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Mechanisms to increase environmental investment: feed in tariffs

08 June 2010 #Environment

In April 2010, the UK government introduced a feed in tariff (FIT) to encourage microgeneration from renewable sources. This follows a long lobbying campaign from environmental groups and investors, who see FITs as a vital way to encourage investment in smaller scale clean energy technologies. This is backed up with evidence from Germany and Spain, where FITs have been in place for many years and have incentivised large domestic consumer uptake, and created new business opportunities. The government sees the introduction of a FIT as a method of encouraging domestic and commercial consumers to produce their own energy, thereby reducing total demand on the grid, and helping meet our renewable energy targets.

FITs are a method of guaranteeing the income from microgeneration devices, designed to reduce the payback time on these energy generating technologies. This comes in the form of a premium price paid per kWh electricity generated, higher than that achieved by selling to the grid. Only renewable energy devices that provide under 5MW of power are eligible to FITs, and these must be certified technologies.

Designing a FIT regime is not an easy task, where subsidy levels need to be set high enough to encourage mass take-up, but not too high that it creates a burden on the budget. This has been a problem on the continent, whilst the regime has encouraged adoption of these technologies on a large scale. It is also putting strains on national budgets, including Spain, Germany and Italy, which have all had to reduce the availability and price structure of their FITs.

The German FIT regime is often used as a demonstration of how forward thinking and stable policy can help to develop new industries. In 1991 Germany first legislated for renewable energy and FITs, with FIT guaranteed for 20 years from 2000 and since then has become the largest solar PV producer in the world and is home to many international companies` solar parks.

The Spanish market has been a huge success, and now Spain boasts some of the largest players in renewable energy in Iberdrola and Abengoa. These companies began installing wind and solar thermal respectively on a domestic front and are now major international corporations. Abengoa is the largest solar thermal developer in the world and took advantage of generous FITs introduced in 2004 to equalise the payback for large scale solar thermal power plants. The technology it has developed is now being exported to the US and Middle East. Wind is now the third largest energy source in Spain and recently generated over 50% of the spot electricity demand. Spanish firms have grown to compete with more established firms such as Vestas in the global wind market, with Iberdrola, Gamesa and Acciona all active internationally. The development of wind as a sector has been aided by the FIT scheme and little opposition from planning officers. This is clearly an issue that needs to be addressed in the UK, with the ‘Not In My Back Yard` (NIMBY) approach of local communities that object to ‘eyesores`.

There has been some criticism of the FIT scheme within the UK, with estimates that the costs of the scheme could reach £8.9 billion. The Guardian`s George Monbiot reports that for the estimated CO2 saving, in relation to cost, each tonne of CO2 mitigated would have cost the taxpayer £420 compared to an EU ETS carbon price of around €15. A recent study by Frondel et al. reveals that less than 1% of Germany`s electricity is supplied by solar PV, despite costing €10b to date and leaving a burden of more than €40b through guaranteed payments. Both Spain and Germany have had to reduce their FIT structure because of unexpectedly high uptake increasing the cost of the scheme. This problem should have been militated in the UK structure, with the consumer rather than the government footing the bill, through higher electricity bills for consumers. Although the problems have led to some doom-mongering, particularly in Germany, the skill- and research-base built up over the last decade will continue to make these countries attractive places to locate renewables businesses, particularly with the lead developed through the FIT policy which has developed a new positive economic sector.

Written by The EIC Environmental Investment Network.

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