Feed-in tariffs (FiT) are one of multiple ways to push renewable energy technologies into commercial viability. The idea here is that if you install some sort of renewable electricity generator, someone will buy your excess production as you pump it into he grid. Not only are you guaranteed a buyer but you are also guaranteed a buying price. This works out brilliantly for would-be investors because they know exactly how much they can get from their investment. This isolates them from a lot of market risk and allows them to make their assessments confidently and spend their money happily. Of course if the buying price is too low they won’t invest in anything but at least they would be happy knowing that there is no opportunity missed there.
Now there are generally two types of electricity markets in the world (very broad generalisation there). A centrally planned one and a market based one. In a centrally planned electricity system, things are easy. The government is your buyer and it decides the price that it will pay you. Of course the buying price is normally at a premium so that you can make some money and help advance renewables. This premium, acting here effectively as a subsidy is out of tax payer’s money. In order to implement a FiT in an electricity market however the government has to force electricity suppliers to buy the premium electricity at a premium price. So the companies then have two choices, they can eat in their margins or they can pass the cost along to the consumers.
Now the question here, is a bit of an ideological one. In the centrally planned system, the government has decided that the tax payers should pay for it. They do not have a chance at saying no. They could of course not reelect the government, if this is in those rare countries where governments get elected. However there is bound to be more important issues in the election than the FiT and we can confidently say that re-election is not going to affect the path of the FiT policy or vice-versa. But then again if you have a centrally planned system, you tend to be in some sort of centrally planned government and you have already accepted the government making some decisions on your behalf.
But in a market economy are FiT fair? Is it fair for the government to just impose something upon the companies? After all if people actually valued green energy then they would chose to pay for it. Why are we being forced into this. Not only that but once you put the company in a position of choosing between their margins and their prices, it is very fragile ground. Competitive forces are forcing them to try and absorb as much of the cost to hold on to their market share, but if they cut their margins too thin they just might end up going out of business after incurring some losses. You have therefore forced the shareholders of those companies to subsidise a technology and effectively subsidise other people in the country.
There is also an issue of location. There is a saying that goes, equality in injustice is justice. But here is there an equality of injustice? Should one supplier happen to have more people on their network pumping green electricity in, doesn’t that put them at an unfair advantage as they have to pay more for their electricity? This would completely distort the market, and will have the companies trying to fight any renewables that will feed in into their networks. Hardly constructive, and definitely not helping competition.
So while it is important to find ways to make the renewable industry stand on its own two feet, we must watch out in how we implement that. And if we must be unjust, then we should try to be unjust across the board.
Trackbacks