Why a Smart FiT Is Smart Policy
A modified feed-in-tariff would take the best elements of the most effective solar energy compensation system to date but remove some of its weaknesses.
By RICHARD PEREZ, TOM THOMPSON, THOMAS E. HOFF, LYLE RAWLINGS, KEN ZWEIBEL, PRADEEP HALDAR and RICK LEWANDOWSKI
A Smart FiT should embrace attributes that have been successfully pioneered elsewhere, such as community solar gardens and virtual system ownership. This will enable every energy producer, large or small, to participate and enhance high-value deployment without penalizing prospective investors in low-value locations.
Photovoltaic (PV) systems still appear to be expensive when compared without context to traditional power generation, despite immense progress over the last few years. Constituents, however, generally believe that solar energy delivers a higher value than can be monetized in a business-as-usual setting the values that are often unaccounted for include environmental value, fuel depletion and price mitigation value, market price reduction, economic development, jobs, energy security and value linked to displacing conventional resources’ embedded incentives (e.g., see figure 1 below).
This understanding is the reason why cities, states, provinces and countries around the world have developed financial-transfer mechanisms in an attempt to level the playing field and make up for the part of the value delivered by solar generators that is not currently monetized.
These financial-transfer mechanisms are typically referred to as “incentives.” However, as we’ll discuss, the term incentive does not have to imply subsidy.
Incentives/financial-transfer mechanisms have taken many forms. These include buy-down grants, solar renewable energy credits (SRECs), reverse auctions, net metering and feed-in-tariffs (FiTs), as well as income tax credits (ITC), tax abatements, tax exemptions, low-cost financing and so on (e.g., see DSIRE, 2012), which can either be tax-financed and/or utility ratepayer-financed. In the United States, the ratepayer-based transfers of value are generally driven by renewable portfolio standards (RPS), whereby a renewable deployment goal is specified by the law and implemented by forcing utilities and grid operators to purchase renewable energy credits from renewable energy producers.
We propose a modified FiT, or Smart FiT. This modification aims to take the best elements of the most effective solar energy compensation system to date, but removes some its weaknesses. In particular, the proposed Smart FiT links the tariff to value produced and includes long-term market controls leading to very high penetration.
Assessing the FiT’s Track Record
As described in Wikipedia (2012), “a feed-in-tariff is a policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology. Technologies such as wind power, for instance, are awarded a lower per-kilowatt-hour price, while technologies such as PV are offered a higher price, because of their higher costs” (emphasis added by the authors).
FiTs have been successful financial-transfer mechanisms as gauged by the amount of renewable energy deployed: As of 2010, 80 percent of the PV resource had been deployed worldwide under a FiT market mechanism (Couture et al., 2010).
This success is a direct result of three key attributes: (1) administrative simplicity, (2) contracted long-term revenue guaranty and (3) simple PV-grid interconnection.
However, several of the world’s FiT programs have been victims of their own success. For example, the Spanish program has had difficulties because of an absence of adequate market controls, long-term planning and program flexibility. In Spain, the one-size-fits-all/no-limit FiT resulted in very large systems with large economies of scale rapidly flooding the market and, in effect, killing the program. In addition, because FiTs are cost-based incentives, many question the rationale of preferentially subsidizing the most expensive technologies. When FiT programs are adjusted following cost reductions, it is often done in ad hoc steps, often taken on an emergency basis, leading to market rushes and slowdowns. Although the German program has been the most successful in terms of market growth, it has not been immune to these flaws and has reached near-crisis status more than once.
Building a Smart FiT
A Smart FiT retains the key attributes that have contributed to the FiT success: simple interconnection; minimal administrative work; and predictable, bankable, long-term per-kilo-watt-hour contracts. A Smart FiT, however, differs from a traditional FiT in several fundamental ways:
- It is value-driven.
- It includes market-throttle controls.
- The long-term endgame is controlled.
The Smart FiT is value-driven rather than cost-driven and thus addresses the underlying reason for incentives in the first place: to capture the renewable value that cannot be fully monetized under business-as-usual conditions. The argument is that investors should be fairly compensated for the value that they produce. In the case of PV, this value is multifaceted (figure 1) and influenced by four factors:
1. The location of PV within the transmission and distribution (T&D) networks,
2. The local penetration of PV,
3. The placement (orientation/tilt) of PV and
4. The availability of emergency/dispatchable storage capability.
These factors determine —
1. The ability of PV to actively support the transmission and distribution grids by reducing peak demand stress;
2. The environmental value resulting from the locally displaced energy mix;
3. The operational and infrastructural T&D measures that will be necessary to absorb a growing amount of solar generation; and
4. The ability of installations to mitigate the consequences of power outages and natural disasters1 at an individual or community level.
The Smart FiT should reflect these factors in an intelligent per-kilowatt-hour price that would depend upon location and system specs, and self-adjust over time as penetration increases.
The examples of Spain and, more recently, New Jersey and Pennsylvania have demonstrated that an incentive that is too generous can result in overbuilding, exceeding mandates and planners’ expectations. This overbuilding has resulted in the effective end of a thriving solar market in Spain and a drastic reduction in the value of the SRECS in New Jersey and Pennsylvania. Therefore, PV value should inform the Smart FiT but not set its worth directly, at least not in cases where value would be much higher than current local system cost. Ideally planners should set the Smart FiT at the minimum between a system’s levelized cost of energy (LCOE) with an acceptable ROI and its levelized delivered value, as illustrated in figure 2 (below).
 A non-negligible part of Hurricane Sandy’s toll in New York and New Jersey in October was the lack of electrical power that impeded disaster recovery and kept people in the cold and without access to basic necessities, such as gasoline for their generators and cars. There is ample evidence (including the experience of one of the authors) that PV systems equipped with a small storage system can power emergency loads indefinitely and thereby keep homes and business up and running and even provide community relief (e.g., gas stations equipped with such systems).
Real-time “throttle control” FiT adjustments for new systems should also be built-in by monitoring the rate of installations and adjusting down new FiTs gradually if the rate exceeds the planned rate, or up if it is insufficient, but without exceeding value.
Other existing incentives
The value-derived Smart FiT should account for other sources of revenue. The full value should be considered when the FiT is the only value-transfer mechanism available. The Smart FiT should be reduced commensurably by the value of other incentives (e.g., federal ITC, state ITC, buy-down and net metering, as in New York state) when they exist, as illustrated in the bottom of figure 2.
FIGURE 2. Positioning the Smart FiT: Unsubsidized business-as-usual revenues from PV (blue circle) are often less than the cost of deploying the technology (red circle). The value to taxpayers and ratepayers (green circle) may be considerably higher. The Smart FiT (yellow circle) is a value-transfer mechanism that would most effectively be positioned between the value generated by PV and its cost.
The Smart FiT would have to be reduced commensurably in cases where other revenue streams exist (bottom right).
Controlled Long-Term End Game
The Smart FiT should be designed to gradually decline over time, because value decreases and integration costs increase as resource penetration increases. However, unlike sudden market price-reactive changes affecting traditional FiTs, collapses affecting RECs and threats of discontinuity affecting ITCs, the Smart FiT decline would be predictable and programmed from the onset to reflect planned PV penetration and the associated loss of value and increase in integration costs. This decline, occurring in parallel with expected PV price declines, would be designed to transition to a long-term, very high-penetration equilibrium between value generated and the cost of the infrastructural enablers of high-penetration PV.
These enablers include load management, storage, solar/wind synergy, solar/gas synergy (initially) and long-distance interconnection. Figure 3 (below) represents a hypothetical example of a long-term high-penetration plan for the New York metropolitan area. It should be noted that Germany, as the leading country in deploying solar and other renewables, has already achieved high penetration. Solar at times has approached 50 percent penetration of the country’s electrical load. This has been achieved without significant infrastructure costs.
Not a subsidy: It is important to point out that the Smart FiT is not a subsidy. That is because it is designed to be less than delivered value. As penetration increases, the value will naturally reflect penetration cost and should be low enough to not even be perceived as an incentive by detractors.
What if cost exceeds value?
The likelihood of justifiable value being below PV cost in most of the United States is small today and will likely be in the future. For instance, in the New York metro region at $3 per watt turnkey (certainly achievable today), it takes about 32 cents per kilowatt-hour in the absence of any incentive to generate a 25-year 9 percent after-tax return on investment (ROI). That is well below the levelized value delivered by PV for the region, conservatively estimated at well over 35 cents per kilowatt-hour (CPR 2012, Perez et al., 2011). Using the U.S. Department of Energy Sunshot’s objective of $1 per watt turnkey as a gauge for the very high-penetration future (USDOE, 2012), it will take 10 cents per kilowatt-hour to produce a 9 percent ROI in the considered region. Although the solutions that will enable high penetration are only being conceived at this time, it is unlikely that their cost will bring the total value delivered by PV below this level.
Of course a Smart FiT should include and embrace common sense, effective attributes that have been successfully pioneered elsewhere, such as community solar gardens (e.g., see McCabe, 2012) and virtual system ownership (e.g., see California PUC, 2012). This will (1) enable every energy producer large or small to participate and not only those in high-value, high- yield locations (e.g., a prospective producer with a shaded roof in a low-value area could take part in an unobstructed, high-value system); and (2) enhance high-value deployment without penalizing prospective investors in low-value locations. In essence, the Smart FiT would use market forces to channel PV development to those areas of the grid that need PV support.
Who Would Pay for the Smart FiT?
PV deployment value and costs accrue to two parties: ratepayers and taxpayers. Although these two parties are often the same, it would be practical to retain this distinction in the cash sources of a Smart FiT program.
Such a program would be most effectively handled by utilities, with the ratepayer-traceable part of the Smart FiT originating from a specific rate surcharge and the taxpayer part originating from the taxing authorities — for instance, credited back to the utility through periodic government contributions (see figure 4, right).
Overcoming the Challenges
There are several challenges in implementing a Smart FiT. More specifically, a Smart FiT requires —
1. A shared understanding of the net value created by PV generation as a function of location, resource penetration and system specs. That will involve the collaboration of utilities to identify how the physical value and costs of integrating solar varies throughout their networks (as a function of, e.g., load shape and customer mix, expected load growth, generation mix, outage risk, etc.);
2. An adjustable long-term plan for local solar-resource growth leading to high penetration, so as to inform the evolution of Smart FiT value over time and bring certainty to long-term contracts;
3. Real-time monitoring of the PV deployment rate so as to efficiently operate market-throttle controls if needed;
4. A shared understanding of the infrastructural solutions to very high solar penetration, and of their cost, as these solutions (some of which may not have been invented yet) develop over time.
Richard Perez (email@example.com) is a research professor at the Atmospheric Sciences Research Center, University at Albany, State University of New York.
Tom Thompson (firstname.lastname@example.org) is policy director for the New York Solar Energy Society.
Thomas E. Hoff (email@example.com) is president at Clean Power Research.
Lyle Rawlings (lyle@advancedsolar products.com) is president and CEO at Advanced Solar Products.
Ken Zweibel (firstname.lastname@example.org) is director of the GW Solar Institute at George Washington University.
Pradeep Haldar (email@example.com) is vice-president in the College of Nanoscale Science and Engineering, University at Albany, State University of New York.
Rick Lewandowski (firstname.lastname@example.org) is president at Direct Gain Consulting.
Perez, R., K. Zweibel and T.E. Hoff (2011): “Solar Power Generation in the US: Too Expensive, or a Bargain?” Journal of Energy Policy, 39 (2011), 7290-7297
DSIRE (2012): Database of State Incentives for Renewables and Efficiency. dsireusa.org
Couture D., K. Cory, C. Kreycik and E. Williams (2010): “A policy maker’s guide to feed-in-tariff design.” NREL Technical Report NREL/TP-6A2-44849
McCabe, J. (2012): “Community Solar Gardens Offer a Creative Business Model.” SOLAR TODAY, May 2012
California PUC (2012): Virtual Net Metering, cpuc.ca.gov/PUC/energy/DistGen/vnm.htm
Clean Power Research (2012): “Value of solar to New Jersey and Pennsylvania utilities.” Technical report prepared for Mid-Atlantic Solar Energy Industries Association.
U.S. Department of Energy (2012): “$1/W Photovoltaic Systems: White Paper to Explore A Grand Challenge for Electricity from Solar.” www1. eere.energy.gov/solar/sunshot/pdfs/dpw_white_ paper.pdf