Weekly Intelligence Brief
IN-DEPTH: In search of a good FiT
27 July 2009
It’s still unclear how far US policymakers are willing to drive emerging technologies.
By CSP Today staff writer
Last month the US Department of Energy’s National Renewable Energy Laboratory examined the role of feed-in tariffs (FiTs) in stimulating green energy investment.
NREL energy analysts, who are digging into these complex policies in a series of technical reports designed to inform government policymakers, clean energy investors, utilities and other stakeholders, admit that FiTs can effectively expand renewable energy deployment and remove barriers to renewable energy development, while creating jobs and helping meet renewable energy standards.
From a CSP perspective, it has been calculated that current costs are estimated at between $0.15 and $0.25 per kWh for community-scale solar projects. This is too high to be competitive with the fossil fuel alternative.
In fact, Santa Barbara-based Community Environmental Council’s energy programme director, Tam Hunt, one of the speakers at the CSP Today annual CSP Summit US last year, mentioned that to achieve a community-scale renewable energy boom, any new FiT had to follow one of two options:
1) Amend current laws to include “locational benefits” in the market price calculation. Locational benefits are those benefits provided by community-scale projects such as increased grid reliability, fewer infrastructure additions or transmission electricity losses.
2) Adopt a European-style FiT that provides a reasonable profit above the required cost of building such projects.
Either of these promises to unleash the huge potential for community-scale renewables throughout California, Hunt said.
Size matters
NREL’s energy analyst Karlynn Cory says a typical CSP project needs to be at least 50MW to achieve economies of scale. In the US typical CSP project sizes are expected to be generally over 200MW.
If a jurisdiction was interested in supporting smaller CSP projects, they could chose to use FiT policy to do so – and could target different payment levels for different-sized schemes. For CSP projects smaller than 50MW, the community could have to make larger payments to encourage them, which would cost more – but this might be a priority for some communities (perhaps the manufacturer is local).
Also, there is a difference between value-based and RE cost-based FiT payments, Cory said.
Value-based payments are estimated based on the value to the utility and society like grid reliability and environmental benefits, among others. The challenge is that these calculations are difficult to make and they are not guaranteed to provide the revenues a project needs (there is a possibility of overpayment or underpayment).
Conversely, European FiTs are targeted on the actual RE project cost depending on the technology, vintage, resource quality, etc. For example, class IV wind projects typically receive lower payments than a class III wind project (because it has better resources). Because the upfront cost of the RE project can be approximated, these costs are better known. It appears that the cost-based structure is easier to give the developers the revenues they need (thus providing investor certainty), without having the ratepayers pay excessive tariff payments (substantially more than the developer needs).
Vital measures
NREL believes FiTs can be a good way to support new and emerging technologies like CSP.
“The challenge in the US is whether policy makers will be interested in using the policy approach to drive development for emerging technologies,” Cory said.
Since the cost of generation for new technologies like CSP is higher than for existing ones, employing a FiT may put upward pressure on electricity rates in the near term.
“Some state policymakers who want to limit the rate impact of the policy may choose not to support large scale CSP projects with FiTs. However, FiTs may provide an economical way to drive technological innovation and price reductions for CSP and CSP with storage,” Cory said.
In the US, the policy has not been implemented widely – where it has been used, it is typically focused on distributed generation. A proposal in California would ramp up the project size from the current 1.5MW to 20MW. So there could be larger projects that could make use of and benefit from this policy, but none are for utility-scale so far.
Longer vision
There are two large barriers to CSP deployment – the first is the availability of transmission. It can take five to 10 years to build transmission for new projects, so this is critical. The cost of transmission upgrades can be included in FiT payments – although this is probably not likely in the US.
The second large barrier is investment. If there is uncertainty (e.g. new technology, uncertain revenue streams), financiers may be wary of investing. Well designed FiT policies typically provide pre-determined revenues during their operational life.
“These revenues often cover the project developer’s costs, plus a small return – which can help address investment uncertainty,” Cory said.
Cutting costs
The DOE has taken initiatives towards its goal of reducing the cost of CSP electricity from 13–16 cents per kilowatt-hour (kWh) today with no storage to 8–11 cents/kWh with six hours of storage by 2015.
According to Cory, FiT policies can be one of the many drivers that encourage technological innovation, through tariff degression.
“This means that the FiT payment level decreases every year, so projects built in subsequent years receive less than projects installed this year. This decreased payment over time can encourage technology innovation by manufacturers, so they can remain competitive,” she said.
Another important factor for CSP is likely to be research and development – particularly on storage technologies. Cheaper storage will be crucial.
Read more: NREL, feed in tariffs, RPS
