21 Dec 09 Eddie's Blog Global

Support Mechanisms

The world has tried many experiments with different support mechanisms. We see the renewable obligation system in Britain, we see tax based schemes in the U.S., we see the fixed price feed in systems of Germany and most other countries. All are designed to reduce the risk for developers and to make sure the plants can be funded.

All of the support mechanisms have a limited duration. Eventually renewable generation finishes up reducing the price of electricity. Denmark for instance now makes the cheapest electricity in Europe, (this does not mean that Danes pay the cheapest. The Government heavily tax electricity).

So which is the best support scheme? There isn’t any real question about this in the mind of most policy makers now. The answer is clear, fixed price feed in systems work best and actually are the cheapest way of introducing a new technology into the generation setup.

Why is this?

The answer is quite simple. They are the most effective at reducing risk for the developer and the funder. The developer knows in advance what price he is going to be paid for his electricity, no financial wizardly or complicated methodologies are needed. The plant is built, the developer gets a price, he keeps on getting that price for a few years then he does not get it any more but the plant is paid for at this stage. Everybody has been rewarded for their endeavours and by and large everybody is happy at the outcome except of course for some utilities who don’t like the further encroachment of the private sector into their monopolistic domain.

There is another variation on theme which is found mainly in the U.S. and that is where the taxation system is used to support renewable energy. Politicians in the U.S., for historical reasons, like to use the taxation system to get many things done. In this author’s opinion it is particularly inappropriate to use the taxation system to support renewables.

For instance every year one has to go back to Congress to get the taxation relief renewed. This introduces a phenomenon of booms and slumps, huge build one year followed by no build the next year. This has directly given rise to the fact that for the first time in industrial history America does not lead, America follows. It has lost out on great tranches of employment and it continues to do so even as we speak.

The world centre of innovation of wind and solar energy is to be found in Northern Germany and Denmark. This is doubly to be regretted given that the U.S. has a lot more space and a lot more wind that Europe. If America had introduced a fixed price feed in system it should at this stage have by far the biggest renewable generation industry in the world, would in fact be exporting technology and would be independent of reliance on the Middle East for the bulk of its energy resources.

As an aside the Kyoto debate would in fact be over if the U.S. had a fixed price feed in system. The U.S. would now have a vested interest in the success of renewables and would be the engine of the world. Instead of that we have the awful vista of a President having to compromise on fundamentals simply because of an inappropriate support scheme.

Why should the American tax payer subsidise the American electricity consumer? What conceivable reason can there be for this state of affairs?

Electricity is unbelievably cheap in America. There would be no outcry if prices were increased to build the necessary grids.

More about this tomorrow.