Why Isn't the U.S. Embracing Feed-in Tariffs?

The sun is rising on a new era for renewable energy in Gainesville, Fla.

Starting this month, residents and business owners with solar panels connected to the power grid will get a monthly check from their city-owned electric utility, the result of a first-in-the-nation policy called a feed-in tariff.

The new policy essentially turns privately owned rooftop solar panels into micro power generators for the utility. The city will pay up to 32 cents per kilowatt-hour for power they generate over the next 20 years, delivering their owners about a 5 percent profit over the equipment's lifespan.

Feed-in tariffs like this have long been the primary tool for financing renewable energy projects in Europe, and they are a reason Spain and Germany have become world leaders in wind and solar. Advocates say the system is simpler, more effective and less expensive than traditional U.S. incentives for renewable energy, which are an often byzantine mix of tax incentives, rebates, state mandates and utility programs.

So what's standing in the way of wider adoption in the United States?

It's politics, explained Adam Umanoff, a renewable energy attorney with Chadbourne & Parke in Los Angeles:

"We have never embraced mandated prices as a means of incentivizing renewables in the United States."

Some people will argue that mandatory prices go against our economic culture, he said, but much of the opposition is generated by investor-owned utilities.

The model being used in Gainesville simplifies everything into two short contracts, one for connecting to the grid and the other an energy purchase agreement. The utility buys 100 percent of the power produced at a premium and finances the program through a monthly fee spread among all ratepayers that comes out to about 74 cents per month.

That monthly rate increase would be less than a cup of coffee, yet utilities have been able to use the threat of soaring electricity bills to scare customers in the political process, said John Farrell, author of a recent report on feed-in tariffs for the Institute for Local Self-Reliance. "They will say this is going to be very expensive. They'll say you're going to pay 10 times more for electricity. They'll throw out a number that sounds like a lot," Farrell said.

Since the payments are covered by ratepayers, they don’t hurt the utilities’ balance sheets. But the feed-in tariff does make it easier for anyone to make a profit generating renewable electricity. So, in essence, it's asking utilities to help in the undoing of their monopolies.

Most utilities are set up to make money by building power plants and selling the electricity to customers. Betsy Engelking, a resource planning and bidding manager for Xcel Energy, shared a candid explanation in January at a renewable energy conference organized by the Institute for Local Self-Reliance in Minneapolis.

"The honest truth is we earn our returns by building plants and putting them into rate base and making profits on them," Engelking told the audience.

A feed-in tariff "does take away that opportunity of utilities to earn on their investments. ... If you really, really want us to love this stuff, figure out a way we can make some money on it."

Xcel Energy, in a statement last week, said it was concerned that feed-in tariffs could expose customers to "the very real risk of paying well above the competitive prices that we have received through formal solicitations."

Instead, investor-owned utilities have been more supportive of renewable portfolio standards, which require them to supply a certain percentage of their electricity from renewables but don't dictate prices.

Feed-in tariff supporters point to studies, including a 2005 report by the German Wind Energy Association, that conclude feed-in tariffs perform better and are more efficient than quota systems such as renewable portfolio standards. They also argue that many of the government’s incentives are ineffective in a recession.

Currently, most renewable energy incentives in the United States come in the form of tax credits, which are only valuable to companies with large enough profits that want to lower their tax burden. One problem in this economy is that fewer companies have profits to tax, so the market for tax credits has dried up significantly, Farrell said.

"I don't think we're going to make a lot of progress toward our renewable energy goals unless we come up with an incentive that doesn't depend on rich people and tax credits," Farrell said.

Because Gainesville is served by a municipal utility, it didn't have as steep a political climb to pass a feed-in tariff. For that reason, Umanoff thinks its willingness to try a feed-in tariff is probably an anomaly.

More local efforts will turn up across the country, but as far as a nationwide movement, he said: "I just don't think we have the political will to do it."

If the economy continues to challenge tax-credit-funded renewable energy projects, however, Farrell thinks there will be support for adopting new incentives such as feed-in tariffs.

Christy Herig, a regional director with the Solar Electric Power Association, believes Gainesville's success could inspire other municipal utilities to experiment with renewable tariffs.

Municipal utilities have fewer stakeholders to please, making it easier for them to embrace the concept. If more municipal utilities are successful, their examples could provide political leverage for state legislatures looking to require feed-in tariffs for for-profit utilities.

That's the same path feed-in tariffs took in Europe. They started with municipal utilities, then spread to states and regions before finally being embraced at the federal level.

Herig sees Gainesville as the start of a feed-in tariff trend in the United States.

Already, lawmakers in at least 10 states have introduced legislation that would require utilities to pay a premium to customers generating renewable energy. The nation's largest municipal utility, Los Angeles Department of Water and Power, is also considering a program similar to Gainesville’s feed-in tariff.

Paul Gipe, a leading advocate for renewable feed-in tariffs, said the policies are too important to let utility companies stand in the way.

"It's all about whether you want to do it or not. That's it. Why do we care what the investor-owned utilities think?" Gipe said. "Why does any policymaker – an elected official who's charged with representing the public's interest and future generations' interests – why should their primary concern be what the electric utility thinks? Do you want it or not?"

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