Flaw In Japanese Feed-in Tariff

Yesterday’s Asahi Shinbun (print edition) had a short article about plans to change the Japanese feed-in tariff. The government wants to hold expert hearings this month and get legislation done in time to have it apply from next April on.

Right now, the amount of a feed-in tariff depends on when a project got approved, not on when it starts actually selling electricity.

This gives an incentive to secure a spot in the pipeline, then wait a couple of years for costs to go down, build the project at those reduces prices and reap an unreasonably high profit in the process.

The way to fix this is simple. Just pay the feed-in tariff depending on the time of start of generation. Germany has done it that way until last year’s transition to an auction system.

That works in the opposite direction. People get an incentive to get their projects done fast, so as to get a higher feed-in tariff. If you want fast deployment, incentives to get things done fast are good. Incentives to get things done slowly are bad.

That’s really easy to understand.

But the German reform of 2014 gets this point wrong, among others.

As noted before, the transition to an auction model means that Germany has introduced exactly the flaw that Japan wants to get rid of now.

If you won one of the first auctions this year at 0.0917 Euro, you have two years to actually build the project. This gives an incentive to wait with actually buying the solar panels until some time late in 2016, when they will be even cheaper than today.

It gives an incentive to wait.

You don’t want incentives to wait in a feed-in tariff system. You want incentives to act fast.

It will be fun to watch the complete and dismal failure of the German solar auction system over the next couple of years. That will conclusively prove that auction systems just don’t work.

Published by kflenz

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

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