A Feed-In Frenzy?
By Dan Bihn
Published: SOLAR TODAY, May 2010 issue
 As in many energy-conscious communities around the country, here in Fort Collins, Colo., there’s a lot of buzz about feed-in tariffs (FITs) as a great way to promote the use of rooftop photovoltaic (PV) systems. We're hearing how this simple mechanism transformed cloudy-with-a-chance-of-rain Germany into a solar superpower in less than a decade. The idea is that if the Germans can do it, we can too. Many in our community eagerly imagine what a FIT could do with the 300-plus days of sunshine we get every year, and they can’t wait to get started.
Simply copying the European FIT mechanism is not likely to achieve the promised results. By confusing an incentive mechanism for solid public policy, the communities and states adopting FITs may end up paying too much for too little. Still, a FIT mechanism properly adapted for today’s America could be useful. But first we need to understand what a FIT is ― and what it isn’t.
A FIT is a long-term contract (20 years is very common) between you and your electric utility. The utility agrees to buy all the electricity your PV system feeds in to the grid at a fixed tariff (or rate in utility speak).
A FIT has several advantages over the more common upfront cash rebates many states and utilities currently offer PV owners. Your utility doesn’t need to pay the whole amount at once and it only has to pay for what your system actually delivers. Since you only get paid when your system delivers energy, a FIT encourages you to install your PV system in the most appropriate location and orientation and then rewards you for keeping it in tip-top shape.
But a FIT is not a silver bullet. It’s not as simple or as transformative as some claim, and it doesn’t necessarily bring stability to your local solar market.
Many folks don’t realize that to fund just one year’s PV projects, rates need to go up and stay high enough to make good on the 20-year commitment to purchase the PV power. (Fortunately, if the cost of conventional power keeps increasing, the premium paid for solar will decrease and may ultimately pay a dividend.)
If your community wants to fund more systems the next year, your utility will need to make an additional rate increase and take on an additional 20-year commitment.
Stability? FIT discussions often include a vague reference to stability for investors. But there are a couple of types of investors and a couple of types of stability.
For the investor funding the PV system on your roof (probably you and your bank), a FIT does indeed provide a 20-year utility-backed guarantee to pay for your power. This is a key part of the FIT.
But for the investor who wants to fund a new solar business with the expectation that there will be new projects next year and beyond, a FIT by itself makes no promise. This type of long-term commitment and stability can only come from long-term policies based on long-term public support. If your community’s FIT loses public support, the FIT unceremoniously ends. Of course, systems already installed will continue to receive their payment for energy delivered until their 20-year contract expires.
The Gainesville Story
In early 2009, the city of Gainesville, Fla., pioneered the first solar FIT in the United States, based on the German model.
Its municipal utility pays 32 cents per kilowatt-hour (kWh) for electricity generated by rooftop PV. That’s about three times the retail price for grid power. This money is collected from all the ratepayers in the form of an across-the-board rate increase.
To ensure electric rates don’t increase by more than 1 percent, the city capped the total amount of PV for the first year’s contracts at 4 megawatts ― about 1,000 typical residential rooftop systems. But, as mentioned above, if the city wants to add additional systems to the program this year, they’ll have to raise rates again.
The program was an instant success. It was fully subscribed in a matter of days. Unfortunately, PV owners who didn’t sign up quickly enough were relegated to a waiting list that now stretches to 2016.
Many solar advocates say this shows just how popular solar energy is. But when a marketing engineer like me hears about over-subscriptions and waiting lists, I instinctively think the price must be far too high ― and that ratepayers’ money could be more effectively spent by paying a lower FIT rate on more projects.
The Cost-Based FIT
Gainesville, like many FIT adopters, has adopted a cost-based German FIT model. The rate paid to the PV owner is determined by what it takes to give a PV investor a prudent financial return of around 5 percent annually. The Gainesville folks picked 32 cents per kilowatt-hour. On a $25,000 5-kilowatt system (after the 30 percent federal tax credit of $7,500), that works out to a net profit of around $1,000 a year for the PV owner. (Click here for a simplified cost model.)
$1,000 a year profit? Will you still look at your neighbor, with her profitable PV system, as a solar hero? Or will you resent that your rate increases are paying her a respectable financial return on her investment?
And will this downgrade PV from a blue-chip social investment to just a good way to make a buck for those lucky enough to get into the program? I'm concerned.
The Value-Based FIT
Sacramento Municipal Utility District (SMUD), an early hero in the PV world, broke from the pack and adopted a much lower FIT rate (complicated, but averaging around 18 cents per kilowatt-hour). This rate is based on the value of PV to the local grid, not on the cost of PV.
However, even SMUD’s value-based FIT was fully subscribed in short order. And it too has a long waiting list of people and projects wanting to participate. Conclusion? Even the value-based FIT rate is above market price.
The Market-Based FIT: A Good FIT for America?
The disadvantage of both cost-based and value-based FITs is that they miss one of the most exciting aspects of the PV market (and it is a market): Many people are willing and able to invest in their own PV system without an immediate or significant financial return. Why? Some believe it’s a solid social investment in the future of the planet; some want their PV systems to be visible statements of their personal values; and some think PV is just plain cool.
Today’s PV market just doesn’t need that much of an incentive. And that is why the Gainesville program was swamped by applicants. Had they chosen a lower FIT rate that reflected real market conditions, they would have been able to fund far more systems and get two or three times more megawatts on line.
So what would the price of a market-based FIT be? High enough to encourage many of those would-be solar owners to sign up, but low enough so there isn’t much of a waiting list (this is just how well-functioning markets work). With a fair market price, it takes a while to sell out ― not a few days. That’s how you know you have a reasonable price.
And just how to figure out the exact price? Ask the guys at eBay and Google. They do this all the time with things like reverse auctions.
Whatever the exact market price is, it will be significantly cheaper than either the cost-based FIT rate or the value-based FIT rate. And this will allow communities to stretch their incentive dollar and get more solar on line. And it’s pure American.
Aren’t we trying to get more PV online sooner?
The public enthusiasm and support for PV being released by the promise of FITs is truly impressive.
But it was exactly this public enthusiasm for PV and other things green, and not a specific funding mechanism, that transformed Germany into the world’s solar superpower. German voters and property owners converted their enthusiasm into a concrete, long-term commitment to fund PV and grow a domestic solar industry. Germans pay about 5 percent more for their electricity to fund their commitment to renewables — about one-fifth of that for PV. It’s that kind of commitment — not the FIT mechanism they happened upon — that made this a reality.
So let’s kindle our enthusiasm for PV and grow it into the widespread public commitment we’ll need to transform our PV markets. Let’s not get too excited about any one policy mechanism.
Let's create well-reasoned, enthusiasm-sustaining policies that work for America today.
---------- About the Author: Dan Bihn (dan @ danbihn. com) is a technical marketing and communication engineer and a frequent contributor to SOLAR TODAY. Join the Discussion: What do you think about FIT pricing? Share your comments below.
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