REPs have been successful in stimulating renewable energy growth in Germany, Spain, and Denmark, but not without some growing pains. Each country has specifically tailored the policy to best adapt to their markets and systems. As the U.S. makes strides to implement REPs in various states, each state in the U.S. must examine this policy to ensure best practices are implemented. A number of parameters can be adjusted for the REP to increase its success. REPs need to be fine-tuned to ensure the most effective increase of new renewable energy, while maintaining the lowest cost increase possible to customers. Topics listed below outline the arenas from which best practice criterion must be established for U.S. implementation.
Issues to consider
Costs
In order to encourage investment, the tariff rates tend to be generous, which isn’t great for lowest cost. While it may be good for the investor, the utility does not benefit, and customers rates increase. Should a price floor or ceiling be established for tariffs?
The lowest cost/highest return technology may receive more investments as projects built within those terms will be able to recover costs more quickly. Rates should be adjusted accordingly to account for this.
How did Germany and Spain determine tariff rates?
• The German model determined tariff rates by determining the average project cost plus “reasonable profit”, as well as a fixed reduction of the tariffs for generators over time (designed to place more pressure on industry to increase efficiency).
• The Spanish model offered investors a choice. Dependant on market conditions, they could essentially choose between fixed or variable tariff. Known as the “premium tariff system”, the variable tariff relies on the market price of electricity, allowing the generator to be exposed to increased or decreased profit.
Occasionally when setting the tariff, it can be set to high compared to the market cost. System costs could be much cheaper than they should be, relative to the tariff. Currently in Europe, the market cost is lower than the tariff.
Technology
The REP offers imbalanced support for different renewable resources – high rates of solar, low for wind. This is offset by variable rates, based on levelized cost of electricity, however still doesn’t encourage construction for high capital cost generation. The tariff is not extremely baseload friendly - which is what we really need to increase our renewables to fossil fuel ratio.
The policy assumes renewables will reach cost parity with fossil fuel sources, but with high implementation of renewables, comes the inevitable increased usage of component materials, i.e. silicon, steel, etc., potentially creating shortages or module price increase.
Impact on investors
Some investors will jump on the opportunity to benefit from a quick return on their fixed costs. However, if these rates are stepped down without transparency and planning, as happened in Spain, will investors still be as willing to enter into these agreements?
Impact on utilities
There are concerns about imposed rate structuring on locally owned and self-regulated utilities (public power utilities – represent 10% of all electricity in US).
Many utilities already have policies in place to advance renewables. The REP might undermine the development of renewables through alternative policy mechanisms at potentially more cost efficient and competitive prices.
The law would require utilities to take on renewable energy at any point on the transmission grid, potentially causing unreliability on the grid, passed onto customers.
Barriers to public utilities investing in generation must be removed to permit utilities to profit from feed-in tariffs alongside other investors.
Impact on Transmission
The bill addresses transmission needs, in particular for distributed generation, but interconnection is a heavily regulated business by FERC and interconnection arrangements of the bill could be in conflict with FERCs jurisdictions.
An in-depth analysis of potential needs for new transmission and associated costs should be conducted.
Caps?
Caps will control amount of installation every year, and must be regulated and properly administered (this cap program was not properly regulated in Spain, where bribery and corruption allowed more than cap to be built).
Without a cap, utilities may not be able to connect customers quickly enough, although they would be required to because the REP guarantees that utilities must take on the generating plant at any point on the grid – this could lead to issues with reliability and unforeseen costs of transmission upgrades.
No caps will also prevent a widespread rate increase for customers, whereas an established cap will allow prices to rise gradually to the customer.
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There are many more parameters to consider when implementing a REP, this list is by no means exhaustive but does include several important details to consider when making an REP fit to each state.
