Feed-in tariffs

Andrew Williams | 12 years ago

Feed-in Tariffs (FiTs) offer long-term payment guarantees to renewable energy developers for the electricity they produce, often coupled with the assurance of grid access.  Well crafted FiTs are seen by many as a cost-efficient method for promoting the speedy deployment of renewable energy resources by creating a stable investment environment with long term certainty of payment terms.

However, FiTs are not without their disadvantages, including the fact that they do not directly address the challenges posed by the high initial costs of renewable energy development, sometimes resulting in sub-optimal project siting.  Furthermore, in calling for FiTs to be reduced, some critics claim FiT policies in several European countries, particularly Spain and Germany, have ‘over-priced’ subsidies, resulting in too many unsustainable projects on the market.

So, is it time to reel in the subsidies?  In other words, have the objectives of instilling investor confidence and nurturing new technologies to the point at which economies of scale are achieved and overall cost of production is reduced, been achieved, meaning it is now time to let free market forces drive further innovation?

European FiTs

Europe has a high concentration of FiT policies and the longest experience in policy implementation.  A recent report by the US based National Renewable Energy Laboratory (NREL) highlighted a range of key elements that contributed to European FiT success, including stability, long-term investment security and the provision of opportunities for developers to turn in modest profits by ‘levelizing’ the cost of renewable energy generation.

“The main strength of the European approach has been the assurance of a sustained market and market price, which in today’s financial climate has allowed Concentrated Solar Power (CSP) projects to continue to receive the financing necessary to sustain market growth,” says Mark Mehos, Principal Program Manager for CSP research at NREL.

Other supposed strengths of the European FiT system are open for debate.  For some, the introduction of incremental payment decreases is seen as an effective way of reducing the costs of European FiT policies over time, creating incentives for rapid deployment, further cost reductions and improved efficiencies.  The theory goes that this will create added competition between manufacturers and stimulate innovation, a claim disputed by Mehos.

“The primary weakness of [European FiTs] is a resulting lack of innovation.  The U.S. approach has resulted in more innovative technology approaches and larger plant sizes, both of which should lead to lower cost electricity from CSP plants built here,” says Mehos.

For Luis Crespo, President and Secretary General of Protermosolar, the FiT system is the most efficient one for the deployment of new generation technologies.  However, the incorporation of the added costs of FiTs into baseline electricity price rates, for many a perceived ‘strength’ of the European approach, is singled out for criticism.

“The weakest point is that additional costs fall on industrial and domestic electricity consumers.  Nevertheless the direct effect on the reduction of the electricity pool price and on the macroeconomic figures in Spain exceeded the amount of the premium of the tariff in the past years,” he says.


The view amongst some is that, although it may be the case that FiTs have contributed  towards a perceived ‘glut’ of unsustainable projects in the PV sector, the effect in the CSP sector has been less dramatic.  According to Crespo, although the deployment of PV FiTs was clearly uncontrolled in Spain until around 2008, the amount of the premium received by the CSP sector during 2009 was still only 0.3% of the total support distributed under the Special Regime of Electricity Generation during the year.

“I wouldn’t say that Europe, or Spain at least, has over-priced its [CSP] subsidies at this point,” says Mehos.

“[European] plants are higher priced than what we would predict for U.S. markets due in part to limitations in plant size, available solar resource, and tax incentives.  An analysis on our part indicates that the current subsidies are appropriate given these limitations,” he adds.

Looking ahead

So, is it time for a free market approach?  Well, yes and no.  Whilst many commentators argue that subsidies should be lowered over time to continue to incentivize technology innovation, the view amongst some is that a sudden withdrawal would reduce investor confidence in the CSP sector.

“Wind, PV and Biomass have received incentives since the last century, while the first incentives for CSP were not provided until late 2007.  [However], the trend for cost reduction at CSP plants [means] that no further support will be necessary after 2020,” says Crespo.

Whether the phase out of FiTs happens sooner or later is still very much up for debate.  However, by the end of the decade, it is unlikely that the CSP sector will continue to enjoy the levels of support currently available, and must instead prepare for a new, more competitive era.

About the author

Andrew Williams