Monday, March 03, 2008

Do we need feed-in tariffs?

Recently the Greens have been advocating for feed-in tariffs - a statuary minimum price electricity retailers must pay generators - as a policy for promoting renewable energy. For those wondering about the policy justification, Jerome has a fantastic post at European Tribune which lays it out. While he's talking about wind power, the same framework can be used to justify a feed-in-tariff regime for any form of renewable energy with high fixed and low marginal costs. Such technologies have two important features:

  • the cost of wind power is essentially set at the time of construction, when the parameters of the financing of the initial investment are agreed, in the form of debt service plus a set return, over an agreed period of time, typically 15-20 years. That cost is fixed and will not vary in accordance with the price at which electricity is actually sold.
  • once installed, wind power will always be dispatched - with its negligible marginal cost of production, it will always be cheaper than alternatives, and the only reason not to take such free power will be technical constraints from the network (which I'll discuss later). When dispatched, wind power will move the dispatch curve, and ensure that the marginal cost of production required at that point ot satisfy demand will be lower than if wind power were not available - ie wind power displaces the most expensive power source that would have been needed otherwise, typically a gas-fired plant.
The latter means that a renewables subsidy or feed-in tariff regime can effectively pay for itself by producing lower overall electricity prices - something which has already happened in Denmark (obviously, this requires the subsidy or feed-in regime to be set at the right level).

Of course, appropriate policy depends on local conditions, and simply because feed-in tariffs work in Europe doesn't mean they're appropriate here. With wind especially our conditions are very different: our wind resource is much stronger, producing capacity factors Europeans can merely dream about, while our gas market is isolated, meaning the local shortage will keep prices high. Add in a price on carbon (not actually implemented yet, but the electricity generators consider it certain enough), and the net result is that wind doesn't actually need any support - it's perfectly competitive in the New Zealand market. Whether its competitive enough depends on your goals, but ATM it looks like the market will easily meet the government's proposed 90% renewable energy target with no further intervention necessary.

What's true for wind however may not be true for other forms of renewables, such as solar or wave power. These technologies are still in their infancy, and so may need assistance if they are to become widespread. The question we should be asking ourselves is whether these are good technologies to use in New Zealand. With wave power, the answer at this stage appears to be "yes" - there's obvious potential there for large-scale generation, and so we want to move it rapidly from research installations to commercial uptake (though currently we need to focus on getting it to the research stage here, so we can gather data on how wave-power units perform in NZ conditions). With solar, I'm not so sure. Yes, it has its uses for remote sites and off-grid installations, but our latitude means we're not prime solar generating territory, and in terms of ordinary domestic use, you can generate that carbon-free energy a lot cheaper with a wind turbine somewhere than by putting solar panels on the roofs of people's houses. Solar prices are expected to drop as the technology matures, so its worth continuing to look at this (while keeping in mind the advantages of distributed generation). But ATM, I'd say it's not worth following South Australia and offering a feed-in tariff for solar. However, if prices continue to drop (and the hype of US$1 / Watt comes true) it might be in a few years.