Feed-in Tariffs
Posted by Max Dunn Tue, 29 Apr 2008 17:27:00 GMT
Wind power can now produce energy as cheaply as coal, about 5c per kilowatt hour (kWh). Solar power is almost to the point where it can produce energy at the marginal electrical rate of about 10c kWh. So with oil prices over $100 barrel, natural gas prices doubling, and all the concern about CO2 and other noxious emissions from coal plants, why aren’t more wind and solar projects being built?
The answer has to do with financing. Wind and solar projects are very capital intensive – they require all the money up front to build them and then very little to run. So to get the money needed to build a wind or solar project, it is necessary to get a long-term loan, typically for 15 to 20 years.
It is pretty easy to figure out if the project will be able to make the payments the first few years by looking at the current price of electricity. But what about further down the line? How can they be sure that in 5 or 10 years, that the cost of natural gas won’t dip down and cause the price of electricity to fall? This doesn’t have to be a long term trend; even if this happened for just a few years it would mean that the project wouldn’t be able to meet its loan payments and would default on the loan. Since there is no way to guarantee this won’t happen, banks are going to be very reluctant to loan money for alternative energy projects.
So how do we fix this? Well one way is with feed-in tariffs. A feed-in tariff is an obligation by a utility company to buy electricity produced by renewable energy sources at fixed rates. The most successful feed-in tariff program is in Germany, which has set feed-in tariff rates for different types of renewable energy – for the next 20 years! With this guarantee, it is easy to get financing for alternative energy projects since it takes the risk out of them.
Of course this just shifts the cost to the taxpayer, especially if the rates are set too high. For instance, Germany pays over 50c per kilowatt hour (kWh) for solar energy, which is way more than it costs to produce. (This is just for the first year – built-in reductions drop this amount to half after 14 years.) But even with artificially higher prices, society will still benefit due to reduced reliance on oil imports from unstable regimes, cleaner air and being better prepared once fossil fuels become scarce and expensive.
(For more information, see Why wind needs feed-in tariffs)