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 nondiscriminatory, 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
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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
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
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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 20year 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,
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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
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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.
On the state level some legal issues are already coming to light. On October
21, 2010, FERC issued a ruling on a challenge by utility companies in California
that FERC regulations preempted state regulations from setting feed-in tariff rates
different than the rate based solely on avoided cost as found in PURPA.8 PURPA
limits state regulators to only paying for a renewable energy project’s cost of
generation.8 In its ruling, FERC, holding that there was no federal preemption,
clarified that a state may make its own calculations based on avoided cost. 8 FERC
added that these rates can be delineated based on the characteristics of the
technology, and that a state can separately provide additional compensation along
with the PURPA rate.8
This ruling, a constitutional challenge of federal law preemption of state law,
might not seem earth shattering. However, this ruling “clears the way” for feed-in
tariffs in America by eliminating a potential legal barrier, and in turn will provide
states with a strong incentive to consider using a feed-in tariff. 8 The ruling does
away with many federalism issues, by giving states the authority to be flexible in
establishing rates. States can now establish multi-tiered rates, beyond just the
avoided cost approach in PURPA. Jennifer Gleason of the Environmental Law
Alliance notes that this decision is “another way for states to design strong feed-in
tariff programs”. 8 This ruling should have an immediate positive impact in
accelerating the implementation of feed-in tariffs on the state level. Craig Lewis of
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the California Feed-In Tariff Coalition thinks that the ruling “provides states with
clearly defined flexibility in implementing comprehensive Feed-In Tariffs”. 8
V. CONCLUSION
The feed-in tariff is an ideal fit for our American renewable energy policy. It
promotes fairness and is simple to regulate. It has been demonstrated by European
countries that it can stimulate economic development and create jobs. It is investorfriendly for the project owner, yet also balances the interest of existing utility
companies. There is also the added benefit of energy security.2 Most importantly,
the feed-in tariff has largely been a success story across the globe in actually
increasing the production and consumption of clean, renewable energy.
The next step in America is finding the right way to introduce the tariff.
After the recent FERC ruling discussed above, the most effective way is probably
to implement the tariff on the state level. FERC can then provide oversight, and
help set national rate-making standards. The key is to getting politicians on board
to supporting renewable energy production through the use of a feed-in tariff. The
current methods have not efficiently promoted the use of renewable energy sources
and are not investor-friendly. As the European models have demonstrated, the
feed-in tariff can overcome these problems.
VI. SOURCES
1
Fred Bosselman, et al., Energy, Economics, and the Environment Cases and
Materials, Foundation Press, 3rd ed. 2010.
2
John Farrell, Feed-In Tariffs in America: Driving the Economy with Renewable
Energy Policy that Works, April 2009
http://www.newrules.org/energy/rules/feedin-tariffs-renewable-energy.
3
Shayle Kann, Emerging Trends in the U.S. Solar Market, GTM Research,
November 2009.
4
http://www.wind-works.org/FeedLaws/Great Britain/BritainProposesFeedinTariffsforRenewableHeat .html
5
http://www.windworks.org/FeedLaws/USA/SummaryofRepresentativeInsleesFee
d-inTariffBill.html
7
6
http://www.windworks.org/FeedLaws/USA/RepresentativeInsleeIntroducesUSFee
d-inTariffBill.html
7
http://www.pennenergy.com/index/power/display/9912333722/articles/electriclight-power/volume-88/issue-5/sections/renewables/an-argument-for-state-solarfeed-in-tariffs.html
8
http://www.windworks.org/FeedLaws/USA/FederalRegulatorBlastsOpenDoortoD
ifferentiatedFeed-inTariffsinUSA.html
8