The Promise and Peril of Feed-In Tariffs

feed-in-tariff2As a new article by law professors Lincoln Davies and Kirsten Allen notes, feed-in tariffs (FITs) “often garner praise as the best and most proven policy” to meet critical energy policymaking objectives, including those related to climate change. FITs is a policy mechanism that seeks to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. However, Davies & Allen after conducting a study of FIT operationalization in some of the most “high profile” countries, including Germany, South Korea and Spain, the authors also conclude that FITs may pose some serious downsides to energy policy making.
Among the study’s conclusions:
1. While FITs have undoubtedly “held clear responsibility” for the “explosive” market penetration of renewable energy sources in Germany in the past few decades, its macroeconomic effects in terms of job creation remain contested, ranging from estimates of large employment increases to negative impacts. Moreover, the study cites concerns about the FITs impact on energy prices, with rising energy costs being a primary driver of political resistance in Germany and beyond;
2. FITs in Germany have undergone regular reform in recent years, including capping facilities eligible for the incentive, and ratcheting down of tariffs levels. Despite the fact that FITs rely on continuity to insure investor confidence, Germany and other countries’ experiences with FITs have evinced substantial policy uncertainty, “a core message of feed-in tariffs in turmoil;”
3. While helping Spain achieve a remarkable 54% of total electricity production from renewable sources, its FITs program has also resulted in a “huge tariff deficit (the difference between utilities’ FIT payments to producers and the amount recouped by utilities from customers) that increasingly threatened its viability. This led to reforms e.g. lowering compensation for renewables and removing choices of tariff payment methods. This has, however, helped to produce boom and bust cycles for renewable technologies because it has helped to undermine investor confidence. Ultimately, the Spanish government chose to end FITs in 2014;
4. South Korea implemented a FIT from 2002-2011, but then abandoned it in part due to cost concerns in favor of a renewable portfolio standard. The backlash against FITs was also fueled by the fact that its economic benefits largely inured to the benefit of foreign investment firms and foreign equipment manufacturers;
5. In terms of lessons and implications, the authors proffer several:

  • Those contemplating the implementation of FITs should not be surprised that they create “tumult” given their core objective to disrupt existing energy systems. However, this necessitates intense management and planning as such systems mature. This is an extremely delicate dance because if changes are made too frequently or dramatically, this can undermine investor confidence and slow innovation and market penetration for renewables. Retroactive changes in FITs, e.g. done in Spain in the past few years, is particularly ill-advised;
  • As some technologies mature and production costs drop, it may be possible to both more rapidly decrease tariffs but also worry less about policy uncertainties engendered by rapid changes to the system to respond to market dynamism

b. While FITs and similar systems are designed to “self-destruct” when renewable markets mature and they no longer need support, it is not easy to ascertain when such technologies have achieved grid parity. Moreover, there is a threat of political lock-in, with vested interests seeking to end the use of FITs, with solid empirical evidence of this in Spain and Germany;
c. FITs led to remarkable increases in the use of renewable energy in Spain, Germany and South Korea, but managing costs is a critical consideration to their viability; it was a key reason that both Spain and South Korea abandoned this approach. Equity considerations are also important, with large industrial enterprises exempted from FIT surcharges, forcing consumers to bear the brunt of costs.

This article would constitute an excellent reading for graduate or law students in energy courses because it provides an excellent history of the development of FITs in key countries, clearly outlines the challenges that FITs have faced in recent years, and provides a road map forward. The one shortfall in the article may be its failure to discuss whether alternatives such renewable portfolio standards or net-metering are, on balance, superior approaches when one factors in all of the political, economic and technological factors that are pertinent to formulation of effective energy and climate policy. This question could engender some good class discussion, with this article as a jumping off point.

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