Samantha DeMartino, intern at UN DESA Division for Sustainable Development in Washington, D.C.
Feed-in tariffs (FIT) have been a successful tool in the promotion of renewable energy sources (RES) for many years. According to Bechberger and Reiche (2004), 18 out of the 25 countries in the European Union (EU) that use financial incentives to subsidise and support the development and installation of RES employ a FIT system of some form. A FIT most importantly guarantees the owner of a RES a particular price over a set period of time for the electric energy produced, thereby helping the infant technology to be economically competitive with conventional fossil fuels.
As FITs have been successfully tested in a large number of developed countries, especially Germany, the benefits are known and widely documented. According to Ragwitz and Huber (2004), these include, but are not limited to: an increase in the market penetration of RES, protection of the climate and environment through sustainable development, minimization of the risk premium required by investors due to a high level of price security in the system, and the creation of jobs with a low cost to society. Therefore, the question of feasibility in applying such tariffs to the developing world merits attention.
The rationale for the application of FITs to the energy markets in developing countries rests on several assumptions. First and foremost access to energy and the amount of energy consumed per capita are strongly linked to the human development index (HDI). This is partly due to the positive effects that energy access has on a variety of welfare indicators such as education, income and health. Furthermore, the FITs would strongly promote the accelerated deployment of clean energy sources, making the global climate a major beneficiary of such a system. It could, therefore, help to strike the delicate balance between promoting economic development in the developing world, while mitigating the detrimental effects that growth, and the increased energy consumption that invariably results from it, has on the environment.
With the help of my supervisor, David LeBlanc of the UN DESA Division for Sustainable Development, I have calculated a simple model of a FIT to derive the total cost and critically examine the various steps needed to arrive at a global FIT for the developing world, via country-by-country estimates, provided there is a global fund made available by the developed countries.
The purpose of this model is to assess the order of magnitude of a subsidy which assists developing countries operating under 10 kWh per day of electrical access to have access to 10kWh per day by 2025 through investment in renewable energy technology. The tariff will be created via a digression system whereby the nominal fee at which electricity consumers buy renewable energy technology from suppliers will decrease incrementally over 16 years (until 2025) according to the “experience curves” of the renewable energy technology. Each subsidy is for renewable energy projects and will be supplied for the twenty-year life span of the technology, thereby extending final payments until 2045. Renewal of obsolete facilities is not included in this model, and should be considered as additional needed investments.
Key issues with the model are the large price tag and implementation process. Which developed countries should provide funds for FITs in developing countries, and what percentages should they contribute? Furthermore, which countries should the global fund subsidise? We have suggested that the FITs be calibrated for those developing countries consuming less than 10 kWh of electricity per day per capita, but should the fund subsidize the entire population? The target populations for this model are countries with consumption under 10 kWh of energy per day, the very populations that may not even be able to finance the baseline for conventional technology. Hence, additional funding would be necessary. Nevertheless, we hope this model instigates a dialogue among developed countries seeking ways to assist developing countries to achieve emission reductions while still developing at high rates. ■
For the full report, including methodology and results, please contact Samantha DeMartino at sademartino@gmail.com.
References
Bechberger and Reiche, The spread of renewable energy feed-in tariffs (REFITs) in the EU-25, 2004.
Ragwitz and Huber, Feed-in Systems in Germany and Spain and a Comparison, 2005. Fraunhofer Institut für Systemtechnik und Innovationsforschung.
Image: UNEP/McCallion
Feed-in tariffs (FIT) have been a successful tool in the promotion of renewable energy sources (RES) for many years. According to Bechberger and Reiche (2004), 18 out of the 25 countries in the European Union (EU) that use financial incentives to subsidise and support the development and installation of RES employ a FIT system of some form. A FIT most importantly guarantees the owner of a RES a particular price over a set period of time for the electric energy produced, thereby helping the infant technology to be economically competitive with conventional fossil fuels.
As FITs have been successfully tested in a large number of developed countries, especially Germany, the benefits are known and widely documented. According to Ragwitz and Huber (2004), these include, but are not limited to: an increase in the market penetration of RES, protection of the climate and environment through sustainable development, minimization of the risk premium required by investors due to a high level of price security in the system, and the creation of jobs with a low cost to society. Therefore, the question of feasibility in applying such tariffs to the developing world merits attention.
What is a ‘Feed-in Tariff’?
A Feed-in Tariff (FIT) is an incentive structure to encourage the adoption of renewable energy through government legislation. The regional or national electricity utilities are obligated to buy renewable electricity (electricity generated from renewable sources, such as solar photovoltaics, wind power, biomass, hydropower and geothermal power) at above-market rates set by the government. (Source: Wikipedia)
The rationale for the application of FITs to the energy markets in developing countries rests on several assumptions. First and foremost access to energy and the amount of energy consumed per capita are strongly linked to the human development index (HDI). This is partly due to the positive effects that energy access has on a variety of welfare indicators such as education, income and health. Furthermore, the FITs would strongly promote the accelerated deployment of clean energy sources, making the global climate a major beneficiary of such a system. It could, therefore, help to strike the delicate balance between promoting economic development in the developing world, while mitigating the detrimental effects that growth, and the increased energy consumption that invariably results from it, has on the environment.
With the help of my supervisor, David LeBlanc of the UN DESA Division for Sustainable Development, I have calculated a simple model of a FIT to derive the total cost and critically examine the various steps needed to arrive at a global FIT for the developing world, via country-by-country estimates, provided there is a global fund made available by the developed countries.
The purpose of this model is to assess the order of magnitude of a subsidy which assists developing countries operating under 10 kWh per day of electrical access to have access to 10kWh per day by 2025 through investment in renewable energy technology. The tariff will be created via a digression system whereby the nominal fee at which electricity consumers buy renewable energy technology from suppliers will decrease incrementally over 16 years (until 2025) according to the “experience curves” of the renewable energy technology. Each subsidy is for renewable energy projects and will be supplied for the twenty-year life span of the technology, thereby extending final payments until 2045. Renewal of obsolete facilities is not included in this model, and should be considered as additional needed investments.
Key issues with the model are the large price tag and implementation process. Which developed countries should provide funds for FITs in developing countries, and what percentages should they contribute? Furthermore, which countries should the global fund subsidise? We have suggested that the FITs be calibrated for those developing countries consuming less than 10 kWh of electricity per day per capita, but should the fund subsidize the entire population? The target populations for this model are countries with consumption under 10 kWh of energy per day, the very populations that may not even be able to finance the baseline for conventional technology. Hence, additional funding would be necessary. Nevertheless, we hope this model instigates a dialogue among developed countries seeking ways to assist developing countries to achieve emission reductions while still developing at high rates. ■
For the full report, including methodology and results, please contact Samantha DeMartino at sademartino@gmail.com.
References
Bechberger and Reiche, The spread of renewable energy feed-in tariffs (REFITs) in the EU-25, 2004.
Ragwitz and Huber, Feed-in Systems in Germany and Spain and a Comparison, 2005. Fraunhofer Institut für Systemtechnik und Innovationsforschung.
Image: UNEP/McCallion
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