Renewable Portfolio Standards Vs Feed-in Tariff: A Comparison

Explanation

Introduction

Renewable energies have been considered as a solution to the shortage of energy and pollution of the environment. As a result renewable energy industries have recently expanded at a higher rate. Renewable energy policies have notably contributed towards the expansion of the expansion of activities in domestic industrial for production of sustainable energy. Renewable energy production has been highly embraced by majority of the countries of late. The two popular energy regulatory policies are the renewable portfolio standards and the feed-in tariff. It has been noted that more than sixty countries worldwide have at least implemented one of the policies.

Explanation

A renewable portfolio standards (RPS) scheme refers to a regulation requiring that energy be produced from renewable energy sources which have less harm to the environment. Some of the renewable sources of energy are solar, wind and geothermal among others. The portfolio standards mechanism provides the companies supplying electricity with an obligation to at least produce a stated quantity of the electricity from the available renewable sources of energy. Renewable portfolio standards scheme has been adopted by countries such as Australia, United States of America and United Kingdom. Some other countries have gone a set further and implemented the renewable portfolio standards minimal requirements. For instance, the California Senate passed Bill 350 in October 2015 that required the retail sellers as well as the publicly owned utilities to at least procure a 50 percentage of the electricity from the available eligible renewable sources of energy by 2030.

A feed-in tariff scheme refers to a policy mechanism that is designed to speed up producers and investors to venture into the renewable energy production. It is a price regulatory policy.The feed-in tariff mechanism involves an agreement to meet a proportion of electric bills incurred in the production of electricity by those producing the renewable energy. This is done by offering tariffs as which are determined by the public authorities and are given guarantee for a given period of time. The main aim of feed-in tariffs is to offer compensatory amount to the producers of renewable energy based on costs of production. This helps the producers offer reasonable prices on their produced renewable energy as well as enabling them to the renewable energy cost of investments. Feed-in tariff scheme has been adopted by countries such as Spain, Denmark, Germany and China.

Comparison
In cases where renewable portfolio standards scheme is used, the leaders in the market are those producers who can actually come up with economical mechanisms of producing the renewable energy at lower costs in comparison with other producers. The cheaper production of the renewable energy means that the producers will offer the renewable energy produced at relatively lower costs. Those producers, who produce the renewable energy at higher prices due to inappropriate production process, consequently offer the renewable energy they produce at higher costs. In so doing, it goes without say that they continue being the losers in the market. This means that the renewable portfolio standards scheme results to stiff competition in the market that lowers the costs of renewable energy and as a result it can be afforded by more people.

Comparison

Feed-in tariffs do not involve competition among the producers in the market. This means that the set price remains constant and that no single producer can influence the prevailing prices in the market. This creates some sort of perfectly competitive market. Considering the feed-in tariff premium as well as the payment schedule, producers are likely to maintain strong margins and in turn this results to no investments in efficiency. Feed-in tariff scheme is subject to political stability due to government set tariffs. This therefore means that the market is subject to the government crutches because of its support and if by bad luck political instability occurs, then the market can be wiped off quickly.

Feed-in tariff policy provides guaranteed payments to investors and developers. This means that the market risk is reduced in as much as prices in the market are concerned. Feed-in tariff scheme involve the setting of standardized prices for the electricity purchase that is supplied by the producers.  The renewable sources of energy used are actually environment friendly. The scheme further offers a guarantee for the purchase of all the clean renewable electricity that is supplied by the energy producers in the given region. The contract actually guarantees a long period of time which may be 20 years. Most schemes set the limits on the eligible size of the technologies’ project. Both the investors and governments benefit from feed-in tariff schemes. Feed-in tariffs reduce market risks. This means that they bring about stability in the market and hence make the borrowing rates more affordable to the companies or projects. As technology advances, it is anticipated that prices will decline as creativity and innovation take their part as shown by proved models. Feed-in tariff schemes have greatly helped in reducing costs per unit of renewable energy due to government subsidization.

On the other hand, portfolio standards are considered more risky in as much as the prevailing market prices are concerned. This means that the prices on the spot market can change dramatically during short periods of time. The variability of the spot market poses a great risk to the producers and investors in as much as price stability in the market is concerned. Putting this into consideration the feed-in tariffs can overdo renewable portfolio standards. However the price changes in the renewable portfolio standards are due to supply and demand and they enable the adjustment of the renewable portfolio market. Therefore, it goes without say that the prices in the renewable portfolio standards are influenced by the demand and supply and the producers have to maximize quality of what they offer in order to maximize their profits. The supply in the market is the amount renewable energy producers have to offer whilst the demand is brought about by the observation of the requirements which as stated by the renewable energy level of standards. In case the prices prevailing in the entire market are high, this means that supply is low, consumers react by rejecting the higher prices and this lowers demand. The final situation is that the prices eventually go back to normal.

In case of an imperfect market situation, the supply of the renewable energy when considering the feed-in scheme is higher than that experienced in the renewable portfolio standards. On the other hand the social welfare when considering renewable portfolio standards schemes is consistently higher than that experienced under the feed-in tariffs for due to wide range of parametric values. This therefore raises a point of favoring the renewable portfolio standards as a result of the comparative advantages noted. When putting the price into consideration, feed-in schemes are better due to the incentive effects, but considering the cost control part then renewable portfolio standards scheme is favored.

Portfolio standards enable the production of the renewable energy by the producers to be undertaken in the best efficient manner possible. This is due to the fact that the scheme is not specific in as much as costs are concerned. Producers have the freedom to undertake production in the manner they see it better. This helps improve the quality of the supplied renewable energy and also checks the price part of it. Producers have to play it safe in the market in order to maximize profits. Therefore they have to mind about the consumer and offer reasonable prices. Feed-in tariffs have set fixed price prevailing in the entire market. This may result to recklessness in the production process as the producers are assured of a fixed price set by the tariffs. As a result this may lower the quality and the degree of the services offered to the final consumer.

Feed-in tariffs provide assurance to the producers of the lowest prices possible which are fixed for the renewable energy produced. In situations where the market price exceeds the feed-in tariff, the producers of the renewable energy then opt for the market price. Also in case the price of renewable energy is low, the producers receive the feed-in tariff price. The scheme generates risk for investors but an appetizing one. However, the electricity prices vary and depend on the game of the demand and supply. An example of this kind of feed-in tariff was experienced in Spain for the period 2006–2013. Spain also used the feed-in premium whereby a fixed amount is provided as an addition to the market price with the aim of promoting renewable energy technology but it was limited scale. Feed-in tariff seems not so much beneficial to the expensive projects since renewable energy projects regardless of their cost of investment and size, receive the similar amounts of financial support.

Renewable portfolio standards involve a more competitive market as compared to the feed-in tariffs. A competitive business environment is beneficial to both the consumers and the business organizations; but the greater benefit goes to the consumer. This is due to the fact that producers have to be keen with the production process in order to outdo their competitors in the market. They have to utilize the economies of scale in production. Proper utilization of the factors of production lowers the costs of product which transforms to lower or cheaper prices offered to consumers. Also competitive the environment helps improve the product quality. Consumers will always tend to shift to quality products in the market. This is the case involved in the renewable portfolio standards. On the other hand, the feed-in tariffs involve little or no competition at all. The lack of competition in the market means that consumers will be misused. Low competition lowers the quality of products. This is due to the fact that under the feed-in scheme, producers are already assured of a fixed price irrespective of the services they offer to the consumers.

Feed-in tariffs stimulate investment in the renewable sources of energy. Under this scheme, the producers are assured that they will earn above the market price and hence there is no possibility of making losses. This helps maintain the existing producers and attract new investors to join the market. The government sets the fixed price under the scheme which the producers will earn after venturing into the renewable energy production. On top of that, the producers are further assured that all their supplies in a given region will be fully purchased. On the other hand, considering the renewable energy tariffs, stimulation of investment in the sector is low. This is due to the fact that the prevailing market prices are subject to determination by the demand and supply in the market. It therefore goes without say that, those producers who are not may be keen in the business may adversely make loses and thus exit the industry. New investors may also be scared away from joining the industry due to this trend. Therefore under the renewable portfolio standards energy scheme, every producer must be smarter enough to compete favorably.

The renewable portfolio standards involve an obligation to produce a certain set target of the renewable energy. This therefore means a certain proportion of renewable energy to be produced is determined. This highly supports the production of the renewable energy technology since it is a must for every electricity producer to meet the set target of their energy from the clean environment friendly renewable sources of energy. On the other hand, feed-in tariffs do not set targets for the production of the renewable energy. This means that producers are some kind of left with a choice on whether or not to produce energy from the renewable sources of energy. This means that some energy producers may produce less percentage of their total electricity from the energy renewable sources with some even not producing the renewable energy at all. However, feed-in tariffs can be combined with standards to set the targets but alone they can’t achieve it. This highly discourages the renewable energy production technology since there is no set target for electricity producers to meet in as much as energy production from renewable energy sources is concerned.

Further Examples

Germany highly embraces the use of feed-in tariffs.  Feed-in law scheme in Germany was restructured in year 2000became the Renewable Energy Sources Act (2000). This policy is associated with prioritizing the renewable energy sources. The market prices were based on production cost. Therefore different producers charged different prices for different production technologies. However the prices were set to decrease annually through tariff regression. This feed-in scheme for German was very successful, and therefore the German policy (amended in 2004, 2009, and 2012) was used as the benchmark for considering other feed-in tariff policies. The feed-in tariff scheme was preferred by German due to its cost efficiency.

Texas has highly embraced the renewable portfolio standard policy. It was first enacted in December of 1999. It had set a modest target of 2GW to be produced from the additional renewable sources of energy by 2009. This formed a percentage of 2.5% of the total state energy consumption. This production of energy from the renewable sources had increased steadily from the year 2003 when it was 0.4GW to the year 2009 when it was 2GW. It was to be maintained throughout to 2019 and for sure it is doing great currently.

Australia has embraced the renewable portfolio standards scheme. Efforts have been made and actually continue to be made to expand the proportion of electricity production from harmless environment friendly renewable sources of energy.Renewable energy has been produced using renewable sources of energy which include hydro, solar PV, wind geothermal, solar thermal and landfill gas. Latest estimates have shown that Australia produced 35,077 gigawatt-hours (126,300 TJ) (GWh) of renewable electricity in 2015. This was 14.5% of Australia’s total electricity produced. Production of energy from renewable sources in the year 2006 was9,500  GWh which was actually less than 4% of the total energy production in Australia generated electricity. This proves that Australia is doing great in terms of energy production from renewable sources of energy.

Conclusion

To conclude, energy production from renewable sources of energy has been greatly encouraged in most countries since it does not pollute the environment. Various policies have been put in place to support this with the two most popular ones being Renewable Portfolio Standards and Feed-in Tariffs. A country may choose to implement any of the policies based on the comparative advantage of each policy. Renewable Portfolio Standards is highly favored due to its competitive nature among the energy producers which helps improve quality and offer the energy produced at reasonable prices. It also puts a command on certain percentage of energy production by each energy producer from renewable sources of energy and it cannot be avoided by any energy producer. Feed-in Tariffs scheme has also been embraced by some countries claiming that it is cost effective considering the cost of energy production. Therefore, each country adopts its own scheme based on comparative advantage in energy production with the majority being for Renewable Portfolio Standards scheme.

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