Carlo's Think Pieces

Reflections of a Filipino in the Netherlands

Alternatives to Feed-in Tariffs

Posted by butalidnl on 29 August 2011

Solar panels are sprouting all over Germany and Spain as a result of feed-in tariff programs by their governments. When governments face the need to develop their solar energy, the question comes up if they should consider feed-in tariffs.  Feed-in tariffs is a policy of governments to pay grass-roots producers of solar electricity higher fees (than traditional electricity rates) for the electricity that they generate. This policy has been extremely successful in Spain and Germany, to the point that so many people are putting up solar panels, and have become a major drain on their governments’ budgets.

The Philippines has very recently instituted a system of Feed in Tariffs for Renewable Energy. I think it will not only not work, it will end up raising the price of electricity to consumers, and be an unacceptable burden to the national budget.

I think that a feed-in tariffs policy may have been a good idea in the past; but that we should now use other strategies for promoting solar power. Feed-in tariffs are potentially a big drain to national budgets; but the main reason for not using them now is that the price of solar panels have dropped sharply in recent years, to the point where the price for generating solar electricity is almost the same as ‘grey’ electricity in some times and places. This means that price is no longer the main obstacle to people shifting to solar. Government programs to promote solar energy should address these obstacles directly.

Solar Bank
The biggest obstacle that keeps households or businesses from installing solar panels is the need for a large expense up front. It is similar to having a mobile phone where you pay for 15-20 years worth of service at one time. The mobile phone industry would not have taken off if this was the case. There needs to be a way to ‘cut up’ the expense of solar power to convenient monthly portions.

The government should put up a ‘Solar Bank’ which would pay for the panels, and to which the buyer could make monthly payments. The bank could charge the household for electricity produced, at slightly below the prevailing price of  ‘grey’ electricity(and at a very low interest), until they are fully paid (which should be between 15 and 20 years (solar panels are expected to last at least 25 years) . Included in this contract should also be insurance coverage, so that people will not continue paying if the panels get destroyed or damaged.

Net Metering
Another measure would be to require electricity providers to offer net metering for a modest one-time fee. Net metering is when a user is allowed to sell (excess) electricity to the grid at the same price that he pays for getting electricity.  This is favorable for those who produce electricity themselves,  from solar, wind, biomass etc. Another advantage is that net metering also reduces the need for batteries, which are a significant part of the expense of solar systems.

In Europe, net metering arrangements mean that a household can ‘sell’ excess electricity to the grid, for the same price, but only as long as it does not exceed the household’s monthly consumption. Beyond that, the electricity provider will only pay the ‘generating cost price’ (i.e. excluding transport and taxes )

Business Incentives
Businesses should be stimulated to adopt solar energy.  In a previous blog, I pointed out that, for commercial and industrial users in Metro Manila, the cost of Meralco electricity is sometimes higher than the cost of solar electricity (Solar Cheaper than Meralco in April). This is especially so during the dry season, when cheap hydro-electric power is less abundant. But businessmen consider not only the cost of solar energy; they also have other concerns, which need to be addressed.

Reliability. Solar electricity depends on the presence of the sun; so the panels don’t produce energy at night and only a little during cloudy days. Companies should be able to combine grid and solar electricity to get a very reliable energy supply. And for this, they would need heavy-duty batteries. I propose that the government subsidize the batteries for solar installations of businesses. Perhaps a subsidy from 25% to 50% of the cost of the batteries would be appropriate.

Resale Value. The government could take measures to develop the secondary market for solar panels. This would stimulate businesses to buy and install solar panels. Some businesses may then opt to install second-hand panels that are cheaper. A secondary market would also stimulate businesses to upgrade their panels when technological improvements improve panel efficiency.

One measure to help stimulate the secondary market is to allow panels to be subject to accelerated depreciation. When the panels’ book value reaches zero, businesses may decide to sell them for a tidy profit, and then buy new panels.

Maintenance. Companies may be unwilling to install solar panels because of perceived maintenance costs and hassle. The government should provide them with technical support, and even training programs for building administrators or maintenance staff, to teach them how to maintain the panels properly.

Of course, businesses should also be able to avail of the loans/insurance from the Solar Bank, as well as benefit from net metering.


4 Responses to “Alternatives to Feed-in Tariffs”

  1. Some words from the Dutch in the Philippines. Agreed that FiT is actually not helping introducing renewable energy in a fast way. It is more that subsidies given are paid by the consumers directly through the FiT-All.

    Whilst Solar is a good option for a. remote areas with low consumption and a bad or non existing electricity connection (pole mounted solar) b. Areas without open space to generate enough electricity being consumed (roof mounted), Electricity generation is limited. There are a number of other options which are more cost effective, like waste to energy (not very renewable, I admit, unless the waste is organic) including solar thermal. Now solar thermal is often thought as a source for heating but it can be used for cooling as well. With far more efficiency than the electrical way: sun->DC->AC->grid->A/C->cold air. (sun->DC (20%)->AC( 75%)->grid(90%)->Airco(85%), overall 11%)

    The classic idea of having to pay up for 12 to 25 years of service up-front is hindering implementation of different technology for generating power. FiT does not change that notion at all, merely giving the impression for investors that the revenue stream for an investment is somewhat secured. Still somehow the large amount has to be provided and existing industry has the advantage that it will owns/control already large parts of the requirements (land, distribution systems, poles to put up solar panels, metering devices etc) so its budget requirements are less than for the private owner. In effect they can earn EXTRA from the FiT.
    Of course private owners can organize themselves in groups, holding shares/voting rights in mini co-ops or corporations to have (almost) the same advantage as existing business. I would like to think that it is a better model than the mobile phone model as it puts back the control over the power back to the people and not to some service provider. I have my phone for “free”, but I realize very well that I will pay for it about 2 to 3 times more in the course of 3 years than when I had bought it in the shop with a SIM only card.

    I think you can replace solar energy ( as refering to PV solar) can replaced to renewable distributed generated energy as well. Then there is the option to use the most efficient technology fit in an area. .

  2. Supposedly, the burden is not on the government but on all consumers on the grid. So it’s a case of taxing just about everyone a small amount so a few developers can be “incentivized” to put up solar plants.

    But if grid parity is at hand, as when the cost of home solar is less than or equal the retail price, why not just say no to the feed-in tariff and simply encourage those who can afford to install it at home to do so?

  3. viking said

    I thin the basic point is missing here. So-called subsidies are called for because legislators don’t want to impose taxes to account for pollution from conventional sources. Of course FIT will raise average electricity rates and that is the purpose of the policy: to price in the external costs of conventional generation. Econ 101.

    • butalidnl said

      While it’s true that the price of electricity does not reflect the cost of externalities, it is also true that the NPC price is higher than it should be due to its contracts with IPPs (w/c provide that NPC pays them based on capacity and not actual production of current). So, we can just cancel one off with the other (actually, the overprice due to the IPP is probably more than the underprice due to the unaccounted externalities).
      Now, let me talk about the FIT for solar energy alone, and not for all RE. Solar is different from the others because: first, it is a lot more scalable; and second, it is at the very beginning of its technological curve. The price of solar (assuming the panels are on the roof of the factory) is about P9/kwH for industrial users; while Meralco chareges those companies between P8 and P10 depending on the season (cheaper during wet season). So, I think that the main stress for solar is to have industrial companies install them, bec the cost to them is almost comparable to Meralco rates. I believe that the government could do this thru incentives other than feed-in tariffs.
      Feed-in tariffs are problematic because: one, they commit the government for a relatively long time, financially; and two, it basically is rationed among providers of solar energy (which means that it is open to corruption, would distort markets, and open to wastage, as experienced elsewhere).
      In the end, promoting solar simply needs government to find ways to lower the average cost of solar for industrial companies, so that it would be profitable for them to shift.
      It’s all rather simple. It is Econ 102. 🙂

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