Deploying clean energy in developing countries through innovative feed-in tariffs

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.

2 Responses to Deploying clean energy in developing countries through innovative feed-in tariffs

  1. Dave B says:

    At last, something sensible! But why stop at those doing the least pollution (after all, China sort of uses them, and India is about to use them). The one country that really needs to use them is the U.S.

    Also, please note that FIT’s have two main aspects – fixed, sane prices based on the actual cost of production, and also PRIORITY ACCESS to the grid, ahead of polluting electricity. It is that priority access to the grid that becomes a way to both insure that investors in renewables actually get to sell all of their production, and also to displace polluting, often lower priced electricity. Plus, FITs allow the benefits of the Merit Order Effect to be passed through to the public with bankrupting investors in renewable energy projects. The democratization of investment opportunities that is allowed by FITs (but which does not exist with the present U.S. quota and tax avoidance based incentives) is also a good thing.

    And these are far more effective at replacing/avoiding CO2 polluting based energy production than taxes on CO2 pollution (= carbon pricing, cap and trade, cap and dividend, or whatever advertising terminology is employed). FITs work with without CO2 pollution taxes. So, for those who want to try to do demand destruction on pollution based electricity supplies via CO2 pollution taxes/fees, have at it. But you should also support FITs, and you should not tie the two together legislatively, since the result will be that nothing gets accomplished. Make FITs your number 1 immediate priority, and once these get in, you can work on CO2 pollution taxes – that approach might even work, politically.

    In particular, the U.S. needs FITs like no one else on the planet. We have way more than enough wind capacity (something like 25 times the current usage rate), lots of biomass and in some locales, lots of solar potential. We also have plenty of pumped hydro electric energy storage capability, including the West coastal mountain range (using Pacific Ocean water for the bulk of it), East Coast (Appalachians, related east coast hills/mountains), Central regions (Ozarks, for example) and North Coast (especially western Lake Superior). We have the renewable energy resource AND the short term electrical energy storage capability. And we have between 15 to 20 million “surplus people”, who need jobs in order to participate in our economy and society, but who really don’t have them.

    But, using the subsidy/quota incentives as well as the bizarre idea that fossil fuel derived electricity prices should be related to renewables, which have little or no fossil fuel inputs to them in their cost of electricity production, we have squat for renewable energy development and related economic development. Especially compared with our capability and our need to do this, economically, ecologically and climatologicly speaking.

    Dave B

  2. SteveS says:

    Haven’t read the report, but the post above implies that the investors that would ostensibly be attracted to a reduction in risk premium would be international investors from developed countries. The right policies and programs (including credit enhancements such as partial credit guarantees) can also crowd-in domestic private capital in developing countries. Many developing countries have pension, insurance, and other funds that can be mobilized for long-term investment, for example. Bonds could also be floated for this investment. USAID’s Development Credit Authority (DCA) partial credit guarantee program has been effectively used to lower the risk profile on infrastructure projects in water and sanitation and mobilize domestic private capital in India. There are many advantages to mobilizing domestic private capital for these investments. Foremost is that the long-term cash flows from these projects are in the local currency, and mobilizing local currency investment better matches cash flows and risks to the needs of the local investor. This matching reduces exposure to exchange rate fluctuations at the project level, while conserving foreign exchange at the macro level.