Feed-in tariffs are a cornerstone of renewable energy policies
Already in use in over sixty countries, feed-in tariffs are a cornerstone of renewable energy policies worldwide. Taylor Wessing’s Dr. Michael Krämer explains the concept and the necessity of feed-in tariffs.
The Middle East is “going green”, at least if one was to believe what is being reported in the media these days.
There is no doubt that reducing carbon emissions is a great thing. And with the abundance of sun freely available, particularly in the Gulf region, not making use of solar energy and other natural resources is a waste indeed.
The main question is how the shift to supplying an entire country with green energy can be achieved most effectively. A centralized approach whereby utility companies gradually replace their conventional power plants with those that use renewable sources would most probably take decades, not least due to the sheer amount of investment required.
A quicker and altogether more convenient approach is to involve everyone, you and I, in the process, on a voluntary basis (of course). Such a decentralized approach has the benefit of not placing the significant investment burden on only a few shoulders and promises more energy being generated from renewable sources in a shorter amount of time.
Renewables – where we stand today
At present, the legal framework in the UAE does not really provide the impetus for private investments in the renewable energy field.
If, for example, I wanted to install solar panels on the roof of my house I would not be entitled to connect such an installation to the public grid. That means I would be forced to install panels with a capacity that guarantees satisfying 100% of my electricity needs at all times.
This in turn means not only that the dimensions of my solar array would have to be huge (as would be the cost), but also that I would be facing rather hot summer nights without air condition due to the usual lack of sunshine during that time.
In short, without being able to connect to the public grid there is absolutely no reason for me to make a significant investment into renewable energy generation.
The second problem is that, at least to date, the generation of any form of renewable energy is more expensive than electricity produced from fossil fuel. Instead of reducing my electricity bill, installing renewable energy sources merely adds to my cost and I have virtually no chance of ever recouping my investment.
This means that only renewable energy enthusiasts will be willing to spend money on generating clean energy.
Feed-in tariffs - a problem solver
The above two issues can effectively be dealt with by introducing so called feed-in tariffs. Under this system, individual producers of energy from renewable sources are being granted the right to feed the electricity they generate into the public grid and get paid fixed rates for any kilowatt hour (KWh) they produce, or feed into the grid.
So how does this work in practice given that the utility companies will hardly be interested in purchasing electricity from individuals at rates which are higher than those at which the company could produce the same amount of energy itself?
Simple. It works by putting a legal obligation on the utility company to purchase such energy. In turn the utility company will charge its entire customer base for whatever additional cost it incurs by purchasing such fed-in electricity.
Hence, ultimately it is the consumer who will pay the price. On the upside, however, we all benefit from a more environmentally friendly future.
At present, feed-in tariff policies have been put in place in more than sixty countries around the globe, including Australia, Brazil, China, France, Germany, Singapore, South-Korea, South-Africa, as well as some states in the US.
Germany’s renewable energy act: a benchmark
The German “Erneuerbare Energien Gesetz” (Renewable Energy Act) has so far proven to be the most successful policy framework available, and is often used as a benchmark against which other feed-in tariff policies are being considered.
With such a legal framework in place it suddenly becomes possible for me to install my own private wind turbine or solar array regardless of whether the amount of electricity generated actually fits my needs at any given time.
If I am producing too much energy I can feed it back into the public grid, and if what I am producing is insufficient I can obtain the required balance from any power socket.
At the same time I am gaining security for my investment. I know that every kilowatt of energy I am producing either saves or even earns me money. All of my “home grown” energy that I consume myself reduces my utility bill and any excess amount that I am feeding into the grid actually earns me money.
This provides a sound basis for my calculations in terms of time required to recoup my investment.
It also makes high volume investments (e.g. into complete tidal-wave or geothermal power plants, or offshore wind parks) much more interesting to, for example, institutional investors.
Attracting private investment – big and small
The introduction of feed-in tariff schemes has led to a sheer explosion in private investment into renewable energy production in most countries where these schemes are now available.
Spain, for example, has seen a massive increase of solar energy being produced, both by individuals as well as companies via large solar farms.
Denmark, on the other hand, has seen a large increase in the amount of wind turbines that have been installed. In Germany, the installation of solar panels on private roofs has become intensely popular whilst institutional investors finance the construction of massive offshore wind parks in the North and Baltic Seas.
The fact that the prices being paid depend on the means by which a certain renewable energy has been produced further ensures that no discrimination of a particular energy source occurs.
Hence, although wind energy may be cheaper to generate than solar energy, operators of wind turbines and solar arrays both have comparable chances of generating money with their investment.
Such non-discrimination of certain energy sources has the positive effect that research is being undertaken in all directions instead of focusing on one particular means only.
Together with the general support that the generation of renewable energy currently experiences in many countries, this leads to an innovation-friendly climate in countries where such a non-discriminative approach is being applied.
This may well be one of the reasons why the technologies that are being developed in such countries count among the leading technologies that are currently available in the renewable energy field. It may thus be an incentive to follow a similar path here in the UAE.
It should be mentioned, in fairness, that there is also a downside to putting a feed-in tariff framework in place. As mentioned above, utility companies are being forced to purchase energy at pre-set prices, which, as yet, are not usually competitive. This will inevitably lead to higher electricity costs for all of us.
In addition, the incentive to invest in renewable energy that is being provided by feed-in tariff schemes will constantly have to be monitored and adjusted if necessary. If generation of a particular form of renewable energy becomes too popular, a reduction in the price paid for such energy must be considered in order to avoid overall electricity costs getting too high.
It might be a price worth paying. In Germany, for example, the average household now pays only about AED 20 a month more for their electricity than they did prior to the tariff being introduced. In the long term, this is likely to be AED 20 well invested.
The Erneuerbare Energien Gesetz - the key principles of Germany’s benchmark renewable energy act
- Individuals are given the right to feed any electricity they generate from renewable sources into the public grid and to be paid for any amount of electricity they make so available to the public.
- In turn, grid operators are obliged to not only allow any such private source of renewable energy being connected to the public grid, but also to purchase any electricity so produced at pre-set rates.
- Prices are guaranteed for a period of twenty years, which provides producers of renewable energy with a reliable means of recouping their investment.
- The price payable to each individual producer of renewable energy is based on the typical cost of generation from a particular source of energy. This results in different prices being paid for energy from different sources (e.g. solar energy yielding higher prices than electricity generated by wind turbines).
- The price of a KWh of renewable energy depends on the time of installation of the energy source. Higher prices are being paid for energy produced from sources which have been installed earlier (“tariff digression”).