Can Feed-In Tariffs Reduce Electricity Costs?

Note: For basic information on feed-in tariffs, visit:

http://en.wikipedia.org/wiki/Feed-in_Tariff

Feed-in tariffs are generally funded by adding a charge to customer utility bills, so the idea that feed-in tariffs can reduce electricity rates is somewhat counterintuitive. But if your electric power system is inefficient – and most are – a well designed tariff can be a powerful tool for reducing rates or, at a minimum, stabilizing rates against future increases.

Electricity rates are determined primarily by the cost of operating and maintaining the electric power system. There are caveats, of course, but for the most part utilities add up their costs and bill them to customers. In the case of investor owned utilities, an allowable profit is added and also billed to customers.

So how much does it cost to operate and maintain an electric power system? That depends, more than anything, on what utilities buy with the money they spend. All other things being equal, a utility that invests in high-efficiency equipment and builds an efficient system will have lower rates than one that buys inefficient equipment and builds an inefficient system. Efficient systems run cooler, last longer, and use less fuel to deliver the same amount of energy. If you want to minimize system costs, high efficiency is essential.

One of the strongest arguments for feed-in tariffs is that they stimulate investments in equipment that raises system efficiency. Recipients of the tariff – generally independent energy producers – earn higher profits with efficient equipment and processes. A well structured tariff can also encourage placement of new equipment in strategic locations such that overall system efficiency is increased. In that case, even though the tariff is funded by an added charge on the bill, the resultant gains in efficiency can be enough to bring rates down.

Communities considering a feed-in tariff should determine whether efficiency improvement opportunities exist on their electric power system. If the majority of the energy comes from distant coal or nuclear plants, with supplemental energy provided by gas turbines, overall system efficiency is likely below 30 percent. Throwing away 70 percent of the energy in the fuel means there are lots of opportunities to raise efficiency.

Feed-in tariffs also promote more efficient investments for meeting load growth. Instead of constantly adding new, remote generators and upgrading lines for more capacity – the expensive way to do it – a tariff can be designed to promote additions of strategically located resources that obviate or delay line upgrades and generation additions. Such strategic measures generally have lower capital costs, and they further improve system efficiency. Denmark and the Netherlands have perhaps taken strategic system architecture further than anyone, shutting down nearly all of their inefficient central power plants in favor of many smaller plants that cooperate to serve nearby loads efficiently and without reliance on bulk power shipments over a massive wires infrastructure.

There are many reasons for considering a feed-in tariff, including to support the independent energy producers that live and work in your community, and to accelerate implementation of renewable energy. But if your power system is inefficient, a well designed feed-in tariff can improve efficiency enough to either reduce rates or, at a minimum, to insulate a community against future rate hikes. With rapidly rising fuel costs and an increasingly uncertain economic climate, the time for feed-in tariffs is here.