04 Aug 09 Eddie's Blog Global

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