Why Renewable Energy Feed In Tariffs (REFITS) pay for themselves from Year 1.

We pointed out in the last few blogs that Feed In Tariffs were the surest way to get a new technology like wind energy deployed into a conservative sector like electricity.  In simple terms the risk for the developer is greatly reduced.

It is readily agreed by everyone that REFIT systems work. So why then are they not used in every country having been so successful in Denmark, Germany and Spain? There are cultural reasons that go some way to explaining why they are not adopted everywhere. But a common thread is that utilities say they are expensive.

The argument runs something like this. The average cost of power here is 7 cents the refit is 8.5 cents. That makes electricity more expensive, it’s a penalty on big business and the poor people are starving. Let us take a country where the average price of power is 7 cents.

So why is 8.5 cents paid for wind not more expensive than an average price of 7 cents?

Firstly there is no charge for carbon in the 7 cents. The utility is allowed to pollute the atmosphere and destroy the climate for free.

The emissions trading scheme that was introduced in Europe almost totally failed to address the carbon issue.

If the utility was charged at €30/tonne there would be a fine of 1.8 cents on every kWhr of electricity. If it was €20 a tonne for CO2 then the fine would be 1.2 cents. If €40 per tonne it would be 2.4 cents.

Secondly, when wind is introduced onto a predominantly fossil fired utility it changes the risk that all the users of electricity have to pay for.

In a study carried out at Scotland, it was shown that when you went from 21% to 32% wind installed on the system the price of electricity was reduced by 6%.

At an average price of 7 cents this price reduction would amount to 0.42 cents.

The third effect of wind on the system is called the Merit Order Effect. When the wind blows it does not replace the average cost of power (7 cents).

It replaces the most expensive unit on the system because the fuel is free. So the value of each unit of wind is not 7 cents, it is some number above this. In Ireland when the average price was 8 cents the average value of wind was 8.5 cents.

A fourth major effect of wind on the system is that it impacts on the spot price and the forward price of fossil fuels. It does this by reducing the demand for fossil fuels.

In a study carried out in Mexico it was shown that if there was 10% wind on the Mexican system the price of fossils would fall by 9%. We have seen this effect work dramatically on the German system in 2007. Not only was the spot price of gas affected but as the windy spell persisted for six weeks, forward gas contract prices out to a year ahead were heavily impacted as well.

Now every electricity system has a different combination of plant generating the electricity. The merit order varies from system to system and the fuel mix varies. It is therefore impossible to generalise what the value of wind is. I can however say that definitely the value to the Irish system of the unit of wind generated electricity was 14.2 cent in 2007. The price paid under the REFIT system for a unit of wind was 6.5 cents. Similar values were observed in Germany and in Scotland. The REFIT system in Germany pays 9.2 cents per kWhr.

We have seen no attempt made by the conventional utility commentators to quantify the value of wind. The media pays more attention to the tired rantings from a few pro-nuclear economists and the highly dubious global warming denying apologists for the oil industry.

I challenge anybody in the world to disprove this thesis.

The thesis again being that REFIT systems pay for themselves from Year 1.

In a support scheme like they have in the United States the wind developer is forced to take fossil fuel price risk. This is so because the price a developer gets for wind generated electricity is linked to the price of fossils. It is the same as saying “I have a preventive cure for colitis (mitigates the risk to ones general health of colitis) but I must give you colitis first”.

REFIT systems are designed to allow developers to pay for the capital cost of a wind fired power station. The support price lasts only for ten years. Thereafter the customer and the utility take the full benefit of electricity whose primary fuel is free

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5 Responses to “Why Renewable Energy Feed In Tariffs (REFITS) pay for themselves from Year 1.”

  1. Michael Williamson 17. Aug, 2009 at 1:36 pm #

    Very though provoking. We have undertaken a study of the electricity market in Victoria, Australia which confirms the merit order effect. Simulating wind energy inputs into the national electricity market, it is clear that highest cost gas peakers are the first to be displaced.

    As a follow up, how about thoughts on the cost effectiveness of REFIT compared to a mandated renewable energy target? Some will cliam the RET offers the lowest cost outcome. I have my own theory on this one.

  2. Claude 18. Sep, 2009 at 3:36 pm #

    Hi Eddie,

    The concept of paying for carbon footprint as a “fine” continues to put us against them in the power business. The fact that the world is finally waking up to attach a cost to polluting activity has been a long fought war that we have won a few battles in. The ExternE program in Europe recognizes the full life cycle costing of generating electricity and attaches a cost (ther payment for polluting) to those embedded generators who choose not to change. The payment of the cost adder for polluting on levels the playing feild for the new entrant to the marketplace (the renewables player). The Feed In Tariff programs are designed to recognize the cost of the new entrants cost of competing against the embedded generator who generally are regulated to make a profit against the new entrant who is not regulated (or guaranteed a rate of return by the regulator). Finally the FIT program recognize the additional costs for early investing in renewable technologies whose benefits cannot be fully realized in the regulated power market. Through a FIT program these technologies become mainstream and will eventually reduce the cost to deploy.

  3. R O'Sullivan 22. Sep, 2009 at 11:12 am #

    That is a very interesting article – thank you. What are your thoughts on the level of REFIT in Ireland? As you mentioned in your article, the level of REFIT in Germany is significantly higher, even though (I presume) the capital cost of the wind farm is not higher in Germany.

    Do you have any view on what is happening in the wind market in Ireland? In short, whether as a result of the banking collapse or otherwise, only existing, proven players are able to get funding for wind development in Ireland, thereby effectively excluding new entrants to the market. In addition, because of the backlog of grid connection applications, a new applicant now would probably be waiting 5 years to even find out if it could get a grid connection – only larger players can afford that kind of strategic investment. Is the effective consolidation in the market a welcome development?

  4. Dave 08. Mar, 2011 at 11:49 am #

    How about this for an Idea, put some money in place to allow farmers to process their own bio fuels, every tractor, combine harvester, electrical generator will eventually be free of the greedy claws of petrochemical giants.

    If you can gain 300,000 litres of biofuel from an 100 acres of high cellulose derived biomass distillation you can supply a huge region with their fuel needs at an incredibly low cost.

    In a nutshell

    A localized biomass distillation plant can be bought placed onsite and used as a renewable energy source to give farmers the competitive edge without the concerns of heavy metals and pollution from oil and gas.

    Give farmers the opportunity to manage their own fuel autonomy in a self sustaining manner through a co-operative configuration and the people of this country will certainly see that its a viable proposition.

    Lets move things back to the small scale and help the farmers that don’t have hedge fund cronies to leverage money they don’t actually have to manipulate fuel prices and make our hard working long suffering farmers self sufficient in some manner.

    Do you want imported oil from Libya or locally grown biofuels from Letrim that have significantly less impact.

    I think we all know that our government ministers would rather tow the line and get a sweet directorship in an energy company after they lose a seat in the Dail than to work for the benefit of the people that elected them.

    Farmers – if you want the fuel then you just need to toss in a few seeds and let nature take its course, buy a small scale bio processing kit and run your vehicles from renewable sources. Why should you be considered a criminal for making the land self sufficient, and can you really trust the politicians who have made this the reality.

Trackbacks/Pingbacks

  1. Energising South East Asia : Part 3 – Carbon Strategy | mcgenergy - 14. Apr, 2011

    […] The Merit Order Effect was also highlighted. It shows that renewables can actually reduce the cost of electricity compared to conventional fossil fuel plant. It More information on the merit order effect in Germany can be found here and is also mentioned in a blog post by Eddie O’Connor of Mainstream Renewable Power here. […]

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