Feed-in tariffs – do they discourage efficiency?

By all accounts – you can take the IEA’s recent statements on the matter if you like – feed-in tariffs are the main policy driver behind renewables and photovoltaics in particular. Craig Morris wonders why the policy has such fierce opponents – and why they misrepresent the policy so much.

Why turn off your inefficient air conditioning when net-metering doesn't reward that behaviour? (Photo by Shai Barzilay, CC BY-NC 2.0)

Why would you turn off or replace your inefficient air conditioning when net-metering does not reward that behavior? (Photo by Shai Barzilay, CC BY-NC 2.0)


As someone with a moderately open mind, I promote the sharing of best practices. If you support renewables, feed-in tariffs (FITs) seem an obvious choice; they have been used successfully – even predominantly – for practically all types of renewable energy. The IEA says more than 70 percent of PV installed worldwide by the end of 2012 was the result of FITs.

Last summer, however, this report from the US claimed that FITs “[eliminate] energy efficiency” by encouraging “the consumer […] to build as large a system as possible instead of matching system size to their consumption behavior.” The website proposes net-metering for solar instead.

Not only does the website once again conflate FITs with solar power, but it also confuses the effect of FITs and net-metering on efficiency. True, in net-metering, your power meter runs backwards, so if you produce as much power as you consume at the end of the month, you have no power bill. If you produce more, however, you generally do not get the full retail rate back, however, so there is a built-in incentive in net-metering to keep arrays small.

There is therefore also less incentive to be efficient. The net-metering policy in North Carolina, which made the most progress with PV last year, stipulates that any power you produce in excess of what you consume is “granted to [the] utility” at the end of the year.

Now, let’s assume you have excess solar power. Rather than look for further ways to reduce your power consumption – which would only result in you getting your utility more solar power for free – you are likely to look for ways to consume that electricity you would otherwise give away. And if you do not yet produce more solar than you consume, keep in mind that all reductions in your power consumption bring you closer to giving your utility solar power for free.

Net-metering thus discourages efficiency.

In contrast, FITs paid for the power produced completely irrespective of consumption. Go ahead, buy those more efficient appliances – or switch them off and go to bed in the dark early. Whether you live like a caveman or have the air conditioner on to compensate for the waste heat from the lights that your saltwater aquarium needs, compensation for your solar power remains unaffected.

Craig Morris (@PPchef) is the lead author of German Energy Transition. He directs Petite Planète and writes every workday for Renewables International.

by

Craig Morris

Craig Morris (@PPchef) is the lead author of Global Energy Transition. He is co-author of Energy Democracy, the first history of Germany’s Energiewende, and is currently Senior Fellow at the IASS.

6 Comments

  1. Russ Bailey says

    A FIT at wholesale prices would be a good thing. Any FIT at grossly inflated prices – say even 10% above wholesale – is simply shafting the other customers of the utility.

    • Craig Morris
      Craig Morris says

      Russ, I think you’re misunderstanding feed-in tariffs. The wholesale rate is irrelevant. To calculate a feed-in tariff, take the average price of a system, divide it by the amount of electricity it can be expected to produce, and add on a 5-7 percent profit margin.

      Pegging the price to wholesale rates is counterproductive for systems that cannot dispatch, such as solar and wind. And if you underpay, then you simply do not want the transition.

  2. Daniel Maris says

    Personally I have never supported FITs. They are not the best way to create support for developing a green energy infrastructure.

    Far better to develop the green energy infrastructure directly through grants supported by general taxation and then allow consumers to benefit from the low operating costs of green energy.

    In the UK you could do this very painlessly through Stamp Duty ,the tax on property sales. Use that tax to fund green energy installations – either through funding PV panels on roofs or through using the tax to purchase shares in green energy renewables schemes such as wind energy which are then held by the owner of the property.

    • Craig Morris
      Craig Morris says

      Daniel, taxation is an immoral way of covering these costs. First, we do not actually cover our expenditures today; we run a deficit. We pass on costs to future generations. I do not want my unborn grandchildren paying for my solar power.

      Second, to the extent that the country has progressive taxation, any incentives provided through tax credits give those with greater tax burdens (essentially, the rich) greater incentives to invest in renewables. The magic of the German system is that the return is the same regardless of your income and tax burden. Indeed, you do not even need to have a tax burden to invest, whereas in the US the lack of a tax burden limits the number of investors.

  3. photomofo says

    What are the production costs from the last 5 coal plants?

    What are the production costs from the last 5 wind projects?

    How close are you?

  4. Michael Hoexter says

    Craig,
    FITs are indeed better for energy efficiency, as net metering fixes energy users’ incentive to become more efficient at exactly their yearly production of solar electricity (in the area of electricity). Meanwhile with a FIT, the more they save (in the way of electrical energy), the more they earn from their solar investment.

    However, I am also responding to your response above to Daniel Maris which is misleading in a number of ways. the first response is easy: Daniel wasn’t advocating tax credits but public investment in renewables, which I think you should support as well. He erroneously attributed this to using “taxes” but most federal governments (though not those of the Euro-Zone) spend not tax dollars but sovereign currency which may or may not be matched by taxes collected. But I would think that you would support governments’ spending money on renewable energy, unless you think that the energy system should be entirely in private hands…do you think that?

    Also, your first statements about using public moneys to spend on renewables as “immoral” was a reflection, I’m afraid, of your long residence in Germany, where there are many erroneous ideas about money floating around. Germans are hard-money obsessed to the point that they have designed the Euro to benefit them and a few of the richer Euro-Zone countries. Germans have an “implanted memory” in that they think the Weimar Republic failed because of the hyperinflation of the mid-1920’s when in fact it failed because of the DEFLATION of the Bruening chancellorship in 1932 (i.e. when it actually failed). The Euro, which is essentially an extension of the old DM to the entire Euro Zone run out of the Frankfurt, forces European governments to collect taxes even when it it bad for the economy and shrinks the economy, because the Euro is essentially a “hard” currency that “fears” inflation and doesn’t recognize the danger of deflation.

    Modern economies, need flexible currencies, because of events like booms and busts as well as the demand for growth by economies. The currency has to grow in order to accommodate people’s desire to save or corporations needs to make profits. Otherwise like in the Euro-Zone, you end up with national economies trying to hoard currency by running a trade surplus..meaning that other countries run a trade deficit and see their economies shrink. Or they run up private debts to bankers (who are all too willing to lend to them) to finance housing booms and then get into trouble, as happened in Spain and elsewhere in the EuroZone.

    So, I think your idea that using public monies (the inflationary effects of which a SOME POINTS needs to be checked by taxation) is somehow burdening your children is a product of the very bad design of the Euro system plus the German obsession with hard money. What the next generations of Europeans need is in fact lots of public investment in zero-carbon infrastructure from both private and public sources. However, other European nations should be protected from nations that attempt at all costs to run trade surpluses by either once again having separate European currencies, or, less likely, the Euro-Zone governments being able to spend on deficit with the ECB covering their deficits. The real resources of a zero-carbon infrastructure are what Europe’s children need not the fake idea that national currencies are “hard money”.
    Here is some reading re: design of Euro and Germany:
    Wynne Godley predicted the Euro’s problems before it’s inception:
    http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
    Edward Harrison’s is smart commentator on money:
    https://www.creditwritedowns.com/2013/11/germanys-deflationary-bias.html

Leave a Reply