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Green energy sector needs a price booster

South China Morning Post – 29 Aug 2011

The use of feed-in tariffs to assure companies of returns and market demand

China’s decision to set a feed-in tariff of 1 yuan (HK$1.20) per kilowatt-hour for solar systems is a welcome boost to the renewables sector. A similar feed-in tariff in the Philippines is meeting resistance because of its impact on electricity prices.

Feed-in tariffs are higher prices assigned to renewable sources in recognition of the higher costs of producing energy, as compared to fossil fuel sources like oil and coal. In Spain and Germany, they led to significant growth in installed renewables.

Instead of simply awarding tax exemptions or grants for research and development, feed-in tariffs are efficient because payments are made to renewable energy actually sold to the grid, and requires no subsidy. When a renewable source matches the cost of fossil fuel power, it is said to be at grid parity.

Feed-in tariffs tend to initially raise the average price of electricity, as you are mixing currently expensive low-carbon sources with cheap fossil fuel ones. But this can be managed by a price regulatory body or open electricity markets, by operating at less than maximum capacity to prolong use, and can be offset by carbon credits, less demand for coal and oil, technological progress and economies of scale.

Why are feed-in tariffs needed now? They make it attractive for investors, entrepreneurs, engineers and scientists to devote their efforts to renewables. While a desire to showcase renewables is good, it alone is not enough to create confidence in the sector.

In contrast, feed-in tariffs are long-term contracts (whose price can be revisited regularly) to insulate renewable power plants from oil price swings. Once economies of scale and technology move forward, we should see better, more efficient and cheaper renewables, which means that feed-in tariffs can eventually be scrapped. Coal- and oil-powered energy systems have been around since the 19th century, and to expect that renewables will instantly catch up is unreasonable.

An excellent analogy is the personal computer and chip industry: while competition and innovation may have driven us to US$100 tablet PCs, it was the US military that first had to jump-start a market for the semiconductor industry many decades ago.

Feed-in tariffs are needed now. Waiting for renewables to become cheap without supporting the current renewables market is wishful thinking. For many decades, the renewable sector and the people working in it have been repeatedly courted, ignored and jilted. Experts and investors will not risk their time, money and careers trying to create better renewable technologies if the market demand is constantly dependent on the price of oil.

Dennis Posadas was editor of Cleantech Asia Online. He blogs about clean energy at

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