Feed-in-Tariffs: A Policy and Economic Analysis

1. Feed-in-Tariffs: A Policy and Economic Analysis FARE 2009 Conference Renewable Energy Feed-in Tariffs Toby Couture February 3, 2009 NREL is a national laboratory of the U.S. Department of Energy Office of Energy Efficiency and Renewable Energy operated by the Alliance for Sustainable Energy, LLC

2. Feed-In-Tariff Definition Feed-in Tariff (FIT)*:A renewable energy policy that offers guaranteed payments to renewable energy developers for the electricity they produce. This revenue can be comprised of: 1: Electricity sales, or 2: Electricity sales + RECs * Also called fixed-price policies, minimum price policies, standard offer contracts, feed laws, feed-in laws, renewable energy payments and advanced renewable tariffs. National Renewable Energy Laboratory Innovation for Our Energy Future

3. Feed-in Tariff: U.S. Policy Distinctions Net metering (NM) vs. FIT policies • NM provides a credit for excess generation • NM technically a “demand reduction” policy • NM usually re-sets/zeros out credits at the end of the year • FITs are a supply-oriented policy • FITs provide cash payment for the entire electrical output over a pre-established period of time National Renewable Energy Laboratory Innovation for Our Energy Future

4. Feed-in Tariff: U.S. Policy Distinctions Production based incentives (PBIs) vs. FIT policies • PBIs are distinguished from capacity-based incentives ($/W): • PBIs generally offer a per kWh payment without regard to production costs • all US FITs currently fall under this category • FITs provide cash payments for all electricity generated • Successful FITs are based onproject economics - i.e.: they ensure that the revenue streams cover total project costs, plus a reasonable return National Renewable Energy Laboratory Innovation for Our Energy Future

5. Feed-in Tariff: U.S. Policy Distinctions • Important to distinguish between utility-based FIT policies and state-based FIT policies • PG&E, SCE, Xcel, MGE etc., all have “FITs” - None are cost-based - None are meant to stimulate large amounts of RE - None are meant to create jobs  But that’s not utilities’ role National Renewable Energy Laboratory Innovation for Our Energy Future

6. FIT Policy Characteristics FIT policies generally: • Guarantee grid interconnection for RE • Involve a separate supply-oriented meter • (i.e. not net metering) • Are differentiated by technology type, project size, location and/or resource quality • Are designed to ensure the profitability of RE investments National Renewable Energy Laboratory Innovation for Our Energy Future

7. FIT Policy Objectives • Diversify the electric generation portfolio • Support a variety of newRE generation and capacity • Provide certainty to RE project investors/developers • Help support financing to meet RE goals and mandates • Secure the fixed-price benefits of RE generation • Optimize cost efficiency across various RE technologies • Achieve a wide variety of policy goals National Renewable Energy Laboratory Innovation for Our Energy Future

8. Feed-in Tariff Misconceptions • FITs are not a “foreign” policy • Utilities have been signing cost-recovery + profit contracts for decades, only for conventional generation • FITs can be compatible with an RPS mandate The real question is between FITs and competitive solicitations (RFPs)  They are two alternative procurement mechanisms National Renewable Energy Laboratory Innovation for Our Energy Future

9. Fundamental FIT Payment Choice (1) Fixed Price FIT Payment (2) Premium FIT Payment (above market price) National Renewable Energy Laboratory Innovation for Our Energy Future

10. Policy Design Options Primary Differentiations: • Technology Type • Project Size • Resource Quality • Location National Renewable Energy Laboratory Innovation for Our Energy Future

11. FIT Differentiation by Project Size <30kW 30-100kW >100kW >1000kW National Renewable Energy Laboratory Innovation for Our Energy Future

12. FIT Differentiation by Resource Quality Source: Klein, 2008; NREL 2009 National Renewable Energy Laboratory Innovation for Our Energy Future

13. FIT Research Research is beginning to demonstrate that: • FITs are not incompatible with RPS policies • FITs can be understood as an open PPA, based on the cost of generation • FITs are more effective at stimulating domestic job creation than other RE policies • FITs are not costlier than “competitive” mechanisms • FITs create more dynamic RE markets with more rapid RE growth National Renewable Energy Laboratory Innovation for Our Energy Future

14. FIT Policy: Application in the U.S. National Renewable Energy Laboratory Innovation for Our Energy Future

15. Key differences b/w US & EU 1:To date, FIT policies in the US have not been based on the cost of generation 2: US FITs have imposed numerous restrictive caps on FIT policies - project size caps - program size caps - total cost caps - caps based on green power participant base 3. FIT policies in the US have yet to offer appropriately differentiated FIT prices for different technology types National Renewable Energy Laboratory Innovation for Our Energy Future

16. NREL Research Findings • Countries with FITs: • 1. have highest RE deployment effectiveness • 2. have highest and most dramatic job creation growth, and the highest economic benefits tied to industry, manufacturing, and service sector development • 3. have counter-intuitively delivered lower cost RE generation than countries employing “competitive” policies like the RPS & RO in the UK National Renewable Energy Laboratory Innovation for Our Energy Future

17. Case Study: A Tale of Four Countries Germany & Spain: FIT Policies UK & Italy: Quota-based Policies (except solar in Italy) National Renewable Energy Laboratory Innovation for Our Energy Future

18. RE Deployment – Wind Power Source: BMU, 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

19. RE Deployment – Solar PV Source: BMU, 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

20. RE Deployment - Biomass Source: BMU, 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

21. FITs vs. Alternative Policies Wind Power Deployment in the EU: Source: EUROSTAT, 2008; NREL, 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

22. Economic Issues • Jobs • Costs National Renewable Energy Laboratory Innovation for Our Energy Future

23. RE Jobs and Economic Development Source: BMU, 2008; EUROSTAT, 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

24. RE Policy & Cost FITs RPS + RECs * Electricity price + Tradable Green Certificate (i.e. REC) Source: BMU 2008; ISI, 2008; Fouquet, D. et al., 2008 National Renewable Energy Laboratory Innovation for Our Energy Future

25. FITs vs. RPS on Cost  NREL Research finding that FITs offer better value for money Source: OPTRES, 2007; NREL 2009 National Renewable Energy Laboratory Innovation for Our Energy Future

26. FIT Policy Advantages • Long term price certainty • Lower risk than alternative policies • Price hedge • Lower financing costs (better debt/equity ratio) • Stimulate rapid market growth • Job creation • Compatible with RPS mandates • Create asecure and stable investment market National Renewable Energy Laboratory Innovation for Our Energy Future

27. FIT Policy Advantages • FIT payment is not linked to avoided costs • In the financial crisis, FITs provide low-risk returns on local and domestic investments • Cost efficient: provide a reasonable return to help developers get projects financed • Customize the policy to support various market conditions, including regulated and competitive electricity markets National Renewable Energy Laboratory Innovation for Our Energy Future

28. FIT Policy Disadvantages Setting FIT payment level is challenging: if set too low, little new RE development; if too high, surplus profits to developers Cost: supporting emerging technologies leads to near-term, upward pressure on electricity costs Policy design challenge: Tracking technological improvement and cost reduction accurately over time National Renewable Energy Laboratory Innovation for Our Energy Future

29. FIT Best Practices • Payments based on the cost of generation • Marginal costs integrated into the rate base (i.e. not via green power programs, treasury, etc.) • Payments differentiated by technology type, project size, location, and resource quality National Renewable Energy Laboratory Innovation for Our Energy Future

30. FIT Best Practices • Contracts should be based on lifetime of the project (secures the hedge benefit) • Policy stability is as important as price stability to investors • Clear interconnection rules and cost allocation procedures (e.g. for T&D) • Larger projects should provide daily/hourly forecasts to facilitate grid balancing National Renewable Energy Laboratory Innovation for Our Energy Future

31. FITs in the Financial Crisis • In the midst of the financial crisis, FITs provide a viable alternative to get RE projects financed: • US is down to four (4) tax equity investors • FITs facilitate project financing through price guarantee • Project developers can obtain debt financing  Reduce dependence on tax equity • Proven mechanism to create jobs and stimulate new industries • Help leverage capital investment from a wider variety of investors, including untapped local capital National Renewable Energy Laboratory Innovation for Our Energy Future

32. Coming Soon… Detailed NREL Report on FIT Policy Design: “Feed-in Tariff Policy Design and Implementation: Best Practices Guide” NREL, 2009 http://www.nrel.gov/docs/fy09osti/44849.pdf National Renewable Energy Laboratory Innovation for Our Energy Future

33. Thank you – Questions? Toby Couture Energy & Financial Markets Analyst Strategic Energy Analysis Center National Renewable Energy Laboratory www.nrel.gov/analysis 1617 Cole Blvd. Golden, CO 80401-3393 P: (303) 384-7471 email: Toby_couture@nrel.gov National Renewable Energy Laboratory Innovation for Our Energy Future