Feed-in Tariffs Wind Energy

A Renewable Energy Feed-in Tariff (REFIT) is a policy mechanism designed to support and accelerate investment in renewable energy technologies. This is achieved by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each different technology. Technologies like wind power are awarded a lower per-kWh price, while technologies like solar PV and tidal power are currently offered a higher price, reflecting their higher costs.

In addition, feed-in tariffs often include "tariff degression", a mechanism according to which the price (or tariff) ratchets down over time. This is done in order to track and encourage technological cost reductions. The goal of feed-in tariffs is ultimately to offer cost-based compensation to renewable energy producers, providing the price certainty and long-term contracts that help finance renewable energy investments. The outline of the article is geared to an scientific analysis of feed-in tariff remuneration models by Couture and Gagnon (2010) and to a policy maker's guide to feed-in tariff design published by the US National Renewable Energy laboratory (2010).

Market-dependent and market-independent REFIT models

The design of a REFIT is an importment basement for the overall effectivenes of the development and integration of renewable energies into an energy system of a country. The payment levels must be high enough to give a return on investment, by this means encouraging investors to develop new projects. For this reason reliability of the REFIT over project lifetime is an important variable as well: If the REFIT-policy allows changes of the payment during project lifetime, this will cause additional risk for potential investors.

On the other hand too high payments rise costs of renewable energy supply and the additional costs have to be covered either by increased electricity prices (costs for renewable energy supply are passed through to consumers) or by government subsidies (passing-through the costs to the tax-payer).
The main difference in REFIT-design concerns the connection to the electricity market. The most commonmarket-dependent REFITs are known as premium price models. These models require the operators of renewables to sell their electricity on the market, while incentives for investment is set by premium payments tied to the market price. The 'tightness' of this connection varies significantly with the different designs of market-dependent REFITs.

The most common market-independent REFITs are fixed-price models: A determined payment (€/MWh) is paid for a period of time, which is often geared to the specific technology lifetime. Normally these modells are accompanied by a purchase guarantee for the electricity generated by a RE-project.

The design of an appropriate REFIT within a jurisdiction is usually a combination of great number of options. As this article provides a rough description about REFIT designs commonly used today, it should be stated, that the design options described here can be combined in several different ways according to the policy goals and specific conditions within a country.

Market-dependent feed-in tariffs

Percentage of the retail price model

In this type of REFIT-Design the operator is paid a percentage of the retail price for the electricity delivered to the grid. As an example Germany offered a payment of 90 % of the retail price for wind and solar application smaller than 5 MW under its feed-in law of 1990. In this way payments were directly connected to the spot market price. These types of models have been used in early renewable energy policies and are not used very often today.

• Advantages: When models of this type have been implemented, the coupling of the tariffs to the retail price was regarded as an appropriate measure to remove some discretionarity from the REFIT, because premiums are not set by government agencies directly. The retail price itself is often seen as an 'objective referent' of the value of electricity, which should be the guiding value for the renewables tariff either. In general REFITs related to the retail price are easier to implement in comparison to fixed feed-in tariffs, because only the percentage has to be set without regard to different technology costs.
  An important advantages of the model is its sensitivity to market demand. The coupling to the retail price sets an incentive to supply electricity when demand is highest.
  

• Disadvantages: As tariffs are not adjusted to the substantial variations in technology costs, resulting payments for generated electricity have been of inadequate renewable resources other than wind. Coupling of REFIT to the retail prices poses additional risk on investments, because financial benefits of projects can not be calculated accurately in advance.
  Additionally it has been observed, that the percentage of retail price model frequently lead to windfall profits in the past.

Premium price model

A constant premium for electricity generated by renewable energy projects is offered above the average retail price. The idea of this model is to support integration of renewable energy projects into the market while at the same time higher investment costs are covered and an incentive for investment is set.

• Advantages: The payments can be adjusted to the different technology costs of renewable energies. In this way different policy goals like supporting a specific technology or diversifying the implemented portfolio in a country can be pursued. From the perspective of a project operator the premium price model causes more return with high prices and vice versa.
• Disadvantages: A higher risk of too high or too low premium level is often mentioned as a disadvantage of the premium price model. This can cause negative effects on market growth, and investor security similarily to the effects of the 'percentage of retail price model': The premium price model can not be regarded as an exactly definable base for investment calculation.
  Analyses have shown that on average, premium price policies cause higher costs per kWh than fixed-price policies. Generally the implementation of a premium price model imposes the risk of high policy costs due to increasing market prices.
  

Variable premium price model

The described disadvantages of premium price models have been adressed by some jurisdictions through implementing regulations concerning the price premium: Spain introduced a cap and a floor for the price paid to the operators of renewable energy projects to avoid rapidly increasing policy costs. If the market price decreases below a certain minimum, premium is increased to ensure an adequate return for renewable energy projects. In turn the premium decreases with rising market prices and is finally off-set, in case the market price reaches the determined cap.
In general the determination of certain upper and lower limits provides higher security for investment calculation. Thus risk perceived by potential investors is decreased.

Market-independent feed-in tariffs

Spot market gap model

The spot market gap model operates basically similar to the explained variable premium price model with determined cap and floor: As long as the market price does not reach a certain limit set by the policy, the gap is 'filled' by additional payments to the renewable operator. If the market price rises, the FIT premium declines and is offset in case the set limit is reached.

• Advantages: The important difference according to the variable premium model is the guaranteed payment per energy unit provided by this policy. While the variable premium model only fixed a certain limit of variations in payment, the spot market gap model determines a price, which can be used for financial assessments of renewable energy projects.
• Disadvantages: In some countries the premium, which is paid to fill the price gap, is financed through governmental subsidies. This strategy makes the model dependend to a policy budget, which could be exhausted and thus poses a certain risk on the investment in the renewable energy project. On the other hand, covering the difference by government subsidy means that electricity rates will not be influenced.
  An additional disadvantage results from the transaction costs of marketing the power of a project to the electricity market. Especially for smaller project operator (communities, homeowner or farmers) it could be a burden to pose offers for the electricity to be sold and to observe the market continuously: On the first hand the spot market gap model increases the compatibility to existing electricity markets, but on the other hand it cause a significant additional work-load for project operators.

Fixed price model

Fixed price REFITs today are the most frequently used tariff models. As the name 'fixed price model' describes, the implementation of these models contains the determination of a fixed payment for electricity for a fixed period of time (often the lifetime of the related technology is used). The payment is not influenced by other variables like market prices, fuel prices or inflation. As the fixed price is not adjusted to inflation, the real value of the payments decreases during the project lifetime.

To avoid the risk of not covering the costs of a project appropriately, the payments are set to a higher value for photovoltaics compared to wind projects. In Germany the missing adjustment of inflation is replaced by a higher initial payment during the first project years and diminishing payments in the later years of a project.

The guaranteed payments for the contracted time period form a very reliable base for calculation of expected profits. Even if no adjustment of inflation is applied, the fixed prices creates a stable and reliable environment for investment.

Fixed price model with full or partial inflation adjustment

The fixed price model can be adjusted to several parameters. Common adjustments applied in international jurisdictions are:

• predetermined tariff degression: this strategy has been explained according to the German form of the fixed price model
  
• responsive tariff degression: this term means an adjustment of the tariff degression dependent on market growth. This model has been implemented recently for German photovoltaic projects.
  
• annual inflation adjustment
  The adjustment to inflation can be applied in several ways. In some jurisdictions the whole rate of payment is adjusted by a pre-established formula. In other countries only certain a portion of the tariff price is raised according to inflation. The range of different strategies also contains full adjustments, with only a number of basis points excluded. Additionally the period of adjustment can be set (e.g. annually, quaterly).
  If the influence of inflation is balanced by higher payments at the end of a project, a high level of remuneration is secured near the end of a project’s life, when the depts of the project usually are paid. As a result a larger part of the revenue generates profits for the operator. For the appraisal of a project such a strategy is attractive even for risk averse investors, because the payments over project lifetime are guaranteed and the risk caused by inflation can be avoided.
  
• front-end loading: This REFIT-design contains higher payments in the first years of a project and lower payments in the later years. The higher payments help operators to repay loans and equity investors during the first years. Additional reasons for the implementation of this strategy are the promotion of a greater site flexibility and thus the promotion of a greater dispersion of project sites have general benefits for the energy system.
  
  
  

Technologies

Phase 1 of the REFIT was launched in March 2009, with four priority technologies, namely, landfill gas, small hydro, wind and concentrating solar power (CSP). These, were selected on the basis of the 2004 Department of Minerals and Energy (DME) financial and economic study which focused on the optimal mix of technologies required to fulfil the country’s RE targets. Biomass pulp and paper and sugar bagasse were excluded from Phase 1, because of the inclusion of these technologies in the Pilot National Cogeneration Programme (PNCP) implemented by Eskom within the same period when the REFIT was being developed. However this programme was not successful in terms of getting projects off the ground.

Development of Implementation Strategies for a Regional Regulatory Action Plan (RRAP) for the Western Cape 16 Phase 2 was published in October 2009, following public consultation, and includes the following additional technologies:

• biomass solid waste, however pulp and paper, bagasse and projects based on mill waste from industrial processes remain classified as cogeneration and presently excluded from the REFIT;
• biogas through anaerobic digestion;
• building integrated and ground-mounted large-scale solar PV systems with a capacity greater than 1 MW;
• CSP with a capacity greater than 10 MW, mounted on a two-axis tracker on the ground; and
• CSP without storage and central tower technology (CTT) with six hours of storage a day.

Wave energy, tidal energy and geothermal renewable technologies are also excluded as they are presently viewed as non-commercial, but could be considered in the future.

Concentrating PV is also not included at this stage, owing to the high economic cost, and fossil fuel will be allowed for the CSP technology, but will be limited to a maximum of 15 percent of the total primary energy input.

Small scale grid connected PV systems are also not included under Phase 2, however NERSA has stated that small-scale producers are likely to be included in Phase 3 of the REFIT, due in the second quarter of 2010.

In addition to proposing the addition of new technologies to the REFIT, NERSA also published, for public review and comment, a draft PPA to assist in reducing the risk to developers and speed up the process of getting projects on line. The PPA was modified based on a PPA used under Eskom’s Medium-Term Power Purchase Programme (MTPPP) in 2008. The public comments received on the PPA will be reflected in the final revision of the PPA scheduled for the end of November 2009. The other commercial agreements such as direct agreement, fuel supply agreement and transmission connection agreement will be considered for inclusion in the PPA. NERSA has also indicated that the standardised Direct Agreement, Fuel Supply Agreement, Transmission Connection Agreement, and Transmission Use of System Agreement would be included as schedules of the PPA, in the first yearly review of the REFIT.

Tariffs

The tariffs set out in the REFIT are generous when compared to international feed-in tariffs and cover the cost of generating renewable energy plus a ”reasonable profit” to encourage developers to invest. The tariffs are competitive globally and have been designed to take into account the higher risks associated with project development in a new environment, where there may be greater challenges in terms of finalising power purchase agreements and actually getting grid connection.

Wind power plant 1.25 Concentrating solar power (CSP) with storage 2.10 Concentrating solar power (CSP) without storage 3.14 Biomass solid 1.18 Biogas 0.96 Photovoltaic systems (Large ground or roof mounted) 3.94 Phase 2 Concentrating Solar Power (CSP) Central Tower with storage capacity of 6 hours 2.31

Key Issues

Grid connection and Licensing Procedures

It is generally considered that there are three primary challenges to getting renewable energy generation on line, firstly the price (which is now being addressed by the REFIT), secondly the PPA (a draft is proposed under REFIT Phase 2), and finally the actual grid connection.

Although the REFIT guidelines provide a basic structure for the implementation of the programme, further clarity is still required on key issues such as the pre-qualification criteria, licensing process, and fixed timelines. Some of these issues are presently under discussion.

• Pre-qualification criteria: This is still an issue which appears to be an ongoing debate and is of major concern to developers. In order to quantify the potential market and make sure only good quality projects are brought on line, it is understood that a pre-qualification process may be proposed as part of the REFIT application process. Although this issue has not been finalised, this could have the effect of discouraging a certain amount of investment in renewables and increasing risk to developers and investors. Experience in other countries in the establishment of FITs shows that certain parties, including utilities have also proposed combining a tender with a FIT, however this proved to be unworkable and was rejected. The integration of any tendering processes would also significantly increase the costs of project development and would also slow down the project development process. A decision on this issue is awaited.
• Single Buyer Office: According to a Cabinet paper, Eskom was appointed as the single buyer of electricity in the country, with both the right and obligation to buy power. The need for a single buyer is justified in the country due to the small power market in which the various players operate. At present, it is considered that the market is not large enough or diverse enough to sustain multiple power buyers.
  In response to this, Eskom established the Single Buyer Office (SBO). Under the REFIT, Eskom’s SBO was appointed as the REPA.
  The office is instrumental in facilitating investment in renewable energy in South Africa and because the SBO is critical for the take-off of the renewable energy industry and is responsible for the power purchase agreements between Eskom and IPPs, many industry players are calling for its independence from Eskom.
  Although there is general agreement on the need for an SBO, there are concerns and questions about its impartiality since it is established within Eskom, and that it will not favour or support smaller power projects.
  It is understood that there are proposals and discussions to house the SBO externally to Eskom, however no decision has been made to date, although it is understood that a draft bill has been proposed to establish an independent System Operator.
• Power Purchase Agreement: In order to provide greater certainty to developers and investors, it has been proposed by NERSA that there will be a standardised PPA. A draft PPA, based on the MTPPP, PPA was released for public comment in August and is expected to be finalised by the end of October.
  The main concerns from developers about the PPA was the greater security and therefore limited risk it provided to Eskom, compared to that for developers.
• Project size: A small number of developers have raised concerns that the SBO may only be interested in larger renewable energy projects, with a suggestion that this may only include projects above 20MW. The REFIT however focuses on all projects above 1MW. There is therefore a need to clarify this issue to ensure that the smaller projects are not excluded from this process.
• Licensing procedures: It is expected that the detailed guidelines will be developed and published in the near future to assist and support project development in a clear and transparent manner. These guidelines will also need to clearly specify the detail application process, identifying the roles of particular stakeholders, and also defining the timelines for the relevant authorities to address and respond to the various issues.
  It is expected that these guidelines will also provide guidance on the specific obligations for the REPA, and therefore Eskom’s Single Buyer Office, to purchase power.
• Grid Connection: The REFIT states that the developer is responsible for the shallow grid connection and that the utility is responsible for any grid upgrades. Although this principle is agreed, the precise mechanisms have not been put in place. This is of particular concern to a number of wind developers who have some sites identified, but could be facing a four year delay, which is the present timeline for such network upgrades.

Cost Recovery and Capacity cap

To date, no PPAs have been signed by the SBO, due to concerns and a lack of clarity on the cost recovery mechanisms. Although the REFIT indicates that the costs of the REFIT will be recovered from all electricity consumers using existing pass-though mechanisms, there are concerns about the potential impacts on electricity prices if there is a high interest from developers and extensive project development. High electricity prices could have significant negative socio-economic impacts both for industry but also the country’s poor.

As a means to address this, proposals have been made to put in place limitations on capacity for the various technologies. The capacity cap was provided for in the initial guidelines to allow some measure of control for NERSA on power projects, with the overall aim of preventing significant increase in consumer electricity prices in the event of major take up of the REFIT. Although the level of the cap is not specified, NERSA has the mandate to exercise this if it is considered necessary.

The concern from developers is that irrespective of what the renewable energy resource availability is in the Western Cape Province and throughout the country, it is possible that there may be limits on the amount of renewable energy projects that NERSA will approve and licence and the SBO will contract to purchase electricity from.

A renewable energy installation cap under the REFIT for all of South Africa would lead to a finite amount of renewable energy projects which would be approved for the feed-in-tariff. This would provide major uncertainty for investors and developers and would remove long-term security for the programme. In other countries, the implementation of a capacity cap has caused programmes to stall and fail.

It is therefore important that there is further debate on how this cap will be set and the implications. The first step will be to get a comprehensive understanding of the potentially viable resource and the cost implications on national electricity tariffs. Based on price projections for conventional power, many of the REFIT technologies will be competitive in the short- to medium-term with only solar PV and CSP requiring mechanisms to limit consumer tariffs increases.

Small-Scale RE Projects

Since the introduction of the REFIT, there have been calls from non-governmental organisations, private sector, lobby groups and the general public to include small-scale projects in the REFIT, as these are presently excluded. NERSA has indicated that this will be included in Phase 3.

It is noted that there are two key challenges to small scale projects.

Firstly, under the Electricity Regulation Act (Act No. 4 of 2006), all generators connected to the national grid require a generation licence, issued by NERSA. For the numerous small-scale projects, this could pose a significant capacity burden on the Regulator in terms of processing the licences. It is possible for the Minister of Energy to issue a notice to exclude certain technologies for example small scale solar PV, however it may be more advantageous to establish a small-scale generation licence in order to monitor projects connected to the grid. Such a licence could be simplified in terms of the application and approval process.

Secondly, the role of Municipalities is of importance and needs to be taken into account as these are the bodies that manage many of the municipal electricity networks and would be the ones most likely to interface with small-scale renewable energy generators. Their precise role and potential obligations needs to be defined.

Other technologies

Although phases 1 and 2 provide a REFIT for a wide range of technologies, there are still certain omissions that could be brought on at a later date, for example wave, tidal, bagasse and pulp and paper waste. This needs further analysis to define the status of the technology development and also if the REFIT is the most appropriate mechanism for support in the short- to medium-term.

In addition, it is possible that an off-grid REFIT may be considered in the future for mini-grids and isolated grids, taking into account the need for increasing access to electricity across the country, but also using renewables as a cost-effective and sustainable approach.

References

see: GTZ 2009: Development of Implementation Strategies for a Regional Regulatory Action Plan (RRAP) for the Western Cape.pp. 15 amd pp. 123 http://www.gtz.de/de/dokumente/gtz2009-en-regional-regulatory-action-plan-western-cape.pdf

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