To FiT or not to FiT? [News]

November 8, 2011 by Eugene Tay
Filed under News

By Dennis Posadas, Today, 8 Nov 2011.

For many countries, the means to encourage a shift to renewables is the Feed in Tariff (FiT). FiTs are agreed higher prices per kilowatt-hour given to renewable energy investors for wind and solar, because these renewables currently cost higher compared with fossil fuel sources. Eventually, once a market is made available, economies of scale will force prices to drop.

The Singapore Government currently does not take this position on encouraging renewable energy sources. Second Minister for Trade and Industry S Iswaran said, during the Singapore Energy Summit forum on Oct 1, that Singapore supports research and development (R&D) to help bring down the costs of alternative energies so that they can stand up to the scrutiny of economic feasibility studies.

He was quoted as saying that “if we choose the path of subsidising consumption of these alternative energy sources, then really we are subsidising a more costly alternative in an environment when we need to look at the competing options available”. The argument against FiT is basically to avoid distorting a free market with subsidies.

There is a good reason to distort the existing worldwide fossil fuel-dominated power market: Climate change.

While R&D does potentially lead to cost savings in the future, economic planners need to make decisions on how to fill energy requirements now.

Think of a cancer patient. One can try to soothe the patient by saying that R&D will eventually make treatments cheaper. But he needs to make a decision for the present. In this case, the decision is whether to go with low-carbon or high-carbon sources. Not in the future. Now.

Depending on the prevailing cost of electricity in a particular country, FiTs may tend to raise the average price of electricity as you are mixing currently expensive renewable sources with cheap fossil fuel ones. But this can be managed by various means, including a power price regulatory body, through competition, by lessening the FiT over time, and through carbon credits, among others.

In a free-market domain without low carbon electricity considerations at the moment, cheap sources like coal win hands down, especially if we are just talking price. So if coal costs only a few cents, to attract the solar and wind (and other renewable technology) investors to spend for currently more expensive renewables, the price per kWh needs to be set so that it is attractive.

If a particular renewable energy source already matches the cost of fossil fuel power, then it is said to be at grid parity, which means FiT is no longer needed for that technology. The goal of having these FiTs is so that in the future, economies of scale and R&D combine to make solar and wind cheaper.

But without paying the high price now, cheap prices will not happen, unless some scientist suddenly develops an ultra-cheap solar panel tomorrow. Statistically, that is the stuff of movies and film. Most R&D results in incremental, not radical improvements if measured overnight.

Once economies of scale and technology move forward from this initial market, we should see better, more efficient and cheaper renewables, which means that FiTs can eventually be scrapped.

Coal and oil-powered energy systems have been around since the 19th century, and to expect that renewables will instantly catch up is unreasonable, even with R&D.

If you look at the PC and chip industry: While free competition and innovation may have driven us to US$100 tablet PCs, it was the United States military that first had to jump-start a market for the fledgling semiconductor industry many decades ago by paying an arm and a leg for each chip. And that price decrease took decades to happen. We had to purchase US$3,000 PCs in the 1980s before we reached our current price points for cheap PCs.

Tax exemptions or R&D grants may be given to prospective investors, but there is no guarantee this will actually result in generated clean electricity. And it does nothing for power capacity that needs to be built now. In the case of the FiT, the price is paid for electricity that is actually generated – so Singaporeans get something (in this case, clean electricity) for the slightly higher price, which should go down over time.

FiTs make it attractive for investors, entrepreneurs, engineers and scientists to devote their time and effort seriously to renewables. As Malaysian Minister without Portfolio Idris Jala put it during last month’s summit, if governments do not “create the conditions for the tipping point, then I think the future of renewable(s) is doomed”.

Dennis Posadas is an author, tech columnist and consultant who blogs about clean energy issues.

Source: Today