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Wednesday, March 26, 2008

Feed In Tariffs - how to structure

For anyone not familiar with the term, Feed in Tariff  (FIT not surprisingly) is the money the electrical company pays you per unit (kWh) that you generate and send down their wires.
A most interesting system of feed in tariffs exists in Germany today. The government has legislated a feed in tariff equal to about 3 times what the same customer pays for electricity. The electrical company charges a little more to all customers and uses this money to subsidise the owners of home generation systems. Houses and businesses have two metres. One metre records the amount they use, the other how much they produce. You don't get the three-times rate for the difference between what you use and what you produce but on the whole amount you produce. The German government has guaranteed that this situation will continue for 20 years from the date of installation. To induce people to get in early, the small generator gets the rate for his power generation that is extant in the year he installs his solar unit and this rate decreases from year to year. Thus people who installed solar in 2004 are getting 55c per unit until 2024 while people installing their unit this year (2008) will get 45c per unit until 2028. By 2011, the rate may be around 35c per kWh (kilowatt hour)

The system is obviously not sustainable. A company can't be buying a product and selling it for a third as much. Moreover, as more and more people put solar panels on their roves or wind turbines in their garden, the power company will have to charge the conventional customers more to pay off the generating customers. However, you have to hand it to Germany. What they aimed at has worked and at a bargain price when compared with building coal fired power stations.  Best of all it is  without any involvement of the always inefficient government tax system. (well, maybe in Germany it is not inefficient.  In fact in this link you will see just how clever the German Tax Department is.)

Germany has clearly recognized that in the not too distant future, the cost of power from fossil fuels will start to increase exponentially, due to demand exceeding supply and due to increasing compliance costs. With the German scheme of feed in tariffs, they have created a renewable solar-electric generating capacity equal to the output of about 4 large coal fired generating stations (over 13 GW as of the end of 2007) and growing day by day. With energy being a large part of the cost of any product, when the rest of the world is trying to play catch up, Germany will have megawatts of stably priced, renewable energy for her industries.  This in a country with less that 2 peak hours of sunshine per day.

Here in New Zealand, I suspect, (and hope) we won't go for the subsidy model that Germany is using. Part of this is philosophical-historical. Not so many years ago, our agriculture was one of the most heavily subsidized in the world. People didn't farm crops, they farmed subsidies. With great foresight and more than a little courage, the government of the day decided to scrap all agricultural subsidies. We went cold turkey and it worked. After some admittedly hard times, our farmers have become lean and mean and of most importance, their decisions are now based on economic reality rather than how to play the system. They now compete all over the world against subsidized agricultures and compete very successfully. (or would if the Americans would pay more than lip service to their professed free trade policy)

I would like to see a much different system. It is simpler, more easily understood and sustainable. Keeping in mind the law of unexpected consequences, as a first suggestion, it would be structured as follows.

There would be only one meter in your house or business and the electricity you generate would simply turn the meter backwards.  The two meter system is a scam. The electrical company would structure its charges (as they do at present) with a fixed charge and a charge per unit (kWh) used. There have been many names for this fixed charge but for the sake of this discussion lets call it a line charge. This is the amount you pay for the privilege of being connected to the grid. This is reasonable as the electrical distribution company had to build the distribution system and has to maintain it. Now here is where we have to be a bit careful. The electric company could structure this differently for people just using electricity and for people using and generating electricity. For the generators, they could have a very large fixed cost and a very low power rate for power used or generated. For the non-generating customer the reverse. This is where the government must step in and block this possibility. They must simply legislate that whatever the charge structure the power company decides on, it must be the same whether you are generating or not. Then if the generating company tried to charge a huge line charge and a small per-unit charge, the ordinary customer could use huge amounts of power for almost a fixed cost. If they charged a very small fixed charge and a large per-unit charge, the generating customer would make lots of money. Structured so that the system is the same for both types of customer, the system is reasonably self regulating since it is in the interest of the power company to maximize its profits by a middle of the road approach.

There is also no need for the power company to send out bills every month (or payments for that matter) to the user-generator.  The amounts either way will be small and a financial reconciliation can occur once each year.  Ordinary  customers get billed as usual. So what are the implications of such a system.

Firstly, there is no need for the installation of any extra meters by the power company which they will charge to the customer. This also eliminates the VAT you would have to pay on the extra meter.

Secondly, the power company doesn't have to service a developmental loan for installing new power stations. All the capital costs fall on the private individual. The only extra wiring needed is the wiring associated with the power generating unit. The customer must have in place all the equipment that makes his system compatible with the electric company and that is the end of it.

Thirdly, this system is sustainable and good for the power company. The power company is "buying" power during the day when they charge the greatest amount for their power and the power, on average, is being generated closer to the end user than is the case with remote, high output power stations. Getting power when the demand is greatest and reducing their line losses increases their profits.

Fourth, the system can be left in place for ever and doesn't have to be changed at some time in the future as with the German system. Stability of system allows for long term business planning and is greatly encouraging to businesses.

Fifth, the power company also gains on the Internet effect. Diffuse power generation is less vulnerable to line outages than high-power point-sources.

Sixth, the power company still makes money on their line charge commensurate with the cost of maintaining the lines.

New Zealand is an innovator in so many ways. Hopefully we will also be innovative with Feed In Tariffs.

One thing we must guard against at all costs is double metering. In Germany, even, now when the government is trying to encourage as much uptake of solar electric as possible, they are adding the revenue made by the small generator to his income for income tax purposes. For someone with a high salary, the marginal rate is 46% and there is a further 5.5% Unification surcharge. They are also charging GST (VAT/sales tax) at 19% on every unit of electricity the customer uses. Note that these charges are  not on the difference between what you use and what you produce but on ever kWh you use and every kWh you produce.   When the unrealistic FIT system ends, the small generators are going to find they are still paying quite a bit for their power even if they are generating as much as they use. In fact, depending on their tax bracket, the small German generator would have to produce 2 to 3 times as much power as they use in order to reduce their net power bill to zero. Think about the cost of servicing the loan they have to take out to buy this extra large system. Think about the GST they pay the government for this larger-than-needed system.   If someone does decide to put in a system which is larger than they need for their own use, they should be allowed a fair return. For the sake of argument, let's say 80% of what the power company charges for power at the time of generation.

The correct system of metering and Feed In Tariffs which is fair to both power company and customer and which is sustainable will be a great encouragement for the uptake of renewable energy by the small generator and won't have the customer wake up one morning and realizing he has been scammed.


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Anonymous said...

Very nice and intrestingss story.

Anonymous said...

This is the kind of thing I try to teach people. Can we count on a sequel?

Martin Clooney said...

World Trade Organization has announced a program which will increase the use of Solar energy known as FIT (Feed in Tariff) is good for our ecological system as it increase the use of green energy.
Feed in Tariff Program