Feed-in-Tariffs: An Innovative Policy Tool Capable of Accelerating Solar Energy Growth
This past week, the Department of Energy’s Solar Energy Technologies Office (SETO) and National Renewable Energy Lab (NREL) released their Solar Futures Study, a vision study on solar energy’s potential role in the future decarbonized grid. The Solar Futures Study provides analysis on future solar technologies, the growing solar workforce, and solar energy’s important relationship with clean energy technologies like battery storage systems. Among other findings, the study claims that with supportive policies, technology improvements, and widespread electrification, solar energy could account for 45% of US electricity generation by 2050, significantly contributing to the decarbonization of the national energy grid.
As our national and local policymakers consider how to combat climate change, the Solar Futures Study makes it abundantly clear that solar energy expansion must be a top solution. It is vital that solar energy’s technical potential is converted into policy action if we want to prevent the worst of climate change, which, as the recent IPCC report claims, may already be too late. Our policymakers must explore all possible methods capable of rapidly accelerating solar energy expansion. Although there are several potential methods to bolster solar deployment, I suggest we consider feed-in tariffs (FITs), an innovative and proven policy tool that can launch solar energy to the next level.
What are Feed-in Tariffs?
Made popular in Germany, feed-in tariffs are a successful policy mechanism that promotes renewable energy growth. Similar to net metering, FITs guarantee that customers who own and operate eligible renewable energy systems receive a locked-in price from their utility for the produced electricity that is supplied to the grid. Importantly, FITs can be set at higher than retail prices, incentivizing the adoption of the particular renewable energy technology and providing clear market signals to renewable energy developers and manufacturers.
If designed properly, FITs can produce benefits for customers, manufacturers, and the energy grid.
As explained by the Rockefeller Institute of Government, FITs with their price-fixed contracts, create market certainty about the revenue streams from renewable energy investments, greatly influencing investors’ decision-making. If the FIT is higher than the retail electricity rate, customers are more likely to invest in new renewable energy projects because they are confident that they can pay off their investments at an acceptable pace. In addition to providing a stable return on investments, FITs allow customers to finance projects at more affordable rates because FITs promote greater market stability.
FITs also benefit manufacturers by encouraging greater market demand, which creates new business growth opportunities and leads to more players entering the market. Incentivized to innovate and outperform their competitors, manufacturers can improve renewable energy technologies through R&D investments and eventually sell their products at lower prices. Improved technology performance and lower prices lead to higher adoption rates, producing a self-reinforcing cycle of technology improvements, price reductions, and market growth.
A well-designed FIT program also produces benefits for the grid and grid regulators. Many countries require massive renewable energy expansion if they are to meet their nationally determined contributions (NDCs) under the Paris Agreement. The Biden administration, for example, wants the grid to achieve carbon neutrality by 2050. FITs can help utilities achieve their renewable energy goals and/or meet their government mandates by incentivizing needed renewable energy growth and by establishing a robust, stable renewable energy market. Additionally, FIT programs can incentivize the deployment of distributed energy technologies, like rooftop solar and battery storage, which enhance grid flexibility and lower demand pressure.
Feed-inTariffs in Action
Germany’s energy transition and renewable energy expansion are regulated by the Renewable Energy Sources Act (EEG) which was originally created in 2000. Since the passage of the EEG and the creation of the German FIT, renewable energy has grown steadily from 6.2% in 2000 to over 45% today. The FIT gives renewable energy producers a fixed price for a fixed period (usually 20 years) ensuring an acceptable return on investment. The FIT is adjusted by the government based on market developments, and it has been amended several times throughout the years. The extra costs from the FIT are shared among all energy users in Germany via the EEG surcharge.
The Solar Massachusetts Renewable Target (SMART) program in Massachusetts is a really exciting example of how feed-in tariffs can accelerate renewable energy growth, in this case, solar energy. I highly recommend checking out this resource on the SMART program, which simplifies how the tariff-based incentive program works. Created in 2018, the program was doubled last year to support 3,200 MW of solar. Those who qualify for the program receive a fixed rate for their solar energy for ten years, with incentives based on project type and capacity block. Installation owners can determine their savings by subtracting the cost of electricity from their awarded compensation rates. As more projects go online, project blocks are filled, with newer projects awarded lower compensation rates. Thus, the SMART program incentivizes early adoption of solar energy. The program also provides compensation adders, which provide increased incentives based on locations (like landfills), project type (like community solar), and other factors (like energy storage).
Illustrating FIT’s Economic Impact
Using NREL’s System Advisor Model (SAM) tool, I can illustrate the economic significance of feed-in-tariffs on renewable energy project economics. The SAM tool is a free techno-economic software model that can model different energy systems, simulate different market and policy conditions, and ultimately facilitate the decision-making of project developers. I used the SAM tool as part of my graduate capstone, which you can find here.
As we think of how to accelerate the rapid growth of solar energy, we need to think of the different places in which we can build new projects. There are already large utility-scale solar energy projects across the country, so FITs may not be appropriate for those energy systems because the market is fairly robust. I advocate in my capstone that we should continue solar expansion onto contaminated lands like landfills, which is the mission of the EPA’s RE-Powering America’s Lands initiative. We should also consider FITs for rooftop solar expansion, which, although popular in some states, has been greatly limited in other states, like my home state of Georgia. Rooftop solar will be crucial to decarbonize the electric grid, and it will help homes and buildings become more resilient by enabling them to disconnect from the main grid.
I proceeded with creating a hypothetical 150 kW rooftop solar installation mounted on top of a large store located in Hyannis, Massachusetts, which is served by Eversource Energy, a participant in the SMART program. SAM utilizes solar radiation data from NREL’s National Solar Radiation Database (NSRB), which I can tailor to Hyannis. Based on my selected design features, the prepopulated system costs came out to $1.67/Wdc, which aligns with current estimates, with a total capital cost close to $251,000. I applied the 26% investment tax credit (ITC), which is extremely beneficial for renewable energy projects, and I used the local electricity provider’s general service rate for commercial customers. Thankfully, SAM prepopulates a representative commercial building’s electrical load data, but you could input this information if you possess it.
One of the key features of SAM is its ability to run a parametric analysis, which allows me to manipulate selected variables to analyze how they impact project performance, economics, or other outputs. Effectively, I can simulate my rooftop solar system within different market or policy conditions! In this example, I simulated the net present value of my project under 5 different scenarios, 1) with no net metering, 2) with incentive equal to compensation rate for block 8, 3) with incentive equal to compensation rate at earlier block 1, 4) with compensation rate for block 8 and rooftop solar adder ($.0192/kWh), and 5) with compensation rate at block 1 and rooftop solar adder. The results are presented below:
These results illustrate the importance of financial incentives, like feed-in tariffs, to renewable energy projects. Even without any compensation, the large solar PV installation would produce significant energy savings over its lifetime and have a positive NPV of $266,994 with an impressive payback period of 4.8 years. However, the SMART program’s compensation rates and adders make solar PV even more attractive, resulting in drastically higher NPVs and shorter payback periods. The SAM results also illustrates the importance of joining the SMART program early to receive higher compensation rates. In Scenario 3 with the block 1 compensation rate, the final NPV is $60,000 higher than Scenario 2, and its payback period of 2.3 years is 0.3 years shorter than Scenario 2
Proceeding with Caution
Although FITs can accelerate renewable energy development, regulators must be careful to set up a flexible system that responds to changing market conditions. Best practices and design considerations can be found here. Inefficiencies could arise if compensation rates are set too high for too long, but prices set too low will not attract developers. The SMART program in Massachusetts represents a balanced approach that adapts to increases in installed solar capacity within the state. Although compensation rates are high at the beginning, these scale down as solar PV capacity increases, and they are set at reasonable 10 year periods.
As we consider the need to move aggressively against climate change, we must consider the findings of the Solar Futures Study. To further accelerate solar PV’s growth, I believe we should consider FITs to encourage the promotion of rooftop solar PV as well as solar installations on contaminated lands and within low income communities. Hopefully, policymakers are monitoring the SMART program’s results and considering how they could design their own tariff-based programs.