By CAP’s Richard W. Caperton.
The ultimate goal of global climate negotiations is to come to agreement on how much our carbon emissions need to be reduced, and create a framework for achieving those reductions. Even if we do someday achieve these goals, though, we will still need to identify detailed ways to actually get the world onto a low-carbon path. One of these tools will be “feed-in tariffs”.
A feed-in tariff is a policy tool that allows renewable energy generators to sell their power to utilities at a pre-determined, fixed price for a long period of time. Worldwide, 75% of solar PV and 45% of wind deployment are directly linked to feed-in tariffs.
Yesterday, financiers and renewable energy advocates briefed the Cancun attendees on how to make sure that developing countries can reap the benefits of feed-in tariffs. Developing countries have unique needs that can be addressed through effective feed-in tariff design.
Mark Fulton, Global Head of Climate Change Investment Research and Strategy with Deutsche Bank Climate Change Advisors, has done significant work in this area, including publishing an incredibly useful report called “GET FIT Program: Global Energy Transfer Feed-in Tariffs for Developing Countries”, which includes policy options to help finance clean energy in developing countries.
In summarizing Deutsche Bank’s research, Fulton drew out two distinct needs for financial assistance. First, the risk premium that investors expect for investing in developing countries must be reduced. One way to do this would be for a climate fund to provide loan guarantees, or other financial instruments that reduce the risk of developing country investments. When these investments are less risky, investors accept lower returns, which reduces the total cost of projects. Second, even when the risk premium is reduced, in many cases renewable energy will still be more expensive than fossil fuel energy, and this cost premium needs to be covered. Feed-in tariffs in developed countries work by passing this cost premium along to ratepayers, who can afford to pay for the benefits of clean energy. Electricity consumers in developing countries are less able to absorb these costs. Again, a potential use for a climate fund would be to cover the cost premium.
Andrew Yager of UN-Energy broadened Fulton’s remarks to talk about what a truly “global” feed-in tariff would look like. He identified three keys to a system that could be successfully applied across international boundaries. First, a global partnership needs to set a global target for renewable energy generation and cost reductions for clean energy. Second, there needs to be a big push to “crowd-in” private investment (that is, using public money to leverage significant private capital). Third, a global feed-in tariff would have to include a mechanism that both ensures investors a fair return on their investment and ensures that consumers pay an affordable price for electricity.
Other speakers at the event described how feed-in tariffs can work for specific technologies, including wind, solar, bioenergy, geothermal, and hydropower. While everyone broadly agreed that feed-in tariffs will work for all clean energy sources, Cameron Ironside of the International Hydropower Association had some advice to address concerns that may be raised about feed-in tariffs.
Ironside suggested that a feed-in tariff include specific carbon emission reduction targets, instead of simply renewable generation targets. He also proposed that a feed-in tariff consider the infrastructure needs of developing countries. Both Fulton and Ironside emphatically stated that a financial tool like a feed-in tariff is completely irrelevant if a nation’s electric grid is incapable of carrying new renewable energy.
Numerous speakers here in Cancun have talked about a future in which we will need to get 100% of our electricity from renewable resources, potentially as early as 2050. Doing this will require massive changes in how grids are operated, how technology is shared across borders, how energy projects are funded, and how electricity is used. Feed-in tariffs will be one of the tools that help address these needs.
– Richard W. Caperton is a policy analyst for the energy opportunity team at American Progress.