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SOLAR GENERATION V -
2008
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The feed-in tariff: driver of
Europe’s solar success story
It is evident that without the support of suitable
instruments, the expansion of the worldwide solar
electricity market will not happen at sufficient speed. In
order to accelerate the reconstruction of our electricity
supply system, it is necessary to implement powerful and
efficient tools supporting the use of solar electricity.
Over a number of years, the premium feed-in tariff has
proved its power and efficiency in developing new markets.
Worldwide, people are surprised by the fact that Germany, a
country which is not one of the sunniest places in the
world, has developed the most dynamic solar electricity
market and a flourishing PV industry. How could this happen?
Many different types of programmes have been tried in many
countries in the past, in order to accelerate the PV market,
but none has been as successful in such a short period of
time as the feed-in tariff in Germany. The idea has been
adapted for use in other European states, with each country
adjusting the system according to its specific needs.
Extending such feed-in tariff mechanisms beyond Germany is a
cornerstone of the European Photovoltaic Industry
Association’s strategy for promoting the uptake of solar
electricity in Europe. The simplicity of the concept, and
its low administrative costs, mean that it is a highly
effective tool for boosting the contribution of solar
electricity in national energy mixes.
The basic idea behind a feed-in tariff is very simple.
Producers of solar electricity
✜ have the right to feed solar electricity into the public
grid
✜ receive a premium tariff per generated kWh reflecting the
benefits of solar electricity compared to electricity
generated from fossil fuels or nuclear power
✜ receive the premium tariff over a fixed period of time
All three aspects are simple, but it took significant effort
to establish them. For many years, the power utilities did
not allow the input of solar electricity into their grid and
this is still the case in many countries even today.
Therefore, that right cannot be taken for granted, and will
need to be argued for, when facing the likely continued
opposition of utilities.
Feed-in tariff: A temporary measure to develop the market
As the chapter on costs has already explained, feed-in
tariffs are a temporary measure to develop the
competitiveness that will result from economies of scale.
Competitiveness with conventional electricity sources will
be reached in different regions at different times. Feed-in
tariff systems therefore need to be adapted to national
conditions. However, it is important that tariffs are paid
over a period of roughly 20 years from the day the system is
connected to the grid, because the costs will be related to
the initial investment. In some years’ time, investment
costs will be low enough that they can be paid off without
using the support of premium feed-in tariffs.
Feed-in tariff: Who pays for it?
In the past, in order to encourage solar electricity, many
programmes were financed through government budgets. The
disadvantage of this method has been that if the state money
ran out, or was curtailed, the programme could be stopped.
Therefore, some feed-in tariff models take a completely
different approach. In Germany in 2007, the utilities pay a
premium tariff of between Ð0.38/kWh and Ð0.54/kWh (depending
on the size and type of system) for solar electricity from
newly-installed PV arrays. The utilities are authorised to
pass on this extra cost, spread equally, to all electricity
consumers through their regular electricity bill. This means
that the feed-in programme works independently from the
state economy, and the extra cost which each electricity
consumer has to pay, in order to increase the share of
renewable energy in the national electricity portfolio, is
very small. In Germany, the monthly extra costs per consumer
due to the premium tariff for solar electricity are
currently Ð0.20. The result is also that every electricity
consumer contributes to the restructuring of the national
electricity supply network, away from a fossil-based one,
and towards a sustainable and independent structure.
Feed-in tariff: The driver of cost reduction
The costs for solar electricity have been reduced
consistently since the technology was first introduced to
the market. Even so, in most cases solar electricity cannot
yet compete with grid electricity generated from fossil
fuels. Whilst it is expected that prices for electricity
generated from fossil fuels will keep rising, it is still
very important to maintain a strong momentum in bringing
down the costs for solar electricity.
For this reason, the feed-in tariff in Germany is reduced
each year by 5%, but only for newly-installed PV systems.
Once a PV system is connected to the grid, the tariff
remains constant over the complete period of 20 years.
Through this 5% annual reduction, there is therefore
constant pressure on the PV industry to bring the costs for
solar electricity down by 5% each year in order to keep the
market alive. At the same time, the customer can easily
calculate the return on investment in their PV system. This
planning security is an essential element of the success
story of the feed-in tariff.
Feed-in tariff: The driver of high-quality solar electricity
systems
Many solar electricity support programmes are based on an
investment subsidy in order to reduce the barrier of high
up-front capital costs. The drawback of such an approach, is
the missing incentive to invest in high-quality solar
electricity systems and to ensure their efficient operation
and maintenance. If the customer receives a fixed payment
per installed capacity unit, there is no incentive to go for
high-quality products, which usually means a higher price,
or to operate the system at the highest possible level. With
the feed-in tariff, the return on investment is heavily
dependent on the performance of the PV system. The customer
gets his return on investment with each kWh that is fed into
the grid. Therefore, maximising the power output of the PV
system over its whole lifetime is essential to the customer,
ensuring that the PV system will be well operated and
maintained.
The feed-in tariff is the only system that rewards the
generation of solar electricity appropriately and not simply
for installing a system.
Feed-in tariff: The driver of easier
financing
The up-front costs for solar electricity systems
are a clear barrier to wider market penetration. As already
explained, investment subsidies have been implemented in
many countries in order to overcome this barrier, but this
approach has significant disadvantages. A feed-in tariff
guaranteed by law over a sufficient period of time, serves
as an excellent security for the customer’s bank in order to
finance the system. The PV system itself, combined with the
guaranteed feed-in tariff over 20 years in Germany, is
usually sufficient to receive a loan from the bank. Of
course, it took some time until banks became familiar with
PV systems and the implications of the feed-in tariff, but
nowadays the financing of PV systems via a bank loan in
Germany is no longer an unusual and time-consuming activity,
but very common and straightforward.
The feed-in tariff
needs strong co-drivers
Simple and quick administration
There are countries in Europe with an economically
attractive feed-in tariff in place but without a viable PV
market. How can this happen? The feed-in tariff needs a
strong partner in order to release its full power; this is a
simple and quick approval process. Even if an excellent
feed-in tariff is in place, but the procedures for the
approval of PV installations and their connection to the
grid take many months, perhaps even more than a year, the
number of potential customers will remain limited. The
customer’s effort in dealing with administrative and
licensing issues therefore needs to be kept to a minimum. A
complex and time-consuming administration and licensing
process, is a clear indication that an electricity market
has not yet made substantial progress towards liberalisation.
Guaranteed grid access
Given its major social and environmental advantages, solar
electricity should be given priority and guaranteed access
to the grid. In many countries, there is an enormous
over-capacity in conventional electricity generation, with a
range of power sources – from fossil fuels through to
renewables – all jostling for the right to be fed into the
grid. Solar electricity generators must be guaranteed
automatic access, because of their high ecological and
technical value, including support for local grid stability.
Government and industry commitment
Governments that have taken steps to broaden their
energy supply base with an abundant clean technology, such
as photovoltaics, will also be able to count themselves
among the winners. Such diversification not only brings
benefits in terms of greater security of energy supply, but
also leads to wider environmental benefits though the
deployment of zero-emission technologies that, according to
the predictions presented here, will make a significant
impact on global CO2 emissions over the coming decades.
At present, the nations of the industrialised world vary
greatly in their commitment to solar electricity. While
countries such as Germany and Japan, as well as others in
Europe, have moved forward from discussion to implementing
the necessary support schemes, others have actually cut back
their solar electricity programmes.
Both industry and governments, however, will have to expand
their respective commitments to the solar sector if the
potential identified in this report is to be fully
exploited. On the industry side, continuing and accelerated
investment in the expansion of production facilities is
needed in order to meet the demands of the market and to
ensure that the cost, and ultimately the price, of the
technology is brought down through production up-scaling and
introduction of new manufacturing techniques and materials.
On the government side, commitment to the solar electricity
sector in many countries needs to be extended through such
actions as the introduction of premium tariffs, and the
adaptation of building regulations to provide a greater
incentive for the deployment of solar electricity systems in
the built environment.
Like every other industry, the solar electricity sector will
only move forward if sufficient investment is committed to
provide for its expansion. Over the past few years, the
solar industry has been very successful in drawing the
attention of the financial world to this young and dynamic
market. A ‘solar boom’ is still evident in the investment
community. Both industry and governments need to ensure that
the financial world maintains interest in renewables, in
order to make sure that the necessary financing is in place
to keep up the current rate of expansion.
In summary, there is no doubt that the global electricity
business will undergo a significant expansion over the next
few decades. All indicators point in that direction. Solar
power will certainly play an ever more significant role in
the supply mix. However, the extent to which solar
electricity will make its impact on that market will depend
very much on ensuring that the potential winners in this
business are made fully aware of the opportunities
available.
Those opportunities will only be realised if both industry
and governments continue to strengthen their commitment to
broadening the energy supply base and, through the
deployment of solar electricity technologies, offer greater
choice to customers. This will have the added benefit of
demystifying the energy process and giving individuals
greater control over the provision of their electricity
needs. This in itself constitutes a revolution in the energy
market.
International policy on PV solar power
Current policy in the
European Union
The most important European support
measure for PV is Directive 2001/77/EC on the promotion of
electricity produced from renewable energy sources, known as
the Renewable Electricity Directive. This set a target to
double the share of renewable energy from 6% to 12% of gross
energy consumption in Europe by 2010 and to increase the
proportion of renewable electricity to 22%.
In order to reach these goals, the Directive has set
indicative targets for each EU Member State, requiring them
to produce National Action Plans and set their own targets
for renewable electricity. To achieve this, they have been
allowed to establish support schemes for the promotion of
renewable energy sources. Furthermore, they have been
required to eliminate administrative barriers in relation to
authorisation procedures, to grant fair access to the grid
to renewable electricity and to ensure guarantees of origins
for renewable electricity.
Proposed legislation on
renewable energy
In January 2007, the European Commission issued a
Communication on a Renewable Energy Road Map as part of a
comprehensive Energy Package. This Communication
aims to further promote the development of renewable energy
sources in Europe by setting a target for a 20% share of
renewables in the EU‘s energy mix by 2020. The proposed
legislation will set legally-binding targets for renewable
energy in each Member State, which will then be required to
establish National Action Plans outlining their specific
objectives for each of the renewable energy sectors (fuel,
electricity and heating/cooling).
Full details of the proposed Directive have not yet been
agreed, in particular whether it will require Member States
to set sectoral targets for electricity, heating/cooling and
bio–fuels. This would be particularly important for the
promotion of renewable energy sources, since it would create
a secure and stable framework for investment. Nonetheless,
the new Directive is expected to improve the existing
provisions of the Renewable Electricity Directive, and not
weaken it.
A debate is also continuing in the European Union about the
possible harmonisation of support schemes for renewable
electricity. EPIA believes that such a harmonisation
would hinder rather than foster the development of renewable
sources of electricity.
Finally, PV could be positively affected by forthcoming
legislation (announced in the Communication on the Prospects
for the internal gas and electricity market COM (2006) 841)
on the liberalisation of the internal electricity market.
More effective measures to ‘unbundle’ ownership of the
distribution and transmission systems from the large power
utilities would open up new market opportunities for the PV
industry.
Current policy in the United
States
Solar Power Manufacturing
Over the past two years, PV manufacturing facilities
have diversified and expanded greatly, providing a silver
lining to the shortage in silicon. The best example of this
diversification
is the expansion of thin film solar cells. The US leads the
world in thin film production, with nearly half the global
output. Venture capital is also flooding into the solar
industry, especially to third-generation and
nanotechnologies.
Federal Tax Credit
Strong support exists within Congress for a long-term
extension of the Solar Tax Credit, which was first
introduced in 2005. The credit provides a tax incentive for
investors in PV systems, in much the same way as a similar
credit has encouraged a booming US wind power industry.
Legislation already introduced in the House and Senate would
extend the tax credit for eight years and remove the cap
(upper limit) for residential buildings. The prospects for
an early extension of the tax credit are strong.
The President’s Solar America Initiative
The Department of Energy has released details of the
„President‘s Solar America Initiative,“ proposing a large
funding increase for solar energy research. This initiative
aims to make solar competitive with existing sources of
electricity by 2015. The programme also aims to deploy 5 -
10 GWp of capacity, which is in line with the growth
projected by industry and promoted by state incentives, by
the same target date. By 2030 up to 70 – 100 GWp of capacity
could be installed, roughly the same as the current
electricity generation of New York and California combined.
40% of new electricity generation capacity would be from PV
by 2030.
As a result of the Initiative, and the popularity of solar
power within Congress, the federal budget for solar research
and development has grown significantly over the past two
years. The Initiative will place emphasis on funding
industry-led partnerships to accelerate market-ready
photovoltaics with a new focus on manufacturing and
production.
State Policies
 In the last couple of years, a handful of states have
passed laws promoting the large-scale adoption of solar
power. Led by California, New Jersey, Arizona, Pennsylvania
and now Maryland, the states have currently committed to
fund the installation of over 10 GWp of solar electricity in
the next 15 years. These programmes will deliver billions of
dollars in subsidies to residential and commercial solar
projects and represent significant long-term incentives to
the solar industry in the United States.
In San Fransisco (California), the local authority has
recently chosen to establish its own energy supply company,
Community Choice Energy. The city plans to create one of the
world’s largest urban solar facilities and install a total
of 360 MW of renewable energy, enough to power over half of
the urban area’s needs by 2017.
Current policy in Japan
The encouragement of solar PV in Japan
has come through a range of legal measures, national
strategies and frameworks implemented by the Ministry of
Economy, Trade and Industry (METI) and other government
ministries and agencies. Japan’s target for the cumulative
capacity of PV systems to be installed by 2010 is 4,820 MW.
METI has been actively driving forward measures for PV
deployment and R&D programmes to achieve this target.
The New Energy Law of 1997 defined the responsibility of
each sector - national and local government, energy
consumers, energy suppliers and energy system manufacturers
- to introduce and expand new and renewable energy sources.
Under the Renewables Portfolio Standard (RPS) law of 2002,
energy suppliers are obliged to purchase an increasing
percentage of renewable energy each year. In addition, the
Japanese government introduced a Basic Energy Plan in 2003
in order to support these policies.
In 2004, three projections for Japanese energy supply up to
the year 2030 were released, including a PV Roadmap to 2030
(PV2030). This outlined the technological development of PV
systems required to achieve larger scale dissemination in
the longer term. In 2005, the government endorsed the Kyoto
Protocol Target Achievement Plan, which again emphasised the
large-scale deployment of new and renewable energy as one of
the countermeasures to reduce greenhouse gas emissions up to
2010.
In 2006, METI announced the New National Energy Strategy, in
which the promotion of PV systems is established as one of
the major pillars. Two other recent laws on promoting
measures to cope with global warming, and the promotion of
green purchasing, have also been introduced to promote new
and renewable energy.
Current policy in China
The most important development for
renewable energy in China, including solar PV, was the
introduction at the beginning of 2006 of the Renewable
Energy Law. Among its main provisions are:
✜ Power companies must enter into grid-connection agreements
with renewable power generation enterprises that have
legally obtained an administrative licence, and purchase
their output.
✜ The price for electricity from renewable energy power
projects is determined by the State Council according to the
principle of being “beneficial to the development and
utilisation of renewable energy and being economic and
reasonable”, with adjustments on the basis of the future
development of the technology.
✜ The price paid for renewable power should reflect the
difference between its current cost and that of
“conventional” energy sources.
✜ The government will support the construction of
independent renewable power systems in areas not covered by
the power grid to provide a service for local industry and
households.
The National Development and Reform Commission (NDRC), which
has overall responsibility for energy policy in China, made
a further announcement about the price to be paid for PV
electricity under the Renewable Energy Law. This determined
that the price level laid down by the State Council would be
based on the principle of “reasonable costs plus reasonable
profits”, and that any additional costs incurred by PV
generators, including operations and maintenance and
grid-connection charges, would be settled by a tariff
surcharge levied on electricity consumers. Both
building-integrated PV systems and large-scale desert PV
power plants will be subject to this “feed-in tariff”
policy.
For off-grid central PV power plants in villages, the
initial investment will be paid by the government (household
systems are not included) and the portion of the cost of
operation and maintenance that exceeds the revenue from
electricity fees (including the cost of renewing the storage
batteries) will be apportioned to the nationwide electricity
network by increasing the electricity tariff.
However, another important point is made in the legislation.
End-users (whether grid-connected or off-grid) are expected
to pay for their electricity according to the “same network,
same price” principle; that is to say, the electricity
tariff paid by PV power users should be the same as the
electricity tariff paid by grid-connected power users in the
same area.
Practical problems
Grid-connected systems
Many PV power systems capable of being connected to the
grid have been built in China, with capacities ranging from
several kWp to 1 MWp, but in no case has a feed-in tariff,
calculated according to “reasonable costs plus reasonable
profits”, been implemented and no system has as yet been
permitted by the power companies to connect to the grid as a
commercial venture. This is very different from the
situation with wind energy. Wind farms have been built
profitably by developers for many years (without needing
capital investment from the state), and power companies have
accepted these and accordingly executed the “feed-in tariff”
policy.
To encourage electricity companies to accept PV output
unequivocally, and purchase the power for a fair feed-in
tariff price, the following changes are needed:
✜ Reasonable feed-in tariff prices should be established
(for off-grid plants, the reasonable cost of operation and
maintenance needs to be estimated).
✜ Standards for construction and testing, as well as market
access rules, need to be established.
✜ Electricity companies should accept PV power and purchase
it at a reasonable feed-in tariff price.
✜ The additional cost of generation needs to be spread
across the national electric network.
Off-grid systems
Problems have also occurred over payments under the
Renewable Energy Law for more than 720 PV plants installed
under the Township Electrification Program. A mechanism
needs to be urgently developed to incorporate the renewable
electricity tariff into the nationwide electricity network,
so the accumulated funds can be used for the later-stage
operation and maintenance of these rural PV plants.
Otherwise, their investment value of several thousand
million Yuan will be wasted. Unless action is taken, a
similar crisis is likely to face the Power Transmission to
Village Program, which is about to be implemented.
What this experience shows is that it is not enough to
introduce a Renewable Energy Law without considering the
implementation of its details, especially the correct level
of feed-in tariff and cost sharing.
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