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.
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)