RIP FITs: As US feed-in tariffs fade, adopting elements could spur solar growth

FITs worked well until renewable energy prices fell, but aspects of the incentive scheme could still drive growth in the C&I sector

Just before the dawn of the twenty-first century, distributed renewables faced a dilemma: Economies of scale were needed to grow them, but they were largely too expensive to gain that momentum without economic assistance. 

Two general solutions emerged. One was the feed-in tariff (FIT), which provides a per-kWh, above-market fixed price, or tariff, for the output of distributed generation (DG) through a long term contract. That allowed DG buyers to pay off their investments and earn a “reasonable” profit. Typically, the tariff is stepped down as economies of scale develop.

The other was net energy metering (NEM), which credits DG owners at the retail price of electricity over a similarly extended fixed term. In most cases, the retail rate credit is unchanged unless policymakers revise the policy.

The FIT was taken up across Europe and burned bright early – but has since faded. NEM rose to prominence in the U.S. – but is now being transformed by policy changes in solar-heavy states. Elements of both incentive schemes could help policymakers settle on a more sustainable, long-term solar support, sector insiders told Utility Dive.

“FITs are in an interesting place right now because of how NEM is being re-evaluated,” said Craig Lewis, Executive Director of Clean Coalition, which has long advocated for the tariff. “NEM is moving toward a real-time energy sale and a different way of valuing customer-sited generation and elements of the FIT concept are becoming part of that.”

FITs through the years

When the FIT caught on in Europe, a design created by German solar advocates evenutally rose to dominence. It was also taken up by the governments of China and, eventually, Japan. In the U.S., states looking to jump-start solar growth turned to NEM in the 1990s and early 200s. It is now available in 44 states.

For over a decade, it looked like the debate about which was best would be won by the FIT. By the end of 2015, China had an installed solar photovoltaic (PV) capacity of over 43 GW, according to its official news agency. Germany had over 40 GW, according an April 2016 update from the Fraunhofer Institute for Solar Energy Systems.

U.S. cumulative capacity lagged those countries, at 25 GW, according the Solar Energy Industries Association/GTM Research year-end report. But there are other numbers important to notice.

The U.S. industry grew to its present capacity from 2 GW in 2010, a remarkable growth rate. In the same period, Germany went from 17 GW to its present level, with growth slowing by 57% in 2013, by 42% in 2014, and by 30% in 2015. China, with 15 times more people than Germany, went from 800 MW in 2010 to its current world-leading level — growth numbers that overshadow even the U.S.

"FITs remain the best idea for the rapid development of renewable sources of energy — not just solar, but for wind, geothermal, biogas/biomass, and solar hot water as well,” said author and renewable energy analyst Paul Gipe, who many in the solar industry call the grandfather of the U.S. FIT.

The German program is only slowing by design, Gipe said. Market and grid penetrations are now so high that lawmakers are moving to other policy choices. 

“Think of this: Germany has 40 GW of solar with 80 million people and China 43 GW of solar with 1,300 million people,” he said.

The growth driven by the FIT proves it is “a valid concept even though it goes against mainstream economics,” Gipe said. “FITs can grow renewables exponentially but that threatens vested incumbent interests.”

As a result, he said, “there were not sufficient political constituencies to defend FITs in places where the success of the programs created pushback.”

Where FITs went wrong

A re-evaluation of FIT policies in Europe began when skyrocketing demand for the above-market tariffs imposed costs across utilities’ rate bases. Austerity measures imposed by conservative governments due to weakening economies after the 2008 financial crisis added to the pressure.

Slowly, successful growth in Germany, Italy, Spain, the UK, and Canada’s Ontario province was slowed by the introduction of alternative policies, Gipe said. “They are not stopping renewable energy, they are reducing its rate of growth.”

U.S. policymakers, conversely, never got comfortable with the economics behind the FIT model, preferring to set initial solar supports at or near the retail rate of electricity.

“The overwhelming majority of DG solar that has come online to date has come from projects taking advantage of net metering, not feed-in tariffs,” said GTM Research Senior Solar Analyst Cory Honeyman.

“The good thing about net metering is that it does not require re-adjustments,” he said. “It is difficult to set the step downs in the level of the tariff in a measured way that doesn’t either crater the market or drive demand too fast.”

With more accepted U.S. incentive programs like renewables mandates and reverse auctions, “the market sets the price and the government controls the volume,” Gipe said. “With a FIT, policymakers set the price and tell developers to build.”

Gainesville Regional Utilities (GRU), a municipal provider in north Florida, introduced the first significant U.S. FIT. John Crider, currently with the Oregon Public Utility Commission Staff, was the GRU engineer assigned to design that first tariff.

“The way the FIT is designed, if it does what it is supposed to do, it should go out of business,” he said.

The guaranteed above-market return creates a market that drives the future price down. But “since everybody knows the future price will go down, near term demand increases,” Crider said. “Market penetration rises, prices continue to fall until, finally, market transformation puts the FIT out of business.”

That degree of policymaker engagement with renewable energy markets has not proved politically viable in the U.S., Gipe said.

“There has to be a strong commitment to the rapid growth of renewable energy to justify feed-in tariffs,” he noted. “There is not that commitment.”

NEM has also been advantaged over the FIT in the U.S. by concerns that the Internal Revenue Service could compromise the value proposition of the FIT by ruling the revenue earned through it to be taxable income. There is no similar threat with NEM because it is delivered as a credit on utility bills, not a monetary return.

An analysis for the Clean Coalition concluded “any new income tax liability from energy sales under a FIT would be largely offset by associated deductions available under a FIT at rates up to $0.15/kWh…However, to achieve a payback period similar to that of an identical NEM system, the FIT rate must increase to approximately $0.25/kWh. Even then, the NEM system would have a higher NPV over 20 years because of the increased value caused by avoiding rising retail energy prices.”

U.S. utilities and FITs

In the U.S., there have only been a "handful" of FIT programs, Honeyman said. Most of the growth in distributed solar stateside has come from net metering.

The 2009 GRU FIT was established because of a Gainesville City Commission policy decision to grow solar, Crider, who led the tariff design, said. Designed on the German model, it was intended to run seven years and grow 32 MW of solar capacity. The FIT offered 20 year fixed contracts which began at $0.26/kWh.

The aggressively high tariff drove installation of 18.5 MW of solar capacity at 259 sites. The Gainesville City Commission approved its suspension in 2014 “to help control upward rate pressures,” according to Spokesperson Ana Krsmanovic.

GRU still sees potential in the concept because it is a pay-by-performance incentive with fewer limitations on participation than NEM, Krsmanovic reported.

A combination of two factors led to the termination of the GRU FIT, Crider said. First, very low natural gas prices make it difficult for other electricity generation resources to compete economically.

Second, the initial 20 year contracts were signed at prices much higher than the present solar installed cost. Solar is now more competitive with natural gas, but Gainesville is still paying very high rates for it through those early contracts.

Fading utility FIT programs across the U.S. reflect Gipe’s observation that favor for the policy is diminishign.

A 2010 Sacramento Municipal Utilities District (SMUD) FIT targeted 100 MW of PV for its distribution system. It was opened January 4, 2010, fully subscribed by the end of that month, and resulted in 98.5 MW of new solar PV capacity, according to Energy Commodity Contracts Manager Gary Lawson.

SMUD has no plans to expand the program, however.

“The FIT approach requires the utility to offer a set price it is willing to pay for the power generated,” Lawson explained. “With the continuing drop in solar costs, the established price may be significantly higher than the cost of the technology, meaning there is a risk the utility ends up paying more than necessary to encourage solar development.”

Georgia Power’s 2012 and 2013 Advanced Solar Initiative (ASI) programs fall into the category of FITs as well. The ASIs do offer long-term contracts, said Spokesperson John Kraft, but they do not offer above market prices. 

Instead, prices are either set by competitive bidding or at the utility’s levelized avoided cost. The result is that the ASIs have been “extremely effective” in rapidly growing solar in Georgia without “putting upward pressure on rates,” Kraft said.

A Renewable Energy Development Initiative in Georgia Power’s current Integrated Resource Plan led to a stipulation to add 1,200 MW of renewables over six years under ASI-like mechanisms if approved by state regulators, Kraft added.

A Hawaiian Electric Company (HECO) FIT went live in 2012. Queues for the above market tariff for helping build the targeted 15 MW of solar capacity were quickly filled and then oversubscribed.

The program was shut down in 2014 by state regulators “in response to claims that the queues have been mismanaged by the utilities and gamed by developers,” according to a Public Utilities Commission statement.

Once again, the high fixed cost was integral to the program’s termination.

“As the cost and price for PV kWhs has decreased, especially solar power coming from utility-scale projects, FIT has turned into an overly generous subsidy to FIT project owners and developers that comes at the expense of the Hawaiian Electric companies and all ratepayers,” observed ProVision Solar President and Hawaii Island Energy Cooperative Director Marco Mangelsdorf.

Hawaiian Electric did not respond to requests for comment on their FIT program.

Remaking FITs

While FIT programs have proved unstable and short-lived in the U.S., net metering had been a "useful, stable policy tool," until 2014, when re-evaluations of the incentive began in solar-heavy states, Honeyman said.

"There have been variations, such as the value of solar tariff (VOST), but there have been no substantive proposals to replace NEM with a FIT and no substantive FIT alternative proposals," he added.

There is, however, an alternative FIT emerging.

While the FIT’s fixed rate has proven problematic, the contract structure aimed at being fair and transparent and promoting distributed generation remains valid, Crider believes.

A redesign of the German/GRU price structure to suit U.S. markets could be based on something like the utility’s avoided cost, he said. “There is still big opportunity for the FIT if it recognizes the value of renewables to utility customers but makes them indifferent to the cost.”

This is what the CLEAN contracts, a new solar incentive formulation from the Clean Coalition, appears to be doing, Crider said. 

Many of the still active FIT programs had design guidance from the Clean Coalition, according to Lewis.

The best known are those being run by the Los Angeles Department of Water and Power (LADWP), the Northern Indiana Public Service Company (NIPSCO), the Long Island Power Authority (LIPA), the state of Rhode Island, and the municipal utilities of San Francisco, Calif., Fort Collins, Colo., and Palo Alto, Calif..

These programs are primarily aimed at the commercial-industrial (C&I) segment of the market. The installations they are pursing are for big residential, business, and public purpose building rooftops and parking lots and parking structures, Lewis said.

Though these programs have made limited progress, Clean Coalition calls this market segment “wholesale distributed generation” and believes it is where the FIT fits best.

“NEM in its current form, or however it evolves, is appropriate for residential,” Lewis said. “It is a small segment of the market and a distraction from the big opportunity in the wholesale DG segment.”

This strategy also avoids unnecessary battles with residential installers who are committed to NEM, he added.

"About 75% of U.S. commercial property is not owner-occupied and/or is split-metered and/or has more siting potential than load," Lewis said. In these situations, the NEM solar value proposition doesn’t work.

By providing remuneration for output instead of crediting output against consumption, a properly structured FIT encourages investment in such sites, Lewis said. Opening up the wholesale DG segment will be cost-effective because it drives economies of scale like those that come with utility-scale solar but without costs for land, transmission, or environmental challenges.

A CLEAN contract is built around “market-responsive pricing,” Lewis said. When it launches, a 20 year price and a volumetric goal is set. The contract price is either “cost-based” or “value-based,” according to a Clean Coalition program guide.

Cost-based pricing starts with the “local cost of generation” and adds “a target rate of return for the developer,” the guide explains. “This method is the most effective approach for attracting a specific quantity of new generation within a desired timeframe.”

Value-based pricing starts with the “local value of generation” based on “the ‘avoided cost’ to the utility and ratepayers, and may include the avoided ‘external cost’ and the economic benefits to the community,” the guide explains.

This pricing formulation has a “neutral rate impact,” the guide explains, but may not drive DG growth as effectively as an above-market rate. 

Avoided cost and valuation

“All the revisions and re-evaluations of incentives for distributed generation seem to be similar in that they provide individual small power producers some kind of standardized contract,” Crider said. “But getting the price structure right means defining what costs distributed renewables allow utilities to avoid.”

To include all avoided costs, utilities will have to do the work to understand the places and times on the distribution system that distributed solar increases locational and temporal value, he added.

Tools currently being used in the utility world may be inadequate to quantify those values, but Crider expects that to change as distribution system planning reveals where value is on the system.

Oregon is working on the re-evaluation of its solar incentive programs, including its FIT program, he said. It has been quite successful at growing solar but policymakers want it to be more precise.

“We are working on measuring the entire flow of energy on the distribution system so we can make precise values of avoided cost for all the things distributed generation provides,” Crider added.

“But we are just starting so actual values are at least two years to three years away, after the many studies now underway show some collective conclusion about the value of distributed generation.”

Filed Under: Solar & Renewables Regulation & Policy
Top image credit: from REC Solar (used with permission)