Energy Law
Fall 2010
Taylor Noland
An Argument for the Feed-In Tariff
I. INTRODUCTION
The feed-in tariff is a regulatory mechanism that promotes the use of renewable energy resources. It was first conceived in Germany in 1990, and has spread to over 40 different countries.1 In the United States, the feed-in tariff (also referred to as a “Renewable Energy Payment”) has thus far only been implemented in a few states. However, as regulators begin to search for ways to promote the production and use of renewable energy sources, the feed-in tariff has been discussed as a practical and simple solution.
The typical feed-in tariff model provides a mandate that owners of renewable energy projects will receive a guaranteed interconnection with the electric grid, along with an above-market rate of profit that is fixed for a specific number of years.1 There are several key benefits to using a feed-in tariff. First, investors in renewable energy projects are given financial security with the guarantee of profits, and in return project owners can use this financial stability to generate increased interest from investors. Second, the feed-in tariff is non-discriminatory, and has the potential to promote local renewable energy project. Third, the feed-in tariff is easy to regulate and can be implemented on both the federal and/or state levels, which allows it to evade many potential legal barriers.1
The feed-in tariff has had tangible success in helping European countries achieve renewable energy goals, and the feed-in tariff could have the same success in the United States. American states and municipalities should begin utilizing the feed-in tariff in their energy policies, not only because it best balances the interests of investors, project owners, and utilities, but also because it has the potential to develop a “grassroots” infrastructure of renewable energy production and consumption. Furthermore, utilities have failed to meet federal renewable energy initiatives, and the feed-in tariff is a simple and efficient way to bridge this gap.
II. PURPA AND THE RPS
The Public Utility Regulatory Policies Act of 1978 (herein after “PURPA”), was passed with the aim of removing obstacles that smaller power producers encountered when they tried to sell their power to utilities.1 PURPA required utilities to purchase power from “Qualifying Facilities”. 1 In return, utilities were reimbursed for the avoided costs of traditional generation. The legal issues surrounding the feed-in tariff in relation to PURPA will be discussed below, but it is key to initially note that PURPA provides the traditional regulatory framework for renewable energy.
One of the most common government mandates to result from PURPA’s promulgation was the renewable portfolio standard (herein after “RPS”).1 A RPS is a government requirement that an electricity retailer’s electricity supply is sold from a specified percentage of renewable sources. The RPS is accompanied with a market-based mechanism called renewable energy credits (herein after “REC”), which are tradable among suppliers. The REC has become the primary mechanism of an RPS, because utilities can more easily demonstrate compliance by not having to deliver the renewable energy in real time and subsequently reducing transmission and distribution costs. However, the use of REC has been exploited and therefore has not achieved a true increase of renewable resources.1
III. FEED-IN TARIFFS IN EUROPE
Europe’s success in developing renewable energy sources can be directly attributed to the widespread implementation of the feed-in tariff. European countries were driven primarily by environmentalism, and saw the economic benefits and job creation that renewable energy projects could provide.2 The European Union determined that feed-in tariffs were more efficient for promoting renewable energy than the RPS, primarily due to investor security. Feed-in tariffs have now been implemented in over 40 European countries, with Spain and Germany having implemented the best feed-in tariff models to date.3
As previously stated, Germany was the first and most prominent European feed-in tariff model. In Germany, the tariff was intended to promote wind and solar energy.1 The German feed-in tariff’s rate was based on resource type, and the rate was designed to decrease annually. The Federal Ministry noted that in 2009, the average increase in electricity cost per customer attributed to the tariff had only increased slightly.1 The feed-in tariff program in Germany was so successful that it doubled its supply of renewable energy production during the 2000’s, and met its 2010 renewable portfolio goals three years ahead of schedule.1 Additionally, Germany has been able to add 280,000 jobs in the renewable energy industry, and the German Federal Ministry estimates that the economic benefits of the feed-in tariffs outweigh the costs by a factor of three.2
More recently, Great Britain decided to implement a feed-in tariff beginning in April 2011. 4 Britain is focusing its tariff solely on heating energy, which accounts for more than 50% of household electricity use in Great Britain.4 The tariff will be used to meet a target portfolio of 15% renewable energy by 2020. Interestingly, Britain has chosen to allow for a variety of renewable technologies including solar thermal, biomass, air, water, and biogas.4 Great Britain is representative of the trend of European countries that have embraced the feed-in tariff. In doing so, European countries have adopted feed-in tariffs tailored to each individual country’s needs. This highlights the regulatory flexibility of the feed-in tariff, and why it would work as a perfect solution in America. With 50 different states, the feed-in tariff can be implemented to fit the energy market of different regions.
It is probably too repetitive to list all the successes that Europe has achieved through the feed-in tariff. However, it is important to note that a country like Germany, has been able to use the feed-in tariff to meet its renewable energy goals, create a mechanism that promotes investment in these projects, develop jobs and strengthen the economy through renewable energy projects, and deliver clean energy to its consumers at a nominal cost increase. It is reasonable to believe that a properly drafted and regulated feed-in tariff could realize the same success in America.
III. HOW A FEED-IN TARIFF COULD WORK IN AMERICA
There are three basic principles behind the feed-in tariff: fairness, simplicity, and stability. 2 As previously noted, the typical feed-in tariff is structured to guarantee interconnection to the grid, and project owners are paid a reasonable rate of return.1 This rate is locked in for a fixed number of years, and typically decreases over time. Feed-in tariffs work best when rates are delineated based on project type and size.1
The feed-in tariff rate is based on a project’s costs plus reasonable profit expectations, whereas rates under PURPA are based solely on a utilities’ cost.1 Additionally, the feed-in tariff is open to all renewable portfolio projects, unlike PURPA which is only open to qualifying facilities.1 Such a distinction allows for the feed-in tariff model to better promote local and community-based renewable energy projects. This in turn leads to local ownership of energy resources, which can spur economic development.2 This form of a rate, or payment, to project owners can be labeled as “anti-competitive”, and conflicts with the trend towards deregulation of public utilities in the United States energy market.1 However, regulators and lobbyists who have championed “competition” initiatives in the energy marketplace, have also failed to promote PURPA’s initiative to promote renewable energy. While the feed-in tariff might not favor the current deregulation trend, it should still be permitted as an exception because it will ultimately create jobs, promote investment, and deliver clean energy to U.S. consumers.
In 2008, U.S. Representative Jay Inslee (Washington 1st District), introduced a national feed-in tariff bill. The bill included the general elements of a feed-in tariff: (1) guaranteed interconnection to the grid, (2) mandatory 20-year fixed-rate purchase requirements, and (3) a national benefits charge to afford utilities rate recovery.1 The cap on a renewable energy facility was set at any facility which produced 20MW of power or less, however the tariff would be open to any owner (i.e. no qualifying facility requirement).5 Inslee proposed that FERC would set the priority standards of interconnection and transmission, and that the states would then implement these standards.1
Under the Inslee bill, electric utilities would be required to enter into a 20-year fixed-rate contract with any renewable energy facility owner.5 The Federal Energy Regulatory Commission (herein after “FERC”) would be put in charge of setting the minimum national rate, which the bill proposed a rate for full cost recovery plus a 10% rate of return. This rate would be delineated based on the technology type, size, and age.1 In return, utilities would earn RECs to help meet the RPS standards, and the utilities would be reimbursed for avoided costs through a privately-run organization called RenewCorps.5 RenewCorps would be overseen by FERC, and would reimburse utilities for any network and interconnection upgrade costs in addition to the avoided costs incurred.5 RenewCorps would raise revenue to pay these costs by imposing a benefits charge, or tax, on all U.S. customers.5
There are also a few interesting facets of the proposed bill. The bill would allow for all renewable energy sources, including, but not limited to, solar thermal, marine, landfill gas, hydrokinetic, wind, and biogas.5 The feed-in tariff would decrease annually, but would allow for bonuses if a facility either improved the grid efficiency or was delivering power during peak generation.5 Lastly, the tariff program would be reviewed by FERC every two years, but facility owners would be subject to an annual reporting requirement.5
The proposed Inslee feed-in tariff bill is unfortunately still just a proposal. However, the introduction of legislation is a very promising first step. As of 2010, feed-in tariff bills have been introduced in over fifteen states, and Oregon and Vermont have had the most success in passing such legislation.2 In 2009, the city of Gainesville, Florida, introduced a feed-in tariff for its municipality.3 The municipality offered 20-year fixed-rate contracts, and a program cap of 4MW per year, with very similar requirements to the Inslee bill. As you can see, while a federal feed-in tariff mandate has not come to fruition, there is a growing trend on various regulatory levels to adopt feed-in tariffs. If the programs being implemented on smaller-scales turn out to be successful, this will help build support for a more national feed-in tariff mandate.
Under the current renewable energy policy in the U.S., a renewable energy producer must account for expiring incentives, such as complex tax credits, and difficult and lengthy contracts with utility companies.2 The feed-in tariff has the potential to secure more social and economic benefits than the current approach being used in the U.S. of tax benefits, net-metering, and RPS. Studies have shown that renewable power is less expensive in feed-in tariff countries than those with RPS, especially if the feed-in tariff prioritizes the renewable electricity by requiring a utility to purchase the renewable energy first.2 This prioritization reduces the use of expensive current technology, and the increase in supply can drive down the cost of the electric supply.2
Furthermore, feed-in tariff policies attempt to support new development, whereas an RPS requirement is only focused prescribing how much customer demand must be met.1 The fact that a feed-in tariff creates a local market for renewable energy production can help level the playing field for renewable energy development. The more investment dollars that stay in the community and the state will create long-term cycles of investment and jobs.2 Also, the guaranteed contract terms enable project owners to finance more of their projects with debt financing, instead of equity financing, which alleviates the pressures on capital expenditures. The reliable revenue streams guaranteed to project owners will help foster and promote a stable investment environment.1
Lastly, overcoming the stigma of a “tax” could be a big hurdle, from a public support standpoint, in finding a way to implement feed-in tariffs in America. The European experience has shown that the “tax” is hardly felt by the consumer, and adding a flat charge to each customer’s bill is advantageous to all parties.7 The market cap for utility providers can be quickly determined, and the utility will likely receive a boost in its public image because it can now promote itself as investing in clean energy.7 The cumulative power of the entire U.S. customer base can spread the cost out enough to where the additional cost increase is hardly noticeable. Given full and accurate information about the policy behind the feed-in tariff, the public customer will likely be receptive in paying an additional low cost fee for stable electricity costs, that are clean and renewable.
IV. LEGAL ISSUES
There are obvious regulatory hurdles, just as with any legislation, to overcome in passing an effective federal feed-in tariff bill. The promotion of renewable energy projects are constantly being hindered by the special interest lobbying of traditional energy sources such as coal, oil, and nuclear power resource providers.7 This obviously makes it difficult enough in passing an effective feed-in tariff bill. Additionally, even if a federal tariff bill were to be passed, legal issues such as rate-fixing will assuredly appear. However, the Inslee bill provides a proper framework to overcome some common regulatory issues. The bill provides FERC with the proper amount of oversight jurisdiction, but also allots sufficient rate-making authority to the states. This attempt to quickly develop cohesion between regulatory authorities should increase the effectiveness of the tariff.