Posted by: joachim in Policy,Renewable Energy,Solar on June 11th, 2011

How complexity of feed-in tariffs add to the price of solar power.

Among politicians it has become fashionable to state that solar power is too expensive, no doubt as a pre-cursor to drastic cuts, as witnessed in many countries. Understandably, people demand more transparency and to know how much more they pay for electricity due to renewables. The reputation of being too expensive is damaging the solar industry and the technology as a whole. If it’s so expensive, why do we support it?

While solar power has the potential to replace conventional sources on a big scale in future, it is not yet cost competitive with the exception of some niche markets. Investing in solar technology helps driving costs for products and processes down, thus helping solar power to eventually fulfil its promise. Feed-in tariffs where generators of solar power are awarded a price per kWh has proved to be the most effective instrument. This way, investors are incentivised not just to construct but also to run the pv systems.

However, by setting up complex national tariff structures, politicians have caused a significant premium themselves.

The minimum tariff is the one that gives the investor a return that is commensurate with the risk in solar while providing a reasonable margin for everyone in the value chain. If the tariff is set below this minimum (e.g. the UK’s tariff of £0.085 per kWh for installations greater than 250kW), the support is so ineffective and the government may as well drop the tariff altogether.

With only one price level, the market would seek the most efficient locations and solutions (i.e. lowest cost of ownership) by itself. In practice, however, each country has its own feed-in tariff with their own country-specific features, most of which are politically motivated. Both the multitude of tariffs and the special features increase the cost of solar power (€/kWh).

Here are some of the tariff features:

  • Size: Typically, smaller installations attract higher tariffs.
  • Host: Price discrimination dependant on the host type include the preferential rates for hospitals in France or the withdrawn support for installations on potential farm land in Germany.  
  • Index-linked adjustments: Here, the price paid out in future is linked to a defined index, such as inflation in the UK.
  • “Made-here” Bonus: This is maybe one of the crudest features – paying a bonus if components are being used that are made in the host country.

Let’s look at them in more detail:

  • Location: The market follows the feed-in tariffs. With frequent changes to the tariffs, countries go in and out of fashion, sometimes just within a year or two. That causes unnecessary volatility in the market. It also means that the decision where to invest is not cost-driven, but driven by jurisdiction. For instance, assuming the same capital costs, power from a pv system in northern Germany is 50% more expensive than in southern Italy.
  • Size: Most law-makers set higher tariffs for small installations than large ones. In Italy, the difference is 51%, Germany 26%, Ontario 49%, Greece 13%, and in the UK even more than 100%. Large-scale projects are of great importance. They help lower the supply chain costs and accelerate the creation of a local solar industry and support systems. Having preferential treatment for small installations equates to a hand-out to homeowners.  
  • Host type: As with the size discrimination, preferential treatment of hosts that are deemed to be deserving is just another premium.
  • Inflation adjustment: It’s a gimmick that makes the product more attractive to consumers that fear inflation. Unfortunately, this in-built protection against inflation creates uncertainty, as it makes it much more difficult to assess, and therefore more expensive.
  • Protectionism: By providing a bonus for the use of local manufacturers, less competitive manufacturers may be supported. It damages competition at a cost to tax payers. In fact, it runs against the primary objective of helping solar power to become cost competitive.

These politically motivated features easily add 50% to the cost of solar power. Whilst this premium may not be required to help solar to become cheaper, it is the price we pay to increase the acceptance of solar in communities. Rather than saying “solar is too expensive”, politicians should say “we could get more solar power and for the same amount of money, but we want it in our country, on our roofs and with our own modules – and that costs money.” That would be real transparency.

Posted by: joachim in Policy on November 4th, 2010

UK airport departure taxes have been increased on 1 November 2010. The government has cited environmental reasons for the rise in order to hit aviation emission targets, and further rises are planned for 2011. But will the increase result in a reduction in carbon emissions? We think not, and here is why.

The Rationale

The naive rationale is that an increase in passenger duty on flight tickets (with higher taxes on longer flights) will force an increase in ticket prices and subsequently dampen the demand. As a result, airlines will deploy fewer planes, and therefore carbon emissions will be reduced.

The design of the UK departure tax and the increase in November 2011

The airport departure tax introduced by the UK government is only indirectly linked to the carbon emissions through bands according to mileage. Economy passengers pay half the price of passengers in other classes. The logic behind this discount is a bit obscure. Maybe the thinking behind it is that business class passengers use up twice the space? Or maybe it was done under the mantle of fairness.

In November 2010, airport departure tax was increased by between £1 (for short-haul economy) and £60 (for long-haul business and first class) per passenger. The relative tax increase in economy and business are the same. E.g. the departure tax on a ticket from London to New York increased by 33% in both economy and business class. No distinction is made between different non-economy class tickets, e.g. business and first class.

Tax band (distance in miles) < 2000 2001 – 4000 4001 – 6000 > 6000

Example: London to …

Berlin New York Miami Hong Kong
 
Economy

ADT pre Nov 2010

£11 £45 £50 £55

ADT post Nove 2010

£12 £60 £75 £85

Change in ADT %

9% 33% 50% 55%

Return ticket price

 £110  £380  £400  £700

ADT % of ticket price

11% 16% 19% 12%

Ticket price increase

0.9% 4.1% 6.7% 4.5%

Number of seats (typical)

114 180 180 180

Tax revenue (per flight)

£1,368 £10,800 £13,500 £15,300
 
Business

ADT pre Nov 2010

£22 £90 £100 £110

ADT post Nove 2010

£24 £120 £150 £170

Change in ADT %

9% 33% 50% 55%

Return ticket price

 £390  £1,600  £2,200  £2,600

ADT % of ticket price

6% 8% 7% 7%

Ticket price increase

0.5% 1.9% 2.3% 2.4%

Number of seats (typical)

15 70 70 70

Tax revenue (per flight)

£360 £8,400 £10,500 £11,900
         
First        

ADT same as business

       

Return ticket price

n/a £2,700 £3,200 £4,040

ADT % of ticket price

  4.4% 4.7% 4.2%

Ticket price increase

  1.1% 1.6% 1.5%

Number of seats (typical)

0 14 14 14

Tax revenue (per flight)

£0 £1,680 £2,100 £2,380

Likely Effects

Short-haul Flights

On short-haul flights, the departure tax has risen by only 9%. On a typical economy return flight ticket with a full-service airline at £110, the tax increase results in a benign increase of 0.9%. For business class tickets the effect on the ticket price is even less with just 0.5%. However, this is assuming that the airline will pass on the tax increase to the passenger. Many low-cost airlines offer ticket prices (including taxes) that are well below the tax levy. They can easily absorb the tax increase by increasing prices in ancillary revenue streams. I.e. in order to keep ticket prices low, they may increase prices for drinks, scratch cards or hotels. Since the ticket price has not increased, the decision whether or not to fly is not affected by the tax hike. Because the tax is not transparent to customers, the tax rise will probably not change their behaviour either.

Long-haul Flights

Because of relatively high ticket prices for business and first class tickets, the impact of the tax increase on those is (in relative terms) less than on economy tickets. We have examined prices for non-flexible tickets, 3 months advanced purchase and found that on a flight from London to Hong Kong, ticket prices of economy tickets would increase by 4.5%, business by 2.4% and first class by just 1.5%. Hence, the classes (business and first) that provide most of the revenue for the airline are least affected by the tax increase. If the aim of the departure tax was to decrease demand in flights, it would have to target the profitable section rather than the economy class passengers.

Luckily, cost-conscious economy class travellers have an alternative: They can use a short-haul flight (subject to a benign rise of 0.9%) to hubs like Amsterdam or Zurich that have lower departure levies. However, this would lead to an increase in carbon emissions rather than a reduction.

Conclusion

The recent increase in the UK departure tax is ill-designed to trigger any reduction in carbon emissions. Thanks to lower effective tax rates (tax paid as a percentage of the ticket price) on business and first class travellers, it is ensured that demand in those tickets (that are so important for the profitability) will not ebb away drastically, thus optimizing tax revenues. Two other effects are predicted: Use of alternatives via continental hubs and an opaque rise in anicllary costs within the realms of low-cost airlines. None of those effects, however, will result in a reduction in carbon emissions.

If the government was really committed to combating climate change, surely, it would have introduced measures that directly relate to actual carbon emissions or directly influence customers (rather than through an airline).

 

Posted by: admin in Policy,Renewable Energy,Solar on September 12th, 2010

By converting abundant sunlight directly into electricity without any fuels, photovoltaic modules (PV) are an ideal technology to reduce green house gas emissions. No wonder it has caught the attention of many governments that have made tackling climate change their declared priority. In fact, many publications such as the Energy Trust [1] list carbon emission reductions as the benefit first mentioned! Not suprisingly, a 2009 McKinsey report [2] has identified an annual carbon abatement potential for PV solar of 1Gt of CO2 equivalent by 2030 in its medium ‘B’ – scenario. That’s a major challenge. If all panels were to be installed in a not so sunny location (e.g. Germany), and assuming an area of 8m2 per installed kW (kiloWatt), 10,000km2 would have to be covered by solar panels – the size of Jamaica. Only half the panels would be needed if installed in Australia. At this scale, it is crucial where in the world panels are installed.

To date, PV is one of the most expensive ways of reducing carbon emissions. To help this technology to market, and thus drive down costs, several countries subsidise solar electricty, most commonly by guaranteeing a minimum price for a fixed term (feed-in tariff). Yet, those subsidies are also limiting the impact photovoltaics could make in the fight against climate change, because

  • Subsidies set at a national level, seemingly un-coordinated, distort the market by attracting investment in locations with relatively high carbon abatement costs.
  • Subsidies announced by governments that can only present a weak climate change story for PV in their country or have no own solar industry will very likely be cut more sharply and sooner than expected. These policy risks increase volatility and utlimately deter investors that are badly needed.

What makes a site "carbon emission reduction – effective" for photovoltaics? How do feed-in tariffs distort the market? What is the rationale for setting a particular feed-in tariff? What makes subsidies credible and whose government’s argument in support of photovoltaics is under pressure? Read on.

 

The Country’s View

The marginal carbon abatement cost through use of photovoltaics can be calculated from@

where

  • lcoepv, lcoereplaced: Levelized cost of energy using photovoltaics versus levelized cost of energy using the technology of the marginal unit that has been replaced by the pv module [€/kWh]
  • ηpv, ηavoided,: Green house gas emissions from pv module (mostly from manufacturing) versus avoided emissions from the marginal unit that would otherwise have generated the electricity [t CO2e /kWh]

The levelized cost of energy is the price [€/kWh] for generated electricity that makes the net present value of the installation zero. Without subsidies it is:

For calculations we have made the following assumptions:

  • Capital expenditure including equipment and installation of 4,000 €/kWp (kilo Watt peak). This could be higher or lower depending on the type of panel, size of order or location. For the purpose of this article, the precise figure is not important.
  • Operational expenditure is held constant at 0.5% of capex per annum.
  • A discount rate of 6%. This rate reflects the low technology risk of solar and low annual fluctuation patterns. As the carbon abatement cost is a societal cost, this discount rate is applied universally, rather than aligning it with long-term interest rates. In any case, it would not alter the qualitative result of the calculations.
  • The full lifecycle emissions of a crystalline solar module of 1.4t/kWp installed, which equates to 58g/kWh in the UK [3].
  • The levelized cost of energy for the replaced technology is 0.1 €/kWh. Estimates for levelized cost of energy for coal fired or natural gas power stations hover from 0.05 -0.12€/kWh.We have deliberatly chosen a conservative amount in order not to overstate differences between locations.
  • A lifetime of the module of 25 years.
  • For the energy yield in different countries, we picked a favourable location in the country (though not the absolute peak), assuming optimal surface orientation and a performance ratio of 75%. Values obtained from Photovoltaic Geographical Information System. We also assumed an annual degradation of 0.05% in line with typical manufacturers’ performance warranties.
  • Avoided emissions factors obtained from the EIA database [4].

 

 
Avoided Emissions Factor [t/MWh]
Energy Yield [kWh/kWp]
Feed-in tariff [€/kWh]
Electricity Price for industry [€/kWh]
10 year interest rate
Installed PV capacity [MW]
Germany 0.829 1000 0.34 0.147 2.62% 7,000
UK 0.643 950 0.42 0.125 2.97% 10
Portugal 0.69 1500 0.4 0.103 5.49% 80
Cyprus 0.9 1300 0.34 0.091 4.6% 2.5
Sweden 0.495 800 n/a 0.073 2.7% 5
Australia 0.9 1800 0.35 ? 4.89% 115

Apart from the obvious technology-specific parameters, there are two major determinants of carbon abatement costs: Energy yield (driven by solar irradiance) and the avoided emissions factor. Locations where there is little sunshine and the replaced energy is cleaner, abatement costs are high. For instance, abatement costs in UK are 40% higher than in Germany, mainly because of differences in the avoided emissions factors. The lowest abatement costs can be found in Australia with both lots of sunshine and mostly coal fired power stations that are being replaced.

 

In the above diagram, PV modules in the top right corner are most cost effective in reducing green house gas emissions. Locations towards the bottom left corner offer less cost-effective carbon reduction.

 
levelized cost of energy from PV [€/kWh]
Carbon abatement cost [€/ton CO2e]
Levelized cost of energy from PV, adjusted for feed-in tariff [€/kWh]
Carbon abatement cost for PV- investor [€/ton CO2e]
Germany 0.348 321 0.059 -53
UK 0.367 456 -0.05 -262
Portugal 0.232 202 -0.078 -272
Cyprus 0.258 206 -0.23 -392
Sweden 0.435 788 0.435 788
Australia 0.193 107 -0.123 -256

The carbon abatement cost values calculated with the simple assumptions above are comparable to McKinsey report on carbon abatement in Germany (footnote 27).

The Investor’s View

If emissions trading was the only policy tool around and if the carbon price was sufficiently high, pv modules would be installed according to the above diagram, that is starting at low carbon cost locations first. With today’s carbon price of less than 20 €/t, photovoltaics would never be built on a large scale. Luckily, some governments offer subsidies, in the form of feed-in tariffs (FiT), offering a fixed price for each kWh generated. This way the levelized cost of energy for the investor is reduced and the carbon abatement cost becomes negative, for instance (-50) €/ton in Germany. That negative figure is only a virtual figure, because it doesn’t drive investors. Instead, investors look for returns.

We have calculated the internal rate of return on a roof-top mounted pv module using the same assumptions as above. Furthermore, we are assuming that all electricity generated is sold. Eventual savings from own use have not been taken into account. The placement of countries in this diagram is only for rough orientation.

 

For all its simplicity, the diagram highlights vast differences in potential returns. In reality, profits tend to be split between investors and manufacturers such that investors get an attractive but not fancy return. More importantly, feed-in tariffs make some countries financially more attractive than their carbon abatement costs would suggest, resulting in a less cost-effective use of financial resources.

 

The Government’s View

For a government with climate change as a priority, the measure to watch out for is: How much money is spent by the government (in subsidies) for a reduction of one ton of green house gasses.

which is the net present value of the subsidies over the contracted period (which in most cases is shorter than the 25 years assumed lifetime of a panel) divided by the net emissions.

The diagram below shows where different countries are on the abatement cost versus government spend – matrix:

 

Countries that either don’t subsidise pv (Sweden) or don’t subsidise pv enough (Hungary, Estonia) will only ever attract marginal investment in solar, regardless of their abatement costs. Thus, they are excluded from the following discussion.

For all other countries that provide sufficient support for photovoltaics to be investable, a pattern emerges: There is a strong correlation between size of the government subsidy and the carbon abatement cost. Of the surveyed countries, Switzerland has the highest carbon abatement cost (using pv), mainly because of low avoided emissions factor in that country. Switzerland spends almost 4 times as much on 1t CO2 reduction (using solar PV) as Australia, the UK more than twice, but Germany just 10% more. The climate change argument in favour of supporting photovoltaics in the UK is therefore much weaker than in Germany or Australia.

While all subsidies for photovoltaics carry inherent policy risk, it is much lower in countries where

  • the climate change argument in favour of supporting photovoltaics is strong. A government that wants to be seen as effectively working against climate change ought to provide evidence that it spends its money wisely.
  • an established home-grown solar industry of size exists. Hence, subsidies flow back into the country’s own economy.
  • risk of government default is low.

Note that it is expected that all pv subsidies will decrease over time, in line with cost reduction and market expansion, and many countries have already built this degression into their laws. This is not a risk. The risk is that a government will overturn existing legislation and reduce or abandon support much earlier.

Country   Subsidy Risk
Switzerland Very costly to reduce emissions in Switzerland, mostly because its energy mix is already much cleaner than most. Apart from hydro, which is widely used already, Switzerland does not have access to many other sources of renewable energy such as wind or marine energy. Moreover, Switzerland has a significant number of companies in the solar industry that a government might consider worth helping such as Oerlikon, Swiss Wafers, SolarMax, SolarSwiss. Low
Austria Government subsidy is contained by short contract period for feed-in tariff, thus government spend per emission reduction is relatively low. Also Medium
UK Climate change argument for pv is weak (see above). As to solar industry, there is some silicon production (PV Crystalox Solar, Nitol-Polysilicon), but no wafer production. High
Luxemburg Similar to the UK – weak climate change argument, no solar industry. High
Czech Republic Climate change cost (for pv) below the trend line. However, the absence of many manufacturing facilities may make it too expensive. Medium
Germany Relatively low subsidies resulting in a credible climate change argument. In addition, large home-grown solar industry (25,500t silicon, 3GW wafers). More than 1/3 of the world’s PV installation is in Germany. In a recent law, tariffs were prematurely reduced, though not as much as the government originally intended due to pressure from regions with large amount of solar companies, especially Bavaria. Low
Ontario High subidies for photovoltaics in a country generally not known for its sunshine. However, there are some significant solar companies: Arise, 5NPlus, Timminco and Canadian Solar. Ontario is the only state in Canada with such enthusiasm for solar. Low
Slovenia Better than average location for photovoltaics in terms of carbon emission reduction. But no home-grown solar industry. Medium
Italy Despite high levels of sunshine, Italy’s subsidy for photovoltaic is relatively high in relation to reducing green house gas emissions. In addition, Italy has some solar companies (e.g. MEMC, Solsonica). Medium

Portugal, Cyprus, Greece, Spain

Thanks to a lot of sunshine, Portugal, Cyprus, Greece and Spain are cost-effective places to employ photovoltaics for emission reduction. Both Spain and Greece have manufacturing capabilities (Siliken, Solar Cells Hellas). However, the real concern here is government default. High
Australia Excellent climate change story for photovoltaics – Australia is running on coal while basking in hot sunshine! Whilst only a few 100MW installed so far, there are already solar manufacturers (e.g. Prime Solar) Low

 

References / Links

[1] Energy Savings Trust on solar electricity

[2] McKinsey: Pathways to a low carbon economy, Version 2 of the Global Greenhouse Gas Abatement Cost Curve, 2009

[3] Carbon Footprint of Electricity Generation

[4] EIA – emission factors

[5] UK Department on Energy and Climate Change: "The Department of Energy and Climate Change is working internationally to tackle the global challenge of climate change"

[6] Harmonised long-term interest rate according to ECB

 

 

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