Climate Change “is the greatest market failure the world has seen”

       -Sir Nicholas Stern

This analysis and other similarly dire predictions have stimulated decision makers in many countries to consider new approaches to energy policy.  The daunting challenge they face, has been to make the cost of renewable energy competitive with heavily-subsidised conventional energy. In the past, householders or energy companies who wanted to install wind turbines or solar panels have been faced with lengthy pay-back times. They have been forced to make a choice based on ethics rather than economics.  Without increased consumer demand and political measures to facilitate access to the market, manufacturers of, for example, wind turbines and solar photovoltaic (PV) panels, cannot produce the unit volumes needed to bring prices down and drive technological innovation. (Access economics, 2008)

The Feed-In Tariff (FIT) has proven to be the most effective policy instrument in overcoming these barriers. Led by Germany and Spain this simple, relatively low-cost mechanism has turned several European countries into world leaders in the renewables sector. Under a feed-in tariff mechanism, eligible renewable electricity generators (which can include homeowners and businesses) are paid a premium price for any renewable electricity they produce. Typically utilities are obligated to take the electricity and pay them. (Bender et al, 2009).

Close to 75% of the world’s residential solar photovoltaic (PV) installations have occurred with the support of national, state or provincial FIT policies. (Solangi et al, 2011). In 2009, 45 countries and 28 states/provinces/territories had FIT programmes in place. (International Energy Association, 2010)

Gross or Net?

There are two metering options for solar PV FIT programmes: 1) net metering (also referred to as net export, or import/export metering), and 2) gross metering.

Under a net metering scheme, residential energy generators are paid for the net quantity of electricity exported to the grid after accounting for in-home consumption. In other words, Net Export = Gross Production – Household Load.  Western Australia currently offers its incentive on a net export basis.

By contrast, under a gross metering system (as in the ACT and NSW), PV owners receive the premium tariff for all electricity produced by their systems (whether consumed at home or exported). They then pay the retail price for the electricity they actually consume.

It is interesting to note that gross FITs schemes appear to have become the worldwide default standard. Of the 45+ international examples of feed-in tariff schemes, Australia appears to be among the very few, if not the only country to adopt this form of metering for feed-in tariffs (McKinsey & Co, 2009)

The Consumer’s Perspective

Gross FIT schemes are widely believed to be a more effective policy instrument than Net in achieving customer uptake of solar PV renewable energy technology; (International Energy Agency 2010, World Futures Council 2008) for reasons that are discussed below.

• Ease of understanding – Most consumers are able to more accurately estimate the payments they are likely to receive under a gross scheme and correspondingly the expected payback period for an installation. This is because the payments under a gross scheme can be estimated without needing to know consumption patterns.
• Higher return on investment – Because the producer receives the premium tariff for all electricity produced, a gross FIT produces higher returns to the installer of a renewable energy generator, making investment in renewable energy more attractive
• Less discriminatory – Gross FITs avoid discriminating between high peak load onsite users (small businesses, retirees) and those who would benefit from a net metered regime (mainly households who work during the day and consume PV electricity away from their generation site).
  • Behavioural impacts – Under a gross FIT, the householder has to buy the electricity they use at the regular tariff, so they are still prompted to make savings through energy conservation.
  • Investment certainty – A gross FIT allows investment decisions to be made with more certainty. Take as an example the following situation where an installer is setting out the benefits to a household: When selling a system the installer can easily say; “If you install this you will generate around $1,000 or $1,500 a year”. Because net metering depends on the behaviour of the householders, such certainty is not possible.

Net Feed In Tariffs are not without their supporters, some of their arguments are outlined below;

• Ease of installation – Net FITs allow installation without the need for new metering. However a new or replacement meter costs around $200 (Bradley Shone, Energy Policy Manager, Alternative Technology Association, Proof Committee Hansard, 9 September 2008, p. 12), while the total solar PV installation cost is likely to be upward of $8000. Thus is a  small component of total outlays.
• Information advantages – It has been argued that one of the benefits of a net feed in tariff is that consumers become more conscious of their electricity consumption habits. This is arguable.

In sum, net FIT schemes appear to lack several key attributes of successful consumer policy instruments. I.E. concrete, salient examples with cost/benefit information (Tversky and Kahneman 1974) designed to be as specific, detailed, and practical as possible (Stern 1976; Dresner 1990; Dennis et al. 1990) so as to allow participants to know the advantages and disadvantages of each measure and feel in control of their choices (Dennis et al. 1990).

Furthermore, with net metering this difficulty in gauging energy usage may actually serve to undermine the core purpose of FIT schemes, that is to stimulate energy conservation; as households using net metering cannot actually determine their own energy consumption, and therefore cannot use the meter to guide energy saving measures. (Pichert and Katsikopoulos 2007)

What are the others doing? – policies and responses worldwide

Ontario’s recently commenced renewable strategy and residential Gross FIT scheme is among the most ambitious globally. The provincial government is on track to close all its coal-fired power plants by 2014. The 694 large scale FIT contracts announced to date are expected to create 30,000 direct jobs and attract an estimated CAN $14 billion in private sector investment. (Pietruszko,2006)

In Germany, a Gross FIT program has been offered to PV operators since 2001. The success of the FIT along with solar PV purchase subsidies have enabled Germany to reach its goal of a 12.5% renewable energy supply three years early, in 2007. (Pietruszko,2008)

The rapid growth in Germany post 2004 (Figure 1) can be seen in response to a raft of new more attractive policies introduced in that same year. In Spain the first FIT scheme was launched in 2005 and then upgraded in 2007. (International Energy Association, 2008) In Japan meanwhile, between 1996 and 2007 subsidies of around AUS$2400 were allocated by the Japanese government for systems up to 10kw. With the conclusion of the subsidy programme, Japan did experience a reduction in demand from 290 MW in 2006 to 210 MW in 2007. (International Energy Association, 2008). Perhaps as a reaction to this drop in household demand for solar PV, the Japanese government instated a gross feed in tariff of AUS $80c/kwt in 2009 for residential solar generators.

Within the United States, California is recognised as one of the pioneering states in the adoption of FIT policy instruments for solar PVs. In an interesting format, generators can choose between a 10, 15 or 20 year contract and can opt for a gross FIT or Net Fit themselves.

Figure 1 also shows how Australia’s share of the solar PV market has fallen from around 7 per cent in 1992 to 1 per cent in 2007. (International Energy Agency, 2008)

If only! – Designing an optimal gross national FIT

Based on experience from overseas FIT schemes, and modelling by Access Economics; the Clean Energy Council PV Directorate (2008) maintains that FITs schemes should include the following principles:

• Long Term. Long term commitment to the programme such as rates guaranteed for a minimum of 15 – 20 years
• Gross Metering. That is, the feed in tariff rate is applied to all of the energy generated from the solar PV system not just the energy that is surplus to the investors needs.
• All sectors. Open to all sectors not just the residential sector but community halls, distribution centres, churches, shopping centres, factories etc.
• FIT Rates and Payback Periods. Access Economics modelling indicates that to facilitate a 10 year pay back on investments, a FIT of 75c/KWh would be required in year one of the scheme, falling to 62c/KWh for units installed in year 20 of the scheme (2028).

It should be noted that within Australia, no state or territory deploys a FIT scheme with the aforementioned attributes.

References & Further Reading

Access Economics (2008) The Economics of Feed-in Tariffs for solar PV in Australia Report by Access Economics Pty Limited for Clean Energy Council.

Ariely, D. and J. Heyman (2004) ‘Effort for payment: a tale of two markets’, Psychological Science, 15 (11), pp.787-93

Ayoub, J., 2007. Co-operative Programme on Photovoltaic Power Systems, National Survey Report of PV Power Applications in Canada 2008. International Energy Agency (IEA), May 2008, 1-21.

Cesario, J., Grant, H., Higgins, E. T. (2004). Regulatory fit and persuasion: Transfer from “feeling right.” Journal of Personality and Social Psychology, 86, 388-404.

Dennis, M, Soderstrom, J, Koncinski, W.S  and Cavanaugh, B. (1990). Effective dissemination of energy-related information: applying social psychology and evaluation research. American Psychologist (October): 1109-1117.

Dresner, M. (1990). Changing energy end-use patterns as a means of reducing global warming trends. Journal of Environmental Education 21 (Winter 1989-90): 41-6.

Federal Ministry for the Environment. (2007). EEG – The renewable energy sources act: The success story of sustainable policies for Germany.

Fehr, E., U. Fischbacher, U. and S. Gächter (2002) ‘Strong reciprocity, human cooperation and the enforcement of social norms’, Human Nature,13, pp.1-25, 17 September 2009

Garnaut, R. (2008). The Garnaut Climate Change Review. Cambridge University Press.

Gorner, Stephen et al. An Australian Cost Curve for Greenhouse Gas Reduction. McKinsey & Company, 2008, http://www.mckinsey.com/locations/australia_newzealand/knowledge/pdf/1802_carbon.pdf  (acessed 14 March, 2011)

Gertner, J. (2009) ‘Why isn’t the brain green?’, New York Times, 19 April, retrieved from http://www.nytimes.com/20011/04/19/magazine/19Science-t.html, 22 April 2009

Hardisty, D. J., Weber, E. U. (2009). Discounting Future Green: Money Versus the Environment. Journal of Experimental Psychology: General. 138, 329-340.

International Energy Agency, Photovoltaic Power Systems (2010) Trends in Photovoltaic Applications, pg 30 International Energy Agency (2009) PV Power Systems 2010 Annual Report

International Energy Agency (2010) Trends in Photovoltaic Applications – Survey report of the selected IEA countries between 1992 and 2009

International Energy Agency (2009) National Survey Report of PV Power Applications Australia 2007

Kahneman, D. and A. Tversky (1986) ‘Rational choice and the framing of decisions’, in D. Kahneman and A. Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press

Kahneman, D. and A. Tversky (1992) ‘Advances in prospect theory: cumulative representation of uncertainty’, in D. Kahneman and A. Tversky (eds), Choices, Values, and Frames, Cambridge: Cambridge University Press

Kaplan, S. (2000) ‘Human nature and environmentally responsible behavior’, Journal of Social Issues, Fall 2000, pp 230 – 252.

Krantz, D., N. Peterson, P. Arora, K. Milch and B. Orlove (2008) ’Individual values and social goals in environmental decision making’, Decision Modelling and Behavior in Uncertain and Complex Environments, pp.165-98,

Marshall, G,. (2001) ‘Denial and the Psychology of Climate Apathy’, The Ecologist (UK), November, 2001. pp-46-68.

Pichert, D. and K. Katsikopoulos (2007) ‘Green defaults: information presentation and pro-environmental behaviour’, Journal of Environmental Psychology, 28, pp.63-73, doi:10.1016/j.jenvp.2007.09.004

Pietruszko, S. (2009). Feed-in tariff: The most successful support programme. In Conference record of the 2006 IEEE 4th World conference on photovoltaic energy conversion (Vol. 2, pp. 2524–2527).

Peters, R., & Weis, T. (2008). Feeding the grid renewably: Using feed-in tariffs to capitalize on renewable energy (primer). The Pembina Institute 1(23).

Renewable Energy Policy Network for the 21st Century (REN21) (2009). Renewables Global Status Report: 2009 Update. Renewable energy policy network for the 21^st century. Paris: REN21 Secretariat.

Shone, B. Alternative Technology Association, Proof Committee Hansard, 9 September 2008, p. 12

Solangi et al, (2011) ‘A review on global solar energy policy’, Renewable and Sustainable Energy Reviews, 15, pp-2149-2163.

South Australian Department of Premier and Cabinet, (2008) Submission 68.

Stern,P.C. 1976. Effect of incentives and education on resource conservation decisions in a simulated commons dilemma. Journal of Personality and Social Psychology 34 (6): 1285- 1292.

Stern, P.C. (2005) ‘Understanding individuals’ environmentally significant behavior’, ELR News and Analysis, 35, pp.10785-90

Swim, J. et al. (2009) Psychology and Global Climate Change: addressing a multi-faceted phenomenon and set of challenges, Washington DC: American Psychological Association

Thaler, R. (1979) ‘Toward a positive theory of consumer choice’, Journal of Economic Behavior and Organization, 1 (1980), pp.39-60,

Tierney, J. (2009) ‘Are we ready to track carbon footprints?’, New York Times Online, 25 March, 2010

Van Vugt, M. (2001) ‘Community identification moderating the impact of financial incentives in a natural social dilemma: a water shortage’, Personality and Social Psychology Bulletin, 27, pp.1440-9

Weber, E. (2006) ‘Experience-based and description-based perceptions of long-term risk: why global warming does not scare us (yet)’, Climate Change, 77, pp.103-20,

World Futures Council (2008) Feed in tariffs – a guide to one of the world’s best environmental policies.