Buildings and Energy

Energy Freedom Is Not Free

Co-authored by David M Adams of Buildings and Energy and Norman Brand, Ph.D., J.D, with support from Marsha Shenk, a pioneer of Business Anthropology 

As tens of thousands arrive in Anaheim, California for the Solar International Convention there is lots to talk about: Renewable Portfolio Standards, Feed-in Tariffs, the Stimulus Package, and the Climate Bill…just to name a few.

While many hope renewable energy will power us out of the recession, hone our competitive edge, and make us energy independent their optimism may be misplaced.  Here’s why.

Renewable energy is currently financed through a complex mix of tax subsidies, tax deductions, cash incentives, production incentives, and – yes – even a bit of power generation.  Some solar developers still succeed with that model.  When the financial markets collapsed at the end of 2008, however, construction of new renewable energy facilities was severely curtailed.  The financial crisis revealed a basic flaw in how we finance renewable energy: Tax subsidies cannot successfully fund a renewable future.  

We propose a more robust strategy: pay for renewable energy development by – paying for it.  By linking three basic policy initiatives, we can have a realistic renewable energy future.

First, we need a national renewable portfolio standard (RPS).  RPS legislation requires utilities to purchase or generate a percentage of their power from renewable sources by a certain date.  Where states have established minimum targets for renewable energy production, utilities and state agencies have created a wide range of incentive programs to meet the challenge.  With few exceptions, construction of new renewable power plants correlates with the financial commitment to state and local incentive programs.  A national standard will create a national commitment and opportunities for every local form of renewable energy.

Second, replace wildly divergent state, federal, and local subsidies and incentives with a single, national, above-market price for every kilowatt-hour of renewable energy generated and delivered to the grid: a “Feed-in Tariff” (FiT).  A feed-in tariff replaces the complex mix of tax subsidies and incentives by offering a premium price for clean, renewable power. This substitute for inefficient subsidies has helped make Germany a leader in solar energy. 

Instead of complex partnerships with investor groups seeking access to tax breaks and incentive funds , FiT allows renewable energy ventures to be run like conventional business ventures.  Entrepreneurs would have a direct incentive: the larger the difference between the cost of producing alternative energy and the FiT, the more you make.  If we guarantee the FiT (even at a declining rate) for twenty years, we will create a huge business opportunity and inspire competition.

Who pays for this above-market rate?  We all do.  No leap into the future is free.  Current FiT proposals suggest a fraction of a cent per kWh be added to every ratepayer’s bill.  But rate-payers should not bear the entire cost or even a majority of the cost.

Instead, we propose channeling the money generated by carbon pollution permits – essentially pollution penalties – into a DOE pool to fund a significant percentage of FiT costs.  Every renewable energy producer is paid from that pool based on the kilowatt-hours of electricity it produces.  Utility-scale installations, every wind turbine, every small business with a solar roof, and perhaps even homeowners, would be compensated for generating carbon-free energy with pollution permits funds,  In this way, carbon polluters pay a large part of the cost of the FiT, minimizing the cost to ratepayers. 

Initially, the DOE pool would grow quickly because less than 300 MW of renewable power is currently on line.  As more projects are commissioned, more money is paid out.  At times determined in the initial legislation, the FiT is reduced.  As the cost of conventional energy increases, the cost of renewable energy decrease.  When they approximate each other, the Fit is the market rate, and the cost of renewable energy reflects the fair market value of the previously externalized cost of carbon pollution.

Initially, everyone pays a small price for energy independence and carbon polluters are encouraged to convert to renewable technologies.  Ultimately, the value of energy independence more than equals its cost.

There are practical challenges.  Utility companies are concerned about “wildcat” energy developers unbalancing the grid.  Just as national security justified the creation of the Interstate Highway system, it justifies a federal commitment to upgrading grid infrastructure to create energy independence.  .

Critics will ask: What about when the sun goes down? What about variations in electric demand by season and time of day?  Initially, solar and wind power will be such a small input to the grid that there will be little or no noticeable difference.  As both expand, the “smart grid” will grow, giving renewable generation priority when it is online. Renewable storage technologies, currently in development, will become a reality long before “clean coal.”

What about existing state and federal programs?  While there would be no immediate change, tax subsidies would be phased out.  Fit will ultimately take the place of state incentive programs that are already designed to decline gradually.  Won’t Feed-in Tariffs tend to keep the costs of renewable energy artificially high?  A carefully modeled policy for feed-in tariffs will have them decline over time, as technology costs decline and power generation becomes more efficient.

All energy is subsidized in some form.  Unfortunately, the current mix of subsidies and incentives is failing to make us energy independent.  But if we move from tax subsidies to pollution permits, RPS, and Fit, we can unleash capitalism to create a renewable energy future.

And best of all, we will investing in America – kilowatt-hour by kilowatt-hour.