Feed-in tariffs — the new school of thought
As a boy growing up near the Louisiana Gulf Coast, I remember looking out of the car window at times and seeing gigantic flames over the bayous: gas flares. Around 1970, the flaring of natural gas peaked. Oil prices were so low back then that marketing gas would not have been profitable.
Today, far less natural gas is flared off both in terms of volume and, consequentially, as a percentage of our much higher current energy consumption. Oil prices have, of course, risen dramatically over the past 40 years, but environmentalists have also been working hard to get oil and gas companies to reduce gas flaring. Nonetheless, it is estimated that the world still flares off several weeks’ worth of natural gas supply each year.
Left with far fewer resources, future generations will be dumbfounded at our wastefulness. Why did we not take action sooner?
Ask anyone today, and the answer would be that we leave matters up to the market. And for a long time, the market’s answer was that natural gas was a waste product of oil extraction in many cases. We chose to implement legislation banning gas flaring; here, government intervention trumped the market. Another option would have been to mandate a higher price for gas so that the profit margin for oil and gas would have been more equal. Utilities would have at least been encouraged to use gas turbines to generate electricity where gas is plentiful; the higher prices could then have been spread across all power consumers. The market would still have been free — companies still could have done whatever they want — but it simply would have covered more resources.
Here, we see why this option was not pursued: while our resources would have been used more efficiently, electricity rates would have gone up. Rate hikes are politically unpalatable in the Anglo world, even if they help us use resources more efficiently. So we let oil compete with gas, and oil won for decades. And we flared off tremendous amounts of natural gas.
Competing companies: While the proposal I describe above — leveling the profit margins for energy resources — was not implemented for fossil fuels, it has been used successfully for renewables. It is called feed-in tariffs (FITs), and it is the driver behind Europe’s main success stories.
Its detractors in the English-speaking world used the same logic that was used 40 years ago in the petroleum industry: we need competition, and price fixing is anathema to free markets. Of course, the United States has had price fixing in the electricity sector since the 1930s (that’s what is meant when we say that utilities are “regulated”) — but let’s focus on what is meant by “competition.”
Normally, when we think about competition, companies come to mind: GM versus Toyota, Dell vs. Apple, etc. Of course, there is also competition between products and technologies, such as between VHS and Betamax (or, for my younger readers, between Blu-ray and HD DVD). Notice that Betamax and HD DVD disappeared from the market completely — which is itself a considerable waste of effort and investment, though having a single format certainly has its advantages.
If we now look at ways of generating electricity, we see that it would be nice to have competition between companies, but what sense does it make to have competition between resources? If we can leave the resource untouched, then it remains available for future generations — no problem. But if we have to discard one (natural gas) in order to get at another (crude oil), then it makes sense to ensure that the profit margins on the both resources are roughly equal so that it pays to exploit both resources instead of wasting one. The resources need not compete as long as the extraction companies do.
Wind and solar may seem to differ in one respect: we cannot exhaust them. The sun will not be depleted regardless of how many solar panels we have, and no number of wind turbines will measurably reduce the amount of wind on Earth. Nonetheless, the amount of renewable energy we neglect to use can also be considered waste. Each day, we get a certain amount of potential solar and wind power. Were we to use more of it, our consumption of non-renewable resources would be reduced. As a result, the range of our fossil fuels could be extended dramatically.
RPS, cap-and-trade, FIT: If we agree that we would be willing to pay more today in order to use both our renewable and non-renewable resources more efficiently, the question is which policy promotes competition among companies, not resources. Renewable Portfolio Standards (RPSs) are old-school thinking; utilities have to meet a target for “renewables,” and if no further specifications are made, then renewables compete with each other. The cheapest wins, and the rest go nowhere.
Emissions trading is a more recent idea, but it is even worse in a way. Here, large energy producers and consumers are required to reduce emissions. The scheme is praised for allowing decision-makers the flexibility to choose the cheapest way to meet their target: technology overhauls (“clean coal”), investments in third-party offsets (tree plantations funding for technological overhauls abroad), the purchase of allowances from other market players, new low-carbon technologies (renewables), or perhaps just paying a fine. Here, renewables not only compete with each other, but also with all of these options.
Neither RPSs nor emissions trading ensures a comparable, reasonable return on investments in both wind and solar. FITs do. Critics of FITs charge that the policy “picks winners,” but the charge only applies to the energy sources promoted — not to any particular companies or technologies. True, those of us who support FITs for solar and wind have picked these two resources as winners — guilty as charged. But we have not, to take the example of solar, picked any particular company, nor have we even picked a particular technology. Who can say whether crystalline or thin film panels (or perhaps something else) will be more popular in 2020? Indeed, if we provide roughly the same profit margin for concentrated solar power and photovoltaics today, we may find that the one or the other is clearly preferable by 2030 — but then, we may nonetheless choose to keep the more expensive one as a niche product despite the price difference. After all, it would have been the sensible thing to do with natural gas 40 years ago.
We have a history of taking only the cheapest energy first. Our children will pay the price that we refused to pay, so they may very well view our old-school thinking as myoptic. FITs are the new school.