How do feed-in-tariffs work and why are they so effective?
Feed-in tariffs have fast become the incentive of choice for increasing the uptake of solar and other renewable energy technologies. To date they have been implemented in over 40 countries around the world. Essentially the government mandates an amount that anyone who installs renewable energy will be paid for clean energy that they feed into the electricity grid over an agreed period of time (e.g. 20 years).
The amount paid for renewable energy is greater than the standard retail price of electricity. This is because the tariff recognises the environmental and industry development benefits of renewable energy. Feed-in tariffs have created the extraordinary growth of renewable energy internationally, with grid-connected solar power growing globally by 60 percent annually between 2002-2006.
The reason that feed-in tariffs work so effectively to stimulate the market is that they dramatically reduce the pay-back period of the costs of installing new renewable energy. For instance, if an individual decides to install a medium-sized solar power system in Australia, it might cost $10,000 after rebates. This will take a long time to recover in reduced energy bills (approximately 40 years).
However if the individual is paid a much higher rate for electricity they feed into the grid, the payback can be reduced to a much shorter period (e.g. 10 years). This provides enough incentive to invest in the upfront costs of a solar power system.
Since introducing feed-in tariffs in 2000, Germany has doubled the proportion of electricity it generates from renewable energy sources. They reached their 2010 target of 12.5 percent of electricity, three years ahead of schedule. As a result, Germany has recently increased its national renewable energy target to 27 percent of all electricity generation by 2020. Germany now employs nearly a quarter of a million people in renewable energy jobs, with solar power creating three times the number of jobs per installed megawatt as coal fired electricity.
Importantly the feed-in tariff in Germany has actually led to lower wholesale electricity prices as it has reduced peak power demands.
Australia and feed-in tariffs
Not all feed-in tariff schemes are created equal. Feed-in tariffs internationally are almost exclusively paid on the entire production from the chosen renewable energy source. Known as ‘gross production metering’ this guarantees a payback on investment within a given time, providing the certainty required to encourage people to go out and invest in solar and other renewable energy technologies. However, the schemes introduced in Australia thus far are designed to pay homeowners for the electricity exported to the grid minus what is consumed in the home at the time of production. This system of 'import-export metering' - sometimes called ‘net-metering’ - significantly discriminates against certain types of consumers. It also makes calculating the cost of the scheme, and the potential financial return, extremely difficult.
A net-metering scheme for feed-in tariffs does not provide the necessary financial incentive to install a solar system. It also discriminates against both owners of smaller grid-connected systems and those who are more likely to consume electricity during the day, such as senior citizens or stay-at-home parents. Alternatively, families on a double income with no kids, who are able to afford a larger solar system and are typically away from home at work during the day, can potentially do very well.
As well as being discriminatory, such a system makes calculating payback times very difficult. It is virtually impossible to know what portion of the electricity generated will be returned to the grid without undertaking a detailed and expensive energy audit. And people’s circumstances change.
Feed-in tariff schemes paid on total production from renewable energy systems, such as in Germany, suffer from none of these problems. They provide certainty of return, and it is this guarantee that encourages people to adopt these technologies.
The ACT Government looks set to introduce Australia’s first ‘fair dinkum’ feed-in tariff. The Victorian government’s scheme will be left behind, and our chance to be Australia's solar leaders will be gone.
How to tell a real feed-in tariff from a fake one
The devil is in the detail when it comes to assessing whether a feed-in tariff will actually deliver increased uptake of renewable energy. Here's something to help you tell the difference:
An effective feed-in tariff:
- pays a substantial premium for renewable energy (e.g. a tariff of 60 cents per kWh)
- is paid on the entire output of a system via gross production metering
- guarantees a payback on investment of 10-15 years
- applys to the residential, commercial and industrial sectors
A fake feed-in tariff:
- pays a lesser premium that is inadequate to reduce payback time.
- is paid only on the difference between the energy generated and the energy consumed (a ‘net’ model or some variation which doesn’t reward the full amount of clean energy generated).
- is unclear about payback times, or has a payback time of greater than 15 years.
- applys only to the residential sector.
A gross feed-in tariff will result in a small increase in household electricity bills – approximately $6-12 per year. That's why we want a scheme that allows concession card holders to be exempt from this extra cost.