Vermont Experiments with Feed-In Tariffs to Promote Renewable Energy Production

In May 2009, Vermont became the first state to pass a “feed-in tariff” (“FIT”) for renewable energy, legislation that became law without the signature of Governor Jim Douglas (R) who opposed what he viewed as a needless cost increase to consumers. Vermont’s experience is a good illustration of the arguments for and against the use of FITs to stimulate the development of renewable energy projects. Widely used in Europe and adopted on a small scale in a few states, FITs are government-mandated interconnection standards coupled with minimum prices that electric utilities must pay for electricity from solar, wind, and other renewable energy projects. Set at above-market levels, tailored to reflect the relative market position of different technologies, the minimum rates and guaranteed access to the electric grid are designed to establish financial viability for green energy projects that could not otherwise compete against conventional energy sources.

How FITs work

The term “feed-in tariff” comes from the German word for “electricity feeding-in law”. Proponents have decried the use of the word “tariff”, which implies a tax or barrier instead of an incentive. Instead, FITs are more in the nature of advance payments to projects under development. FITs guarantee elevated electrical rates and access to transmission grids for qualifying, small-scale renewable energy projects such as wind and solar facilities. In theory, the long-term stability provided by the subsidy attracts investment capital and jump-starts investment. Typically FITs have sliding scales of subsidies for different types of project and drop every year toward average rates as a means of encouraging early adopters. The cost of the subsidies are included in electric rates and passed on to utility customers. Technology-specific rates are intended to put different renewable technologies on the same footing, thereby promoting growth in new green technology sectors. [1]

The Vermont FIT

Vermont’s new FIT legislation, H. 446,[2] creates a new “standard offer” program to be administered by the state’s Public Service Board (PSB) that will establish minimum rates to be paid by electric utilities for renewable energy plants sited in Vermont. The standard offer program is to be put in place by September 30, 2009. The legislation sets the term of a standard offer contract at 10-20 years, with 10-25 year contracts for solar power. The total capacity allowed for all standard offer plants is capped at 50 MW.

The PSB is to set the price to be paid under the standard offer using four criteria: 1) a generic cost for each category of renewable energy; 2) subtraction of a generic assumption of reasonably available tax credits and other incentives such as grants; 3) addition of a rate of return for the plant owner on its capital investment equal to the highest rate of return paid to a Vermont utility; and 4) an adjustment up or down if needed to provide a sufficient incentive for rapid development of renewable energy. The PSB must review the initial prices no later than January 15, 2010, and reevaluate them at least every two years starting in 2012. Once the PSB sets cost based prices, those prices will apply to new projects, but previously signed contracts will remain at the price set out in the contract.

In a letter to the Vermont legislature, Governor Douglas explained that he supported the development of renewable energy in Vermont but did not think that a FIT was necessary for the growth of renewable energy, arguing that the bill “fails to recognize the current viability of renewable energy in a competitive setting and will needlessly increase costs to Vermont consumers so as to subsidize this one favored business sector. … The rates set out in H. 446 are well beyond the current market price for electricity, and worse, also beyond the price that utilities in Vermont are paying for renewables in the competitive market.” [3] Governor Douglas compared the standard offer program to the federal PURPA program, which he described as forcing utilities “to purchase electricity from Independent Power Producers under long-term fixed prices. Vermont consumers to date have paid a premium of more than $400 million for that electricity.”[4] Despite these concerns, the Governor concluded that a veto would not be appropriate, and expressed his confidence that the PBS would set “fair and balanced pricing for the benefit of Vermont’s ratepayers” in its review of prices in January 2010.

International experience with FITs

Germany, Spain, France and at least 34 other countries have used FITs to create several dominant clean-energy industries. The German FIT system under the Renewable Energy Sources Act, (Erneuerbare-Energien-Gesetz or EEG), first adopted in 2000, guarantees producers of renewable energies a fixed price for the electricity they generate. Germany has led innovation in solar energy and has captured 20 percent of the world's renewable energy market. Germany’s supply of renewable energy has nearly doubled since enactment of the EEG, rising from 6.3% in 2000 to 14.2% in 2007. The FIT costs average German households an extra €1.50 per month.

 At least 60 countries have adopted polices to boost the ability of renewables to compete in energy markets, and 37 of those countries have adopted FITs in some form. Denmark’s wind power strategies allow it to produce 19 percent of its energy through wind. Denmark’s Vestas Corporation employs 130,000 people in six countries including a plant in Colorado.

Spain’s experience with its FIT for solar projects has been mixed. In 2008, Spain’s subsidy program spurred the installation of 3,000 megawatts of solar capacity. However, Spain’s program cost the government $1.4 billion last year, in part because of the program’s unexpected success in attracting many more projects and investors than anticipated because the level of subsidies did not decrease in response to market demand. Further, the government was not prepared to connect so many new distributed electricity generation systems to the transmission grid. The Spanish tariff now has a ceiling on total capacity, which has essentially frozen the market for solar development in Spain.

Will the states beat the Congress?

Several states, including Michigan, Illinois, South Dakota, Minnesota and Hawaii, have introduced or are studying FIT legislation. In 2006, California established a FIT regulation for facilities with a capacity of 1.5 MW and below, capped at 250 MW total statewide. Generators can choose 10, 15, or 20 year contracts.[5] The California Public Utility Commission has asked for public comment on a proposal for a FIT designed to boost medium-sized solar projects near existing transmission lines.[6]

If and when the U.S. Congress turns back to climate change legislation, the debate may include whether or not to establish national “feed-in tariffs” (FITs). Representative Jay Inslee of Washington, who introduced FIT legislation in the last Congress[7], and Representative Bill Delahunt of Massachusetts are reportedly preparing a bill that would require utilities to buy power from small-scale renewable energy facilities at rates equal to the cost of production plus a premium.[8] This targeted spur to development of renewable energy could possibly proceed through the legislative process without the heated controversy surrounding cap-and-trade legislation.[9] In a briefing on the proposed legislation, Representative Inslee argued that FITs are timely and needed: “We have some brilliant Americans with brilliant business plans with brilliant technologies, but they don’t have financing. The charm of the feed-in tariff is solid, take-it-to-the bank security and confidence for the investing community.”[10]

It seems that debate over FITs is unlikely to go away, given the impressive track record of increased use of renewable energy and job creation in many European countries. U.S. lawmakers must weigh the potential benefits of increased innovation and accompanying job creation with increased energy costs to consumers, however moderate those costs may be.

For more information on feed-in tariffs and alternative energy generally, please contact Linda Larson or any member of Marten Law Group’s Climate Change practice group.