A Growing Appetite for Feed-in Tariffs

by Nathan Otto
Contributing Writer            

About halfway between Los Angeles and San Diego, Southern California’s largest power station sits idle. The San Onofre Nuclear Generating Station has been offline since January 2012, when it emitted a small radiation leak and unusual wear and tear was subsequently noticed in some of its internal componentry.

Regulators have shut down the plant while an investigation takes place to determine the cause and whether the plant will be safe enough to eventually re-open. In the meantime, Southern California must prepare for the peak energy demand that accompanies the approaching summer.

Since the disaster in Fukushima, worldwide appetite for nuclear power has diminished. The urgency to shift away from fossil fuel sources has continued to increase as the threat posed by climate change becomes more widely acknowledged.

Adding to the concern are the growing urban bottlenecks in energy supply, regardless of the type of fuel used. Many urban areas derive almost all of their power from just a few sources. If a tsunami, cyberattack, or maintenance issue took a major power plant offline, as had happened in Japan in 2011 and as is now occurring in California, it could eliminate a huge slice of the power-generating pie.

Thus, there has been a growing interest from governments around the world for Feed-in Tariffs (FITs). FITs are a form of price agreement; small-scale renewable energy producers (often ordinary homeowners or farmers who set up a few solar panels) are allowed to enter into a contract with their local utility. The utility pays the citizens for producing their own power and the citizens are even able to sell the excess power that they do not use back to the utility. The utility then distributes the excess power to other customers as needed.

The FIT guarantees a pre-determined price to both parties for a length of time of the individual’s choosing, which is often set for 10, 15, or 20 years. The resulting locked price reduces uncertainty for both parties, allowing homeowners to be relatively sure of the return they will receive on their investment. It also diversifies the energy supply and of course, the government’s use of FITs focuses on renewables, which also benefit the environment.

Untapped potential

There are no shortages of schemes to promote renewable energy. However, efforts such as subsidizing individual corporations can backfire. Much controversy ensued when Solyndra, a solar-power company in the U.S., filed for bankruptcy shortly after being selected to receive roughly $500 million in taxpayer-guaranteed loans.

Broad-based FITs involve the government negotiating on behalf of individual citizens with local utilities, which are often allowed to operate as near-monopolies. After the price of the FIT is negotiated, the government steps away and largely lets market forces take effect: citizens have incentives to conserve in order to pocket more from their own power-generation; utilities receive a more diversified supply of power in case of an incident; and the environment is made better off for the entire population. Surely a few enthusiasts would also cheer the spreading of a little bit of handiwork, scientific education, and pride of owning one’s own miniature power plant.

No silver bullet

The use of FITs is no panacea.  Skeptics often point to Spain’s poorly implemented program, which it has recently suspended, as an example of FITs gone awry. Many other countries, however, have done it right. Germany, for example, spearheaded the idea and today produces much more solar energy than California, despite not being nearly as sunny.

Governments in Australia, Canada, South Korea, Malaysia, the U.S. and elsewhere have all begun to follow suit, providing another tool to harness the power of citizens’ self-interests with the necessity of providing a reliable and sustainable energy supply.

Back in California, the San Onofre plant looks out over the Pacific Ocean. Wreckage from the tsunami in Fukushima is soon expected to begin washing ashore along much of the California coast. Here’s to hoping governments around the world can learn some lessons from the reminders of such a disaster.

Image Credit: KPBS

Nathan Otto received his undergraduate degree at the University of Minnesota. A military veteran, he also served in the U.S. Army. He is currently a first year M.P.P. student at the UCLA Luskin School of Public Affairs.