Designing Policy to Sustain and Scale Distributed Clean Energy in the U.S.

Non-hydroelectric renewable energy today accounts for over 4% of the U.S. energy mix.  We have made modest progress on renewables in the U.S. with a quadrupaling of new renewable energy since the year 2000.  However, we must do a lot more for renewables at home if we hope to keep within reach of China and Germany in clean energy development and show rest of the world that the U.S. is serious about addressing climate change.

Several countries, particularly in Europe, have demonstrated a strong conviction to take action on climate issues by establishing policies to develop and quickly grow renewable energy markets.  One particular policy mechanism, broadly known as a Feed-in Tariff (FIT), has emerged as the most widely adopted platform to drive investment in clean energy technologies, especially solar photovoltaics (PV).  The country most famous for originally designing and implementing a FIT is Germany. The German FIT, alongside a multi-faceted renewable policy strategy, has led to global leadership in solar PV and other renewable technology deployment in both generation and manufacturing capacity. 

Other countries, such as Spain, France and Italy have similarly utilized FITs to supercharge their renewable deployment, although with widely publicized challenges in the case of Spain, and growing unease in France. All told, as of today, over fifty countries spanning Europe, Asia and North America were experimenting with, or fully implementing FITs -- mostly to encourage PV installations, leading to a global boom in solar capacity. Since eclipsing one gigawatt of PV capacity in 2002, the global solar industry has now installed over twenty gigawatts of global capacity, a staggering eight year compound annual growth rate (CAGR) of nearly 50%.

In light of these superlative results, and with a desire to increase incentive options available for clean distributed generation such as solar PV and community-scale wind power, support for the implementation of FITs is growing among key stakeholders in the United States.  This is leading to a wide-ranging and passionate debate among policy advocates (link: recent paper on FITs that I co-authored with Cai Steger and Noah Long in the Electricity Journal), investors and the business community; and to a profusion of U.S. state- and local-level proposed FIT legislation. 

How Feed-in-Tariffs (FITs) are Structured and Work

Fixed-price Feed-in-Tariffs (e.g. Germany’s solar deployment program) establish standard contractual prices, terms and conditions (e.g. “power purchase agreements”) for specifically defined energy producing and/or energy storing technologies that connect (i.e. “feed”) into a larger utility grid or bulk transmission system.  FIT contracts are typically framed and programmatically administered by regulatory bodies that have legal jurisdiction over utilities (including both publicly- and privately-held) that generate and/or deliver electric power.  Drilling a little deeper into this general definition, we identify these common elements:

• Pricing: “Value-based” is a method to securitize long-term grid, public health and environmental benefits that clean distributed generation to a specific geographic area and/or location on the grid.  “Cost-based” creates an above-market tariff that “fills the gap” between current electricity market rates and the installed costs of a given type of distributed generation technology. In the case of the latter, pricing is set to “guarantee” a positive return on investment during the life of the contract.
• Terms: generally ten to twenty years
• Conditions: utilities “must take” energy generated, pursuant to meeting interconnection standards for system commissioning, monitoring and power quality.

Overview of Feed-in-Tariffs in the U.S.

Within the U.S., FITs are intended to complement existing competitive resource procurement mechanisms (e.g., Renewable Portfolio Standards) and other renewables supporting policy, by tailoring financial and/or transactional support for emerging distributed generation technologies that are often neglected by traditional renewable resource procurement mechanisms.  Financial and transactional issues most often identified as barriers to developing robust markets for clean distributed generation include relatively high transaction costs of participation in competitive solicitations for smaller projects, insufficient market liquidity and access to low-interest private capital, burdensome and untimely utility-grid interconnection procedures, and unknown, competing or prohibitive local zoning, environmental and building codes.

The diversity of institutions that govern, invest in, operate and maintain the U.S. electric-delivery system pose many unique challenges to the implementation of FITs.  We stress that these challenges are “unique” and we caution against directly comparing the U.S. among nations with an existing FIT because of the wide ranging, and frankly, wholly different context of politics, laws and institutions that establish electricity policy in each different polity.

Critical Objectives for Cost-Effective Scaling of Distributed Generation that Can Inform FIT Design:

• Attract an increasing percentage of private sector capital and allows market to operate on a ‘‘level playing field’’ in providing the balance of technologies
• Drive industry costs down
• Encourage sustained orderly deployment to avoid overheating the market
• Facilitate the development of a diverse portfolio of emerging, early-stage
• technologies alongside mature technologies
• Limit impact on electric utilities by applying only to those that are revenue decoupled or regulated by a Commission that is moving toward such a regulated regime
• Encourage environmentally sustainable technology build-out and adapting program rules to reflect any new environmental regulations

Points to Consider When Designing and Implementing FITs in the U.S.

There are several important elements of a well-designed FIT. A poorly implemented FIT can cause significant utility rate impacts without establishing a sustainable market; and the complexity of designing such a policy, especially on a federal level, should not be underestimated.

(1) Start in the States. Take advantage of the ‘‘state-as-policy-lab’’ concept, and experiment with different policy configurations.

(2) Competitively neutral. FIT policies should not discriminate by utility ownership or apply asymmetrically within states.

(3) Restrictions on project size. FITs should be available for systems sized up to several megawatts.  Smaller projects typically are stymied by a high transaction costs, which is a key market barrier that well implemented FITs will help diminish.

(4) Informed distributed generation siting. Sufficiently precise, transparent, and accessible distribution system analyses to identify specific grid locations that would benefit from new clean distributed generation ought to precede and then strongly inform FIT rate design and capacity limits.  

(5) Balance legislative framework with public utility commission involvement. In order to maintain adequate flexibility, general principles for the FIT should be established in legislation, but the PUC should be charged with adopting the actual tariffs.

(6) Tariff rate-setting should carefully balance a limited utility rate impact and accurately reflect the true value (externalities included) of distributed generation.

(7) Regular program evaluation with reasonable implementation flexibility.

(8) Program Capacity cap. In order to minimize cost concerns, an annual limit should be placed on the amount of resources that can be procured under the FIT.

(9) Last but certainly not least!  Address non-price-based installation barriers to growth. Feed-in tariffs cannot be used to overcome all barriers to the installation of distributed renewable generation and attempts to do so will likely lead to excessive program costs.  Here are some of the key non-price barriers to keep in mind:

• Widely varying interconnection, technical and installation standards. National standards are needed.
• Unknown, competing, or prohibitive local zoning, permitting procedures, environmental and building codes.
• Substations vary widely in their ability to handle distributed generation. States must share information to target development near substations with low utilization rates and develop plans for sharing the cost of analysis and distribution upgrades among all beneficiaries of renewable energy.

Finally, a key broader challenge for advocates of clean distributed energy lies in accurately framing and systematically comparing the complex set of trade-offs, at a much finer scale, both grid-specific ‘‘technical’’ dimensions (e.g., transmission, grid and utility management), and important socioeconomic dimensions (e.g., environmental, local economic development) that, until now, has been overlooked in the broad-scale planning, deployments, and upkeep of the electric utility production and delivery system in the U.S.