European Experience Provides Example and Cautions

Feb 19, 2010

HAMBURG, Germany – It's no accident that roughly half of the world's installed solar panels aim at the sky in this relatively cloudy, northern country. Investors in German solar power arrays, wind farms and methane digesters can count on significantly higher rates-of-return than alternative investments such as bonds or savings accounts.

A think tank based in Hamburg called the World Future Council credits one renewable energy production incentive in particular. A Council report states, “The Feed-In Tariff has proven to be the most effective policy instrument in overcoming” cost barriers to greater use of green energy.“Mandatory Feed-In Tariffs are essential to accelerate the switch from fossil fuels to renewable energy and avoid climate chaos.

The distinguishing feature of the policy is a requirement that local utilities buy all of the renewable energy produced by anyone who installs solar panels in their service areas (or for that matter, wind turbines, wave energy buoys, a biogas power plant, etc.). In addition, the utility must offer the green energy producer a long-term, fixed price contract that covers generation costs, plus a “reasonable”profit. The premium wholesale price is meant to shorten payback periods and provide certainty to potential investors or lenders.

Germany's feed-in tariff law took effect in 2000 and was replicated in Spain, France and Denmark, among a number of other places. An increasing number of US states are now looking at the mechanism.

“Since we have introduced the feed-in tariff, we have seen a strong increase in the production of power from wind, from biomass and from solar power,”said Hamburg's State Secretary for the Environment Christian Maass. “We have also seen hundreds of thousands of jobs growing in Germany.”

“There is a price, of course” borne by electric ratepayers, acknowledged Maass. Solar power in particular is much more expensive than other sources of electricity. “But if you look at the price and if you look at the benefit and you compare that, it's worth it.”

Utilities are allowed pass on their higher energy acquisition costs to consumers. German government and industry associations peg the cost to the average household of the renewable energy production incentive between 2 to 5 Euros per month, or $2.72-$6.80.

Hamburg resident Patrick Ulmer said Germans routinely complain about high energy prices.“But I don't think that many people made the link to feed-in tariffs,”Ulmer observed. Ulmer knows better than most what components factor into his electric bill because he once worked as a lawyer for a solar company.

China has emerged as a low-cost exporter of renewable energy technology. In Europe, the incentive programs threatened to spin out of control as solar module prices dropped in recent years while the power buy-back rates stayed high. Investors flooded in to lock in high profits. Last summer, Spain abruptly capped how many systems could sign up. In Germany last month, the governing Christian Democrats proposed steep rate cuts. Shares in solar energy companies promptly plummeted worldwide.

In an editorial, the Hamburger Abendblatt newspaper groused, “Electricity consumers in Germany are assuring jobs in China. The ship is going off course.

Savvy consumer Patrick Ulmer said the lesson is that renewable electricity buy-back rates need to be set carefully and then regularly adjusted downward to prod green energy producers to become more cost-competitive.