How fit are feed in tariffs?

A Feed in Tariff or FiT is the price paid by power companies to consumers, for electricity that consumers with their own generating plant supply back to the grid.

In South Australia my cousin is paid 44c/kWh (soon to rise to 54c) by the local electricity company for electricity that she sells into the grid from her solar photovoltaic system. When she has to buy power from the power company the price is 19c/kWh.  Furthermore, the capital cost of her photovoltaic system was heavily subsidised, resulting in an expected payback period of about ten years.  So it is quite a good investment from her perspective.

Similar schemes operate in other Australian states and in other countries, particularly in Europe.  In most countries the highest FiTs apply to solar photovoltaic systems, though other forms of renewables-based generation may also be eligible. Germany, one of the world's least sunny countries, has massive FiT schemes for solar photovoltaics.  There is much interest in New Zealand in such a scheme. 

No government subsidy is involved.  Retail power companies are mandated to purchase the power at a price that is generally higher, often much higher, than their wholesale cost of power from large scale generating companies.  They compensate for this by charging a higher price to consumers. So if you're a consumer who does not own any electricity generation plant you pay for those who do.

Is this any different than paying for higher cost power supplied by a high cost large scale generator?  Under the FiT case all that is different is that the supplier happens to be a household, farm or small business, rather than a large generator.  We do not object to a dairy farmer being both a producer of milk and a consumer of milk.

However, the three key features of a FiT are that it is mandated by government, that it applies to renewable energy (in most cases) and that there is a large difference between the selling price and purchasing price.  Governments introduce these schemes for a variety of motives such as lowering CO2 emissions, lowering peak power demand and deferring investment in new power stations.  Other reasons such as promoting regional development and job creation have also been mentioned. Sometimes a higher share of energy from renewable sources is seen as an end objective in its own right. In the space available I discuss only the energy related motives.

In South Australia, the long run marginal cost of new wind generation is about 10c/kWh, which is approximately equal to the increased cost of electricity from coal-fired plant under a carbon price of $100/tonne of CO2. Contrast this with the price premium under the FiT of around 34c/kWh, which would be analogous to a carbon price of $340/tonne of CO2.  There are many much cheaper ways of reducing emissions, such as by installing energy efficient light bulbs and insulating houses.  Thus the FiT is extremely inefficiently this measure.

It is possible that Fits could flatten the daily and seasonal peaks in electricity demand, thereby lowering prices.  There would also be less pressure on transmission and distribution infrastructure under distributed generation (the technical term used to describe generation from lots of small generation plants).  However, in New Zealand as in most of South Australia, the peak season for power is winter, and peak daily loads occur in the morning and early evening; periods during which solar photovoltaic systems are least productive.

It is also possible that FiTs defer the need for new largescale investment, but this does not provide a benefit if the power that they produce is more expensive than what could be obtained from an alternative source.  As noted above, producing a kWh of electricity by new large scale wind generation is much cheaper than producing it by solar photovoltaics under a FiT scheme.  Small scale wind generation, also typically within the ambit of Fit schemes is also uncompetitive, as windmill efficiency is proportional to the area swept by the rotor, which increase with the square of the radius.

The deferred investment argument for FiTs makes about as much sense as introducing regulations that force bakers to pay us for producing bread, in order to defer investment in a new bakery.

When FiTs are being promoted we should ask: what are the problems they are meant to address and are there better ways of addressing those problems?  In principle FiTs can have merit, but the FiT rate must be much closer to the marginal cost of power from other sources.  Indeed, complications around balancing electricity demand and supply may well lead to quite low FiTs.

The effect of very high FiTs is to force a transfer of income from electricity consumers in general to a small group of micro-scale electricity producers who are themselves also consumers.  Were it not for this transfer of income (via the initial capital subsidy and the high FiT rate) such electricity production would be undertaken only by those who are happy to pay over the odds for particular types of power.  I have no problem with people wasting their own money, but I do object to policies that waste mine.

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