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Feed-in Tariffs: Just Another Renewable Energy Subsidy

Posted By William Schrider On December 8, 2011 @ 1:30 pm In Energy | Comments Disabled

Another day, another new subsidy for renewable energy. This time it’s a feed-in tariff, as Senator Dianne Feinstein (D–CA) recently inserted language supporting feed-in tariffs into the 2012 Energy and Water Appropriations bill. Feed-in tariffs subsidize renewable energy by forcing utilities to purchase renewable energy at fixed, above-market prices. The extra cost is then passed to the consumers. Feed-in tariffs are simply another subsidy that props up a selected industry and damages the economy, industry, and consumers.

As of 2010, more than two dozen European countries had implemented feed-in tariffs [1], with Germany’s being the most widely recognized. In Germany, the tariff dictates that utilities must purchase electricity from renewable energy producers at a rate that guarantees a 5 percent to 7 percent profit. These costs are then passed on to the consumers, who pay higher energy bills to reimburse the utilities for the extra expense. Germany’s tariff is guaranteed for 20 years, with gradual reductions in rates over time to promote innovation and efficiency.

Given such lavish incentives—profits without worrying about market competition—it’s easy to see why the program is a “success” in Germany, where renewable energy production has increased from 6 percent in 2000 to 15 percent in 2008.

But forcing renewable energy also brought increased electricity prices. According to Germany’s Federal Ministry for the Environment, Nature Conservation and Nuclear Safety [2], the extra cost of the “Renewable Energy Sources Act” in 2008 was €4.6 billion. While the Ministry expects the extra costs to ultimately decline, it bases that expectation on the assumption that renewable energy costs will decrease, while traditional energy costs will increase. Given that subsidies generally remove the incentive to reduce costs, this assumption is dubious at best.

Beyond the obvious problem of government distortion of the market, there is also the fact that there is little incentive to innovate. A report [3] by the National Renewable Energy Laboratory (NREL) points to the limitations of predetermined tariff reduction, stating that such a scheme could pose problems for policymakers faced with technologies that experience rapid changes in cost, either up or down.

Consider this real-world example. After a sudden reduction in the cost of solar energy, Germany reacted by reevaluating its solar energy tariff rates to prevent windfall profits for solar energy producers.

Why innovate, then? If rapid cost reduction causes a tariff readjustment (and keeps your profits around the government-determined 5 percent to 7 percent), there is no reason to waste resources attempting to develop technology any faster. And if the government is willing to adjust a tariff down, what is going to prevent a tariff increase if costs “unexpectedly” rise? After all, the objective of a feed-in tariff is not to make production affordable, but to increase the contribution of renewable energy to the energy portfolio. It is a political goal, not an economic one. Increased consumer costs are the least concern.

But consumer costs should be much more than an afterthought. Increased energy costs are inherently regressive, as lower-income households spend a greater portion of their budget on electricity bills. In a time of worldwide economic turmoil, should lawmakers consider a policy that punishes those who struggle to make ends meet?

A feed-in tariff is a regressive, government-imposed, consumer-funded (as opposed to taxpayer-funded) subsidy for renewable energy interests, and it is just one more example of the government choosing winners and losers. The free market should be allowed to encourage competition and innovation in all energy technologies, not just a chosen few. If proponents of renewable energy really want to prove that renewables are worth pursuing, they should personally invest in those technologies. Forcing consumers to subsidize their pet industries is not the answer.

William Alex Schrider is currently a member of the Young Leaders Program at The Heritage Foundation. For more information on interning at Heritage, please visit: http://www.heritage.org/about/departments/ylp.cfm [4]

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URL to article: http://blog.heritage.org/2011/12/08/feed-in-tariffs-just-another-renewable-energy-subsidy/

URLs in this post:

[1] feed-in tariffs: http://www.ebscohost.com/resources/sustainability/sustainability-watch/samples/feed-in-tariffs.pdf

[2] Federal Ministry for the Environment, Nature Conservation and Nuclear Safety: http://www.bmu.de/files/pdfs/allgemein/application/pdf/brochure_electricity_costs.pdf

[3] report: http://www.nrel.gov/docs/fy10osti/44849.pdf

[4] http://www.heritage.org/about/departments/ylp.cfm: http://www.heritage.org/about/departments/ylp.cfm

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