Late last month, the California Energy Commission and Public Utility Commission touted “feed-in tariffs” as yet another approach to spur development of renewable electricity sources. These “renewables” remain a favorite of government despite dismal economics and poor performance.
Government favoritism toward renewables includes subsidies, mandatory purchases such as renewable portfolio standards (requiring utilities to use specific percentages of renewables), and other policies-du-jour in an effort to help these technologies mature. After decades of preferential treatment, however, renewables comprise less than 10 percent of California’s electricity generation.
Enter “feed-in tariffs,” subject of a June 30 workshop, based on recommendations in the Energy Commission’s 2007 Integrated Energy Policy Report. Feed-in tariffs are contracts that offer long-term (15-20 years) fixed prices for delivered renewable energy. European countries have used the tariffs, in different forms, and the California Energy Commission seeks details on whether California should follow suit.
A CEC-commissioned report from KEMA Inc., released last month, outlined design options, goals, grid access and other issues connected to feed-in tariffs.
“To be effective, feed-in tariffs must be designed to reflect the state’s policy priorities,” KEMA said.
They really should also spur maturation of new technologies rather than perpetuate sub-optimal performance.
The fixed and guaranteed prices are viewed as one way to get developers of renewables to take on more risk in permitting projects. Given the heavy subsidies already available – 10 times that of other technologies – it remains unclear just how much risk developers really face. It was noted during the workshop that unless carefully designed, the tariff could feed speculative queuing and inefficient projects could gain approval and continue the dismal project failure rate already occurring.
Benefits to developers include the certainty of a guaranteed price and buyer, low transaction costs and a long-term revenue stream from a project that feeds into the grid. Fixed tariffs can cut project risk and developers’ cost of capital. Less financing and contracting risk may prompt developers to take on planning and transmission risk they otherwise may not have done, or even considered.
Such a hedge can lower ratepayers’ costs, but can just as easily increase costs over an uncertain future market. And tariffs will not solve transmission constraints, which have thus far been the bugaboo for renewable development.
California does have some experience using such tariffs. In the 80s and 90s, certain “qualifying facilities” (including most renewables) were afforded standard-offer contracts. During the electricity deregulation experiment, those contracts became uneconomical, yet were extended and guaranteed by government fiat. They ultimately led to approximately $10 billion in over-market costs to consumers.
That came before current sky-high energy prices and bottomless state deficits. Those high energy prices should prompt California regulators to let energy technologies compete on their own merits in the state’s energy portfolio. Whatever the benefits of feed-in tariffs, California should stop throwing money and preferential treatment at technologies that promise more than they can deliver.