that), so it is hard to demonstrate that competing bids would have been better.

 - The 70 MW PV farm in Rovigo. Many US-based solar developers focus on utility-scale solar and neglect residential roofs, allegedly because large PV is cheaper. So why is solar in the US so expensive?
The 70 MW PV farm in Rovigo. Many US-based solar developers focus on utility-scale solar and neglect residential roofs, allegedly because large PV is cheaper. So why is solar in the US so expensive?
SunEdison

This month, Jigar Shah, the founder of SunEdison, came out with a clear admission published at CleanTechnica: "solar subsidies are manipulated by investors like me to maximize our returns." For years, SunEdison has been a fierce opponent of attempts to introduce feed-in tariffs in the US, and campaigners for FITs have long said off the record that such companies are merely trying to keep the project market to themselves – they do not wish to compete with a slew of residential solar arrays. As Shah now puts it, "India, Germany, and the UK have drastically reduced their feed-in tariffs and the curious thing happened – prices to investors came down."

Shah's remarks finally confirm the obvious. Companies like SunEdison (now owned by stock corporation MEMC Electronic Materials) must by definition provide the greatest returns for shareholders; in fact, they are required to do so by law. If they lower the price of solar for the benefit of society, their shareholders can sue them.

But Shah's conclusion is terrible: get rid of subsidies for solar. His thinking is roughly in line with solar consultant Paula Mints’, which we revisited this week here. Shah ends his article by admitting that it is crazy to call for an end to solar subsidies when coal gas are still subsidized." But he fails to draw any conclusion from that insight, and he misleadingly calls feed-in tariffs "subsidies."

It's good to have Shah finally recognize the superiority of feed-in tariffs, but the proper conclusion should be that feed-in tariffs unleash the competitive forces of the market far more than auctions in which only a small number of large corporations can participate. If you want to get the most renewable energy for your investment, feed-in tariffs are clearly the best option. And if you want to protect the poor from the impact of fast market growth, it is possible to set annual budgets for feed-in tariffs. (Craig Morris)

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3 Comments on "RFPs make renewables artificially expensive "

  1. Jigar Shah - 11.03.2014, 13:15 Uhr (Report comment)

    Wow, this was taken completely out of context. My point was that once rules are put in place, our job at SunEdison was to maximize shareholder returns. That being said, we abused FiTs much more than RFPs. THis has nothing to do with FiTs or RFPs. The reason is because European FiTs were not volume based but calendar based. So in the years when solar fell from $6/W to $2.50/W the FiTs were way too high which is why Germany actually installed 7GW. This has led to the German people paying 100 Billion EUROs for solar programs and developers like SunEdison keeping all that extra profit. In California this rent taking was limited because of the volume based subsidies. So for 3 billion $ we achieved the same grid parity that cost Germany 100 billion EUROs -- roughly same electricity grid size.
    On the India, Germany, and UK example, what I said was that after 2009 the data shows that when the subsidies were reduced faster than the solar industry wanted, the solar industry stepped up to the plate and got more efficient. In all of the three countries the industry said that subsidies were so low that the industry would die, and the industry didn't die. The US industry has heeded my comments since 2012 and is doing exactly what I said, phasing out subsidies. The result is that now Wall Street believes that solar can survive without subsidies.
    Craig, we agree on 99% of issues. Why you deliberately make up this crap to create a divide between us I just don't understand. I was in the room because I worked for BP Solar from 1999-2003. BP Solar has #1 marketshare in Germany back then.

  2. James Wimberley - 10.03.2014, 12:08 Uhr (Report comment)

    I suggest you need to distinguish sharply between solar on the one hand, and wind and geothermal on the other. (Biomass straddles the distinction I want to make). The optimum size of an onshore wind turbine is now over 2 MW a geothermal plant, 50 MW a solar roof, 5 kw. There are some economies of scale in solar, but they aren't very large: going from 5 kw to 50 MW doesn't even cut costs in half in Germany, though it does in the red-tape ridden USA. It follows that citizen generation, which depends on FITs, is an excellent option for solar, not so much for wind, and impracticable for geothermal. You persist in not addressing the troubling fact that German onshore wind capacity factors are much lower than French, and the possibility that this results in part from bad decisions on siting and maintenance by poorly qualified cooperatives compared to EDF's professionals. (Hypothesis B is that the difference simply reflects the respective age profiles of the turbine parks.)
    Your criticisms of Brazilian wind auctions seem to be based on prejudice not facts. Any promoter of a €10m wind farm is a professional and can cope with the auction bureaucracy. It's tough on Enercon that they are losing out in the Brazilian turbine market due to their high prices. Brazilian promoters are not SFIK buying cheap turbines from Goldwind but state-of-the art gear from GE, Gamesa and Alstom, who are prepared to meet local content requirements (http://www.renewableenergyworld.com/rea/news/article/2013/10/brazil-local-content-rules-hurting-major-wind-manufacturers). In a developing country, the budgetary uncertainty of FITs is a real drawback.
    The true criticism of Brazilian policy is not that they are failing to optimise wind, but not encouraging solar to follow a path to parity with it. The recent (and higher-priced) solar-only auction was run not by the federal government but the state of Pernambuco (http://www.cleanenergyamericas.org/5/post/2014/02/brazil-presidential-candidate-proposes-clean-energy-incentives-in-run-up-to-october-2014-election.html), run by Presidential hopeful Eduardo Campos. Brazil has net metering legislation in place, but has done nothing to tackle the red tape and foot-dragging by utilities that is preventing a boom in rooftop solar.

  3. Purchaser - 26.10.2012, 09:54 Uhr (Report comment)

    I believe that you meant RFPs (Request For Proposal), not RPFs.

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