Fossil Fuel Feed-In Tariffs

The feed-in tariff system in Germany has worked. It has grown capacity to the point where one third of weekday peaks is covered by solar alone. It has made Germany Number One in solar installations. It has radically brought down prices for solar panels, making large-scale installations in China possible.

Obviously, adding all that solar energy to the mix means that some other source needs to be replaced. Right now, most of the replacement room comes from the nuclear phaseout and increased exports.

But in the next couple of decades, fossil fuels will have to go as well. For electricity, the goal is to reach 80 percent renewable by 2050. That doesn’t leave much for coal and lignite.

The point of this post is to think about a coal feed-in tariff.

It would work exactly like the successful solar tariff, with one small change. There would be a cap on the fossil fuel electricity bought under the system. That cap would be calculated from the already existing goals for renewable. Look at the renewable goal, subtract that from 100 percent, and you get the cap for fossil fuel under the feed-in tariff.

The price of that tariff would be set like the solar tariff was. Find out what it costs to produce one kWh. Add a reasonable profit and guarantee exactly that rate for twenty years.

What would be the point of such a system?

With solar, the most important goal and the biggest success of the feed-in tariff was to bring prices down. That has turned out very well. Germany’s solar tariff system has massively contributed to – barely – saving the world from catastrophic global warming.

With fossil fuel, the goal would be exactly the reverse. Prices should go up, by design.

Of course, prices of one kWh will go up anyway.

Since solar is eating coal’s lunch and wind is eating coal’s dinner, capacity factors for coal plants are already going down, and will go down further. All things equal, that means that the price of one kWh needs to rise, since the fixed cost of building a power plant is distributed over less kWh.

Carbon permits under the EU emission trade  system will be reduced over the next couple of decades, which means their price will go up.

With less coal in the system, there will be less economies of scale, which means the price per kWh needs to go up.

But independent of these considerations, it makes sense to have prices for coal energy increase.

For one, it will get rid of the unrealistic idea that using coal is cheap. It is cheap only if you don’t factor in the cost of making new coal once you burnt some, if you don’t factor in the health cost from emissions, and if you don’t factor in the cost of making this planet unsuitable for human survival. All of these costs somehow are not reflected in present coal electricity “prices”. Having a high feed-in tariff for coal would come closer to the real cost of burning coal in power plants.

Volker Quaschning recently estimated these hidden costs at over 10 cents Euro per kWh.

And it would be in the interest of the coal industry.

Actually, I think the fossil fuel feed-in tariff should be set so high that the higher price per kWh compensates for the lower volume because of the phaseout. And it will do exactly that, since tariffs will be set considering whatever is necessary to make a profit in a much smaller market.

This is of course Phaseout Profit Theory, or at least influenced by that idea.

I agree with Volker Quaschning that Germany needs a concept to phase out coal. Germany has decided to phase out nuclear, and it is working. But the only thing that is clear about phasing out coal is that it can’t be over 20 percent in 2050. A concept on how to transition from the much higher percentages now to these goals is lacking.

Using a fossil fuel feed-in tariff as an instrument to phase out coal might be one possible way to do it.

 

 

 

Published by kflenz

Professor at Aoyama Gakuin University, Tokyo. Author of Lenz Blog (since 2003, lenzblog.com).

3 thoughts on “Fossil Fuel Feed-In Tariffs

  1. Dear Prof. Lenz,

    I should be very pleased if you would comment the open letter from the Dutch Foundation GEZEN, adddessed to the Dutch minister of Economic Affairs. Not only of Dutch interest, but also of Grecian and European interest, as appears.

    Kind regards,
    Hans Bienfait,
    acting secretary of Dutch Foundation GEZEN, Foundation for the promotion of large scaled energy, webste http://www.gezen.nl (in Dutch)

    H.E. Mr. H. Kamp, Groningen, 2015, May 8th
    Minister of Economic Affairs
    Postbox 20401
    2500 EK Den Haag
    Dear Mr. Kamp,

    In this open letter, the text of which will be available on our website, we request that supplementary to the Energieakkoord (Energy Agreement), you make SDE+ subsidy available for utility scale solar energy (PV farms) in Greece, with the aim to i) achieve the compulsory share of sustainable energy in 2020, ii) strengthen the Greek economy, which is also in the interest of the Netherlands, iii) create a new source of sustainable energy for Europe and in the long run for the Netherlands, iv) create jobs in both countries. A declaration of intent expressed at very short notice by the Dutch government that it wishes to help strengthen the Greek economy will have a positive effect on the current negotiations with Greece.

    The necessary transition of the energy supply from fossil fuels to sustainable energy sources is increasingly being realized on a small, local scale. There is nothing wrong with that, were it not that decentralized production of energy in the densely populated countries of northwestern Europe is simply incapable of satisfying the demand of the local population. But, utility scale production of sustainable energy on own land and waters is equally incapable of achieving the same goal of a practically completely fossil-free energy supply. This fact has been convincingly demonstrated by professor David Mackay in his book Sustainable Energy – without the hot air. 1) In his capacity of Chief Scientific Adviser for the UK Ministry of Energy and Climate Change, MacKay has strongly influenced the energy policies of your colleagues in the UK.

    The problems pointed out by professor Mackay are also relevant in the relatively short term of daily politics in the Netherlands. The Algemene Rekenkamer (Chief Audit Office) recently declared in its report Stimulering van duurzame energieproductie SDE+ 2) (Stimulation of sustainable energy production SDE+) that the Netherlands is very unlikely to attain the goals of the Energy Agreement if the course of action is not changed, and will thus fail to produce the results to which it has committed itself in the EU.

    We propose that you supplement the energy policy formulated in the Energy Agreement. In so doing we see no reason to treat energy otherwise than we treat other economic goods. As a liberal you are undoubtedly aware of Ricardo’s Economic Law: “Produce a good at the location with the highest revenue, and let trade increase global prosperity.” Application of this law has resulted in enormously increased prosperity almost everywhere.

    The output of sustainable energy production is closely related to geographical circumstances and thus to location. We look at onshore wind as an example. Wind turbines in Friesland have a markedly higher yearly output than they have in Limburg. In order to entice investors to build wind turbines in Limburg you have been compelled to increase the SDE+ base tariff in that province to around 30% higher than that for Friesland. Every wind turbine situated in Limburg instead of in Friesland is costing the Dutch energy consumer extra money for many years to come and is a contravention of Ricardo’s Law. This is justified by the necessity to share the inconveniences of the turbines fairly among the whole Dutch population.

    Now we wish to bring another example to your attention which is far more important in terms of volume than onshore wind in the Netherlands: sustainable generation of electricity in Europe. Besides decentralized generation such as by solar panels on roofs and small isolated wind turbines, centralized generation is of essential importance. The most important technologies are offshore wind in Northern Europe and solar power stations in Southern Europe. Offshore wind in the North Sea has a reasonable potential, but the potential of solar power stations in Southern Europe is practically unlimited. For that reason PV power stations (fields with solar panels) and CSP power stations (fields with mirrors and a central receiver) play a leading part in the scenario’s of the International Energy Agency IEA. Yet investments in solar power stations in Southern Europe are completely absent in the Dutch Energy Agreement, regardless of the fact that EU regulations allow such investments to be included in the target, which is that 14% of the total Dutch energy consumption should be from sustainable sources by 2020. In order to determine whether the Energy Agreement is optimal, i.e. in accordance with Ricardo’s Law, the Energie Centrum Nederland (ECN, Dutch Energy Centre) has carried out a number of studies under the name RES4LESS 3). One conclusion is that the kWh cost of a CSP power station in Southern Spain is lower than that of a wind farm in the North Sea. Therefore we think it is strange that that there is no room at all in the Dutch program, as laid down in the Energieakkoord, for investments in utility scale solar energy in Southern Europe.

    We have to conclude that the Energieakkoord contravenes sound economic principles that have held good for 200 years, and that the Dutch energy consumer will pay more than necessary for the financing of the 2020 target. In the case of onshore wind there is a valid reason for deviating from Ricardo’s Law. In the case of utility scale generation of sustainable electricity in Europe it is however our opinion that there is no valid justification for breaking this economic law. The employment argument is hardly relevant for Dutch labor because all projects are tendered internationally, as they should be in Europe. The Dutch business community can profit handsomely from investments in sustainable energy, on the basis of quality and the application of all technologies that are relevant and in which expertise has been built up. That includes technologies that are almost exclusively employed outside the Netherlands, such as utility scale solar power. It is well known that we happen to be surrounded by a large amount of foreign country.

    We are fully aware of the fact that the Energieakkoord is a compromise, just as the government coalition agreement is. Nevertheless the Energieakkoord should be implemented energetically. But, given the probability that implementation of the Akkoord will not suffice for the attainment of the 2020 goal, we request that you take measures now to extend the Akkoord, and not to delay this until the evaluation planned in 2016. We request that during the extension options are also considered that are currently lacking in the Akkoord.

    In the hope and expectation that you are receptive for our argument, and willing to consider the option of making the SDE+ subsidy available for sustainable energy generation in other EU member states, in accordance with the proposal put forward in the Audit Office report, we wish to draw your attention to one Southern European country in particular, namely Greece. In 2011 the government of Greece presented an ambitious plan, Project Helios, 4). This plan consists of the construction of PV (photovoltaic) power stations with 10 GW total peak power output, placed on state-owned land with a total area of 200 square km. The power will be exported to Central Europe.

    Implementing the Helios project has the following advantages:

    — Expansion of Europe’s production of sustainable energy with a technology of almost
    infinite capacity;
    — Strengthening of the the continental high voltage grid, not just for the transport of solar
    power from South to North, but also for the transport of wind power from North to South;
    — Strengthening of the Greek economy (also in our interest) by adding a new export product with
    high economic and societal value;
    — Contribution towards the reduction of the Greek national debt, as already proposed in
    June 2012, see 5).

    Although the contribution of solar energy to the power production of Greece has risen substantially over the last years, to a total peak capacity of 3 GW, its only source is PV on rooftops of residential and industrial buildings. There are as yet no PV power stations in Greece, i.e. large stretches of land covered with hundreds of megawatts of PV panels. Little has been realized of the ambitions that were voiced during the unveiling of the Helios project in 2011.

    In view of the advantages listed above we have taken the liberty of bringing the almost forgotten Helios Project to the fore once again. Via the Greek embassy in The Hague and the Dutch embassy in Athens, the plan together with an explanatory note now lies on the desk of your colleague at the Greek ministry of Reconstruction of Production, Environment and Energy. All Greek officials with whom we have been in contact have up till now shown high interest for our proposal. The importance of a revitalization of the Helios Project is clearly evident to Athens. However, in the present maelstrom of the negotiations with the EU, the ECB and the IMF and in view of the laborious reforms that are necessary in Greece it is unreasonable to expect that the Greek government will give substantial political and bureaucratic attention to the Helios Project. Unless extra incentives are provided by other countries.

    We request that you provide this extra incentive for the Helios Project, because this enormous project is obviously in the interest of Europe, and therefore of the Netherlands. You can provide the first impulse by offering the prospect of SDE+ subsidy for utility scale solar power in Greece produced by PV farms with peak capacities of at least 100 MW. The output is sold to the Greek national grid and the grids of neighboring countries to which it is connected.

    Failure of the current negotiations with Greece will have far-reaching repercussions for Europe and the Netherlands. It is the responsibility of all governments involved, and therefore also of the Dutch cabinet, to stay calm and do everything that is necessary to rebuild and strengthen the cooperation with Greece. We therefore make an urgent appeal on you to inform the government of Greece at short notice about your intention to facilitate part of the sustainable energy production for the Netherlands to be carried out on Greek territory, by offering the prospect of SDE+ subsidy for utility scale PV power stations. With this trust inspiring measure you can make the difference.

    Yours truly,

    Dr. E. H. du Marchie van Voorthuysen,
    director of the GEZEN Foundation

    1. David J.C. MacKay, Sustainable Energy – Without the hot air, freely available from http://www.withouthotair.com

    2. Algemene Rekenkamer, Rapport: Stimulering van duurzame energieproductie (SDE+) 16 april 2015, http://www.rekenkamer.nl/dsresource? objectid=21812&type=org

    3. Francesco Dalla Longa et al. ECN, Cost-Efficient and Sustainable Deployment of Renewable Energy Sources towards the 20% Target by 2020, and beyond, Summary of case studies for cooperation mechanisms, September 2012, http://www.ecn.nl/docs/library/report/2013/013015.pdf

    4. Ministry of Environment, Energy and Climate Change of the Hellenic Republic, Project Helios, The Greek Solar Energy Project, November 2011, http://www.gezen.nl/wordpress/wp-content/uploads/2015/04/Helios-Project-Presentation_nov2011_European-Parliament.pdf

    5. Marco Witschge et al. Uitweg voor de Eurocrisis – duurzame energie concessies. Werk die staatsschulden weg met zon en wind NRC Handelsblad, 4 juni 2012, http://www.gezen.nl/wordpress/uitweg-voor-de-eurocrisis-duurzame-energie-concessies/

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