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  • Host: Price discrimination dependant on the host type include the preferential rates for hospitals in France or the withdrawn support for installations on potential farm land in Germany.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.