marksardella.com

Note: For basic information on feed-in tariffs, visit:

http://en.wikipedia.org/wiki/Feed-in_Tariff

Feed-in tariffs are generally funded by adding a charge to customer utility bills, so the idea that feed-in tariffs can reduce electricity rates is somewhat counterintuitive. But if your electric power system is inefficient – and most are – a well designed tariff can be a powerful tool for reducing rates or, at a minimum, stabilizing rates against future increases.

Electricity rates are determined primarily by the cost of operating and maintaining the electric power system. There are caveats, of course, but for the most part utilities add up their costs and bill them to customers. In the case of investor owned utilities, an allowable profit is added and also billed to customers.

So how much does it cost to operate and maintain an electric power system? That depends, more than anything, on what utilities buy with the money they spend. All other things being equal, a utility that invests in high-efficiency equipment and builds an efficient system will have lower rates than one that buys inefficient equipment and builds an inefficient system. Efficient systems run cooler, last longer, and use less fuel to deliver the same amount of energy. If you want to minimize system costs, high efficiency is essential.

One of the strongest arguments for feed-in tariffs is that they stimulate investments in equipment that raises system efficiency. Recipients of the tariff – generally independent energy producers – earn higher profits with efficient equipment and processes. A well structured tariff can also encourage placement of new equipment in strategic locations such that overall system efficiency is increased. In that case, even though the tariff is funded by an added charge on the bill, the resultant gains in efficiency can be enough to bring rates down.

Communities considering a feed-in tariff should determine whether efficiency improvement opportunities exist on their electric power system. If the majority of the energy comes from distant coal or nuclear plants, with supplemental energy provided by gas turbines, overall system efficiency is likely below 30 percent. Throwing away 70 percent of the energy in the fuel means there are lots of opportunities to raise efficiency.

Feed-in tariffs also promote more efficient investments for meeting load growth. Instead of constantly adding new, remote generators and upgrading lines for more capacity – the expensive way to do it – a tariff can be designed to promote additions of strategically located resources that obviate or delay line upgrades and generation additions. Such strategic measures generally have lower capital costs, and they further improve system efficiency. Denmark and the Netherlands have perhaps taken strategic system architecture further than anyone, shutting down nearly all of their inefficient central power plants in favor of many smaller plants that cooperate to serve nearby loads efficiently and without reliance on bulk power shipments over a massive wires infrastructure.

There are many reasons for considering a feed-in tariff, including to support the independent energy producers that live and work in your community, and to accelerate implementation of renewable energy. But if your power system is inefficient, a well designed feed-in tariff can improve efficiency enough to either reduce rates or, at a minimum, to insulate a community against future rate hikes. With rapidly rising fuel costs and an increasingly uncertain economic climate, the time for feed-in tariffs is here.

Greg Pahl of the Vermont Biofuels Association has been writing lately about Community Supported Energy (CSE), which works similarly to its cousin in agriculture -- the CSA. Energy projects are owned by either a local cooperative or by the entire community. Pahl cites an NREL study that found that local ownership increases a projects local income by a factor of three, and doubles the number of jobs created. His article also discusses the power of using Standard Offer Contracts (Advanced Renewable Tariffs) to promote creation of CSE projects.

Local Energy discussed the benefits of cooperative ownership for its Santa Fe Biomass-Fired District Heating Study, for which Michael Shuman calculated a potential benefit to the community of nearly $9 billion dollars over the project's 50-year lifetime.

The most successful U.S. model for promoting CSE is currently Co-op Power (www.cooppower.coop), although I know there are many more under development. A PDF describing their business model is posted here.

Thanks much to Kelley Rajala of The Livability Project for bringing the CSE model to my attention!

Here are some questions I recently received regarding feed-in tariffs. You can download a flyer of this post here.

QUESTION: Who measures the kWh produced and pays out the appropriate feed in tariff amounts earned to the multiplicity of green producers? Who collects the money from other utility customers which are redistributed via feed-in tariff payments? Finally, is there any regulatory oversight?

MS: I believe the prevailing practice in Europe is to task the utilities with reading the meters and making tariff payments. Utilities are, after all, the ones signing the 20-year power purchase agreements at the tariff rate. Utilities are also responsible for billing and collecting the monthly charges that fund the tariff payments. Paying generators for kilowatt-hours and adding surcharges to bills are things that utilities do in their normal course of business anyway, so the regulatory oversight of these activities under a feed-in law isn’t really an added burden.

I can think of several ways to improve on the European tariff model. First, the funding to cover tariff payments should not be collected using throughput-based surcharges on utility bills unless it can be done in a way that isn’t economically regressive. Given the widespread economic benefits that result from the tariff, there may be a good case for collecting the revenues for it via the tax base rather than the rate base.

Second, the tariff rate offered should be based on the locational strategic value of the generator to the grid. If it’s downstream of a bottleneck such that it frees up needed capacity and delays or obviates a line upgrade, it’s worth more. At the end of a long feeder that sags under load, or in a place that needs VAR support, it’s worth a lot more. The Electric Power Research Institute has software models and reports showing how to assess the value of strategically placed resources.

Finally, the tariff should be used to meet other objectives, rather than just being a tool to promote renewable energy. This can be done by setting qualifying standards for the tariff program. For instance, the tariff language could require that each generator be owned within the community where it is located, which would increase local retention of energy dollars. As another example, biomass generators could be required to have an independent certification showing that the wood was sustainably harvested. The possibilities are endless.

Click to read more ...