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What's the Best Way to Promote Renewable Electricity?
15 Apr, 2009 06:33 am
A new study shows there is no single best way to promote renewable electricity; a combination of policies is needed.
This overwhelming array of policy mechanisms, however, leaves one question unanswered: which one’s the best?
It happens to be a trick question, for one new study conducted by this author has concluded that at least four policies will be needed at once. These include eliminating subsidies for conventional and mature electricity technologies, pricing electricity accurately, passing a nationwide feed-in tariff, and implementing a national systems benefit fund to raise public awareness, protect lower income households, and administer demand side management programs.
To reach such a conclusion, the study drew from almost 200 interviews of energy experts along with an extensive review of the policy literature. Participants identified 27 different policy mechanisms ranging from banning new coal plants to creating an energy police to fine people that wasted energy.
The single most consistent response from participants—more than 70 percent—was to eliminate government subsidies for conventional and mature energy systems. Elimination of subsidies would improve competition in the electricity industry, eliminating the unfair advantage given to nuclear and fossil fuel technologies. The United States is the most egregious example. From the moment the federal government formally began funding energy R&D in 1882 (by supporting coal research by the U.S. Geologic Survey), it has heavily focused on promoting oil and gas development at the expense of alternative and unconventional technologies. Since then, the pattern of subsidization has favored mature, conventional energy sources by a ratio of more than eight to one. End-use energy efficiency has received only $1 worth of subsidies for every $35 spent on forms of conventional supply. Not much has changed recently, with fossil energy receiving 86 percent of government subsidies, nuclear energy 8 percent, and renewables and energy efficiency only 6 percent.
Approximately 60 percent of respondents indicated that electricity prices should be changed. Respondents indicated that policymakers could implement four changes concerning how electricity is priced by abolishing price caps, eliminating declining block rate pricing, reflecting time of use in electricity rates and bills, and internalizing the cost of externalities. Abolishing price caps would enable electricity rates to reflect current market prices and volatility. Eliminating declining block rate pricing would create an incentive for industries to promote energy efficiency and consume less electricity. Reflecting time of use through ‘‘real-time,’’ ‘‘interval metering,’’ ‘‘time-of-use,’’ or ‘‘seasonal’’ rates would show customers how electricity production and consumption varies according to the time of day, week, and month. Internalizing external costs would drastically raise electricity prices but would also ensure that electricity is accurately priced. A preponderance of evidence suggests that pricing electricity more accurately will greatly improve the efficiency of the electricity industry, provide customers with proper price signals, and reduce wasteful energy use, often above 10 percent.
About half of respondents were strong advocates of making renewable power mandatory by implementing national feed-in tariffs (FIT) and guaranteeing renewable power suppliers access to the grid. FITs force utilities to purchase renewable power by setting a fixed price above market rates (say, 20 ¢/kWh) that they have to pay all suppliers. FITs obligate electric utilities to purchase the electricity from renewable energy resources in their service area at a tariff determined by the public authorities and guaranteed for a specified period of time (usually about 15 to 20 years). Germany stands as the paradigmatic example of effective FIT regulation. The country implemented its Electricity Feed-In Law in 1991 in order to create a market for renewable electricity by offering providers a fixed but attractive price for the recovery of generation costs. Despite the extra initial cost, a national FIT policy would quickly depress electricity prices. The German Federal Ministry of Environment estimates that while their FIT cost consumers $3.2 billion in higher electricity rates in 2007, it saved them $3.5 billion in depressed fossil fuel costs.
Finally, one-quarter of participants recommended that a national systems benefit charge (SBC) should be created to distribute public information, protect poor households, and promote energy efficiency. Using SBC funds to educate the public would go a long way toward minimizing the aesthetic and environmental objections some people have toward renewable power technologies. Using SBC funds to protect poorer households would minimize environmental racism and classism. Using SBC funds to promote energy efficiency could produce billions in economic savings and displace the need to invest in expensive transmission and distribution systems.
Pursuing this collection of policy mechanisms will not work in isolation. Making renewable power mandatory through a national FIT, for example, but not removing conventional subsidies and continuing to price electricity inaccurately decreases the economic viability of renewable power projects and interferes with the ability of users to sell power back to the grid (or conserve it). Making renewable power mandatory without promoting public information and education will ensure that consumers remain uninformed about energy-efficient technologies and practices. Promoting a national FIT without funding energy efficiency and DSM would force utilities to procure significantly more electricity supply. Relying solely on changes in pricing also becomes risky when prices unexpectedly change. Pricing electricity accurately but not coupling it with information programs also does nothing to eliminate unrealistic payback rates among property owners and investors.
The lesson appears to be simple: because the barriers facing renewable energy and energy efficiency are diffuse, a multitude of policies must be comprehensively implemented to eliminate them. An effective and synergistic approach would need to treat each of these policy mechanisms as complementary, rather than as competitors that must constantly win approval from policymakers. No single policy mechanism is a panacea, and until comprehensive policy changes are implemented, it seems likely that renewable energy and energy efficiency will never realize their full potential.
For more, see Benjamin K. Sovacool, “The Importance of Comprehensiveness in Renewable Electricity and Energy Efficiency Policy,” Energy Policy 37(4) (April, 2009), pp. 1529–1541, available at http://www.spp.nus.edu.sg/Faculty_Benjamin_K_Sovacool.aspx.