Saturday, December 24, 2011

Comparing the feed-in tariff incentives for renewable electricity in Ontario and Germany
Abstract: The development of feed-in tariff (FIT) programs to support green electricity in Ontario (the Green Energy and Green Economy Act of 2009) and Germany (the Erneuerbare Energien-Gesetz of 2000) is compared. The two policies are highly comparable, offering similar rates for most renewable electricity technologies. Major differences between the policies include the level of differentiation found in the German policy, as well as the use of a price degression strategy for FIT rates in Germany compared to an escalation strategy in Ontario. The German renewable electricity portfolio is relatively balanced, compared to Ontario where wind power dominates the portfolio. At the federal level, Canada does not yet have a policy similar to the European Directive on Renewable Energy, and this lack may impact decisions taken by manufacturers of renewable technologies who consider establishing operations in the province. Ontario's Green Energy and Green Economy Act could be benefit from lessons in the German system, especially with regard to degression of feed-in tariff rates over time, which could significantly reduce payments to producers over the course of a contract, and in turn encourage greater competitiveness among renewable power providers in the future.

► We compare two jurisdictions that utilize feed-in tariffs to support renewable electricity.
► Complementary policy such as mandated renewable energy use in conjunction with tariffs increases certainty for investors.
► Targeted incentives in the form of adders can deliver more diversity in renewable generation capacity.
► Degression of tariff rates delivers renewable generation capacity at lower cost.
... To explore the ramifications of escalation vs. degression, we estimated Ontario and Germany's contract prices for comparable 10 MW biomass, wind, and solar power facilities. In the case of Ontario, the assigned contract price for biomass and wind power is escalated according to an equation published by the OPA (2011d, p. 69)
In the Ontario case, the total contract price (TCPBD) for a 10 MW biomass-to-electricity plant would be 14.3 ¢ CDN/kWh in the base year, assuming that the project is eligible for additional funds through community or aboriginal participation. The total contract price for a 10 MW wind-to-electricity plant would be 13.5 ¢ CDN/kWh, assuming that the contract is awarded at the base rate. The total contract price for a ground-mounted 10 MW solar-to-electricity facility would be 44.3 ¢ CDN/kWh, again assuming that the contract is awarded at the base rate. We assumed an inflation rate of 1.6% based on historic changes to the Consumer Price Index (CPI) (Statistics Canada, 2011). The percentage being escalated is 20% for wind and biomass facilities.

In the case of Germany, the calculation is much simpler. We estimate that the assigned contract price in 2011 for a 10 MW biomass-to-energy plant would be 14.59 ¢ CDN/kWh, given a base rate of 7.71 € ¢/kWh and a 2.97 € ¢/kWh adder (technology bonus for combined heat and power). In Ontario and Germany, adders were selected to create hypothetical facilities that are eligible for comparable initial incentives. The assigned contract price for a 10 MW on-shore wind-to-electricity facility would be about 13.4 ¢ CDN/kWh, assuming that the project was eligible for all available adders. Again, this puts the Ontario and Germany cases at approximately the same initial rate. For both biomass and wind facilities, the initial rate is degressed at a rate of 1% per year. In Germany, the assigned contract price for a ground-mounted solar-to-electricity facility would be about 28.8 ¢ CDN/kWh, a rate that is already significantly lower than the Ontario case. This rate is degressed at an average of 9%, ranging between 6% and 13%.
The estimated FIT rates start at a very similar point for each project with the exception of solar. In every case the contracted rates diverge over the life of the projects. To understand the impact of this divergence, we calculated the net present value of the total contract in each case, using a discount rate of 8% and theoretical capacity factors of 60% for biomass, 30% for wind, and 20% for solar. It is clear that even with very similar starting contract rates, the Ontario system guarantees a larger payout over the lifetime of the project. In the case of biomass and wind power, the actual difference between the value of contracts depends primarily on interest rates, but the German model consistently costs about 10% less than the Ontario model. This difference would be true for a range of specific technologies, including biomass and wind as well as biogas and landfill gas, that have degression rates at about 1% per year in the German system. The difference between project costs for solar photovoltaic are much more pronounced, but harder to compare due to the already wide difference between Ontario and German FIT contract rates. Our analysis suggests that the Ontario model would pay out between 2.4 and 3.7 times more than the equivalent German contract for solar power.

In all, these findings suggests that over the entire Ontario renewable electricity program, the full price of which is not yet known but which will be in the tens of billions of dollars, the increased cost created by the indexed price model is highly significant. The authors estimate that the nearly 2000 contracts already announced and expected to operate between 2012 and 2032 have a net present value in excess of CDN$ 26 billion, depending upon the final application of rates and adders. If the escalation factor applied to wind, biomass, and hydroelectric projects were replaced with simple rate degression at 1%, and if the rates for solar power were degressed at 9%, the NPV of these contracts could be reduced by about 30% to approximately CDN$ 18 billion. Since these 2000 contracts represent only a part of the fully envisioned FIT program, the final savings could be even more significant. It has been noted by others that unless the cost of renewables, particularly solar PV, drop dramatically, the GEGEA program might not be sustainable (Yatchew and Baziliauskas, 2011). The data shown in Fig. 3 suggest that the Ontario model bears a particularly high price compared to the German model.

by Warren E. Mabee 1, Justine Mannion 2 and Tom Carpenter 3
1. School of Policy Studies/Department of Geography, Queen's University, 423 Sutherland Hall, 138 Union Street, Kingston, ON, Canada K7L 3N6
2. Faculty of Environmental Studies, York University, Canada
3. Queen's Institute for Energy and Environmental Policy, Queen's University, Canada

Energy Policy via Elsevier Science Direct
Volume 40; January, 2012; Pages 480-489
Special Issue: Strategic Choices for Renewable Energy Investment
Keywords: Feed-in tariffs; Renewable electricity; Price degression and escalation

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