A Solar Revolution May Be Coming to Your Town

By Mariah Blake, Washington Monthly. Posted April 11, 2009.

Could this approach help revive our renewable energy market, and give a needed jolt to the U.S. economy? There is reason to believe it could. In Germany, which pioneered the modern feed-in tariff, it has given rise to the world’s most vibrant green energy sector. More than forty countries, from Nicaragua to Israel, have followed Germany’s lead, often with dramatic results. Study after study has shown that not only do feed-in tariffs deliver more renewable energy than other market incentives, they do so at a lower cost. "People hesitate to call anything a panacea," says Toby Couture, an energy and financial markets analyst at the Department of Energy’s National Renewable Energy Laboratory. "But if you’re interested in creating jobs, getting capital flowing, and expanding renewable energy, feed-in tariffs get the job done -- often more cost effectively than other policies."

To understand why feed-in tariffs are potentially revolutionary, you first have to understand how they differ from the system we’ve been using to drive investment in renewable energy so far. For the last fifteen years, the United States has relied on a patchwork of state subsidies and federal tax breaks -- mostly production tax credits for wind power, which let investors take write-offs for the energy produced. When Wall Street was riding high on mortgage-backed securities, this made green energy an appealing option for big banks, which funneled billions of dollars into sprawling wind farms as a way of lowering their taxes. But when the market collapsed and corporate profits dried up, so did the incentive to invest. Since last year, the number of tax equity investors -- mainly big investment banks -- sinking money into wind farms has dwindled from as many as eighteen to four, and the remaining players have scaled back.

This tax-based system has other drawbacks as well. Because Congress has to renew the tax credits -- and has often failed to do so -- renewable energy is a risky market. Frenzied bursts of investment are followed by near-total collapse, a pattern that has hampered the growth of our domestic green manufacturing sector. Also, tax incentives (and the quota systems in place in about half of U.S. states) end up favoring large-scale projects, mostly monster wind farms concentrated in remote places like the Texas panhandle. This has been lucrative for the companies, like GE and Siemens, that build them, but of limited economic benefit to local communities. What’s more, a lot of energy is wasted transporting power from the sparsely populated areas where it’s produced to the cities and coasts -- assuming it can be transported at all. Transmission lines are in such short supply that turbines (and occasionally entire wind farms) sometimes have to be shut down because of bottlenecks in the grid.

Feed-in tariffs promise to solve many of these problems by encouraging small, local production, driven not by Wall Street banks but by ordinary entrepreneurs -- a system that boosts efficiency and fortifies local economies.

Feed-in tariffs are not a new idea. In fact the United States tried them once before, in the 1970s. At the time the global economy was in shambles, the result of OPEC choking off the world’s oil supply. In a bid to ward off future oil shocks, Congress passed the Public Utility Regulatory Policies Act of 1978 (PURPA), which required power companies to buy electricity from small renewable generators. This spurred a green energy boom, especially in California, which offered producers long-term contracts at rates that were tied to the then-soaring price of natural gas (specifically, they were linked to future-cost projections). Virtually all of the renewable generating power the state has today came online under the policy. More importantly, the technical breakthroughs made in California during this era helped give rise to the modern renewable energy industry.

But this approach also had some glaring flaws, which came into focus in the early 1990s, when the price of natural gas tumbled. Rates for renewable energy sank so low that there was no incentive to invest, and the industry collapsed. Power companies were also stuck with high-priced contracts, which stirred a well of public resentment. Several key states, including California, rolled back the contract requirements, essentially taking the teeth out of PURPA.

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Mariah Blake is an editor of the Washington Monthly. This story is part of a "Big Ideas" series published in partnership with the New America Foundation.

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