Recently, the Philippines energy department announced it would try to implement so-called feed-in-tariffs for some renewable energy projects, particularly solar, by next year. Significant delays were encountered in pushing for its implementation after the Renewable Energy Act of 2008 was passed that enshrined the measure, particularly from big business and free market economist groups.
Feed-in-tariffs are fixed prices per kilowatt-hour that are pre-agreed for a certain period between the project proponent and the distribution companies who buy the electricity. In China, a feed-in-tariff of around one yuan per kilowatt-hour has been in effect since 2011, although adjustments to this rate has been allowed based on local conditions.
Free market economists in general do not like feed-in-tariffs because they say these fixed pre-agreed prices distort the play of the electricity markets. Instead of allowing the best electricity provider to be the source, winners are pre-picked – in this case, solar and wind farms for example. But the problem with a pure market play approach is that it is biased towards fossil fuels sources, which are currently cheap and in many countries, subsidized. Until economies of scale driven by R&D and massive adoption drive the cost of solar and wind down, and coupled with a dismantling of subsidies for the fossil fuel industry, a pure market play without a feed-in-tariff intervention will surely be biased against renewable energy.
Price wise, the main complaint is that if fossil fuel generated electricity is only a few cents per kilowatt-hour, and solar and wind costs much higher, then by mixing in renewables with fossil fuel power, the average price of electricity goes up. What critics do not mention is that the percentage of renewables compared to fossil sources like coal is so small that there is hardly an effect on price movement, and the intent is not to give all future renewable energy generators the feed-in-tariff, but only the first few investors to allow the renewable sector to jumpstart itself. This is somewhat akin to mixing a drop of expensive scotch with a barrel of cheap scotch, then claiming that the price of the blended scotch has risen significantly.
Let’s start with why coal plants are favored by planners and investors – coal is cheap. But coal is cheap because of one reason – we have never put the price of carbon into these plants. This price includes for example the cost of air pollution, and not just climate change. If we could, for example, quantify the impact of added air pollution from coal into an existing locality such as added hospitalization costs for asthma, bronchitis, and other respiratory ailments, then perhaps coal will not be the cheapest on the list.
We need to find a way across the board for these costs (what economists call as “externalities”) to be plugged into calculations for new power plants, which is exactly what a carbon tax or a cap and trade system hopes to achieve. Then there is of course the much vaunted Carbon Capture and Storage (CCS), which is hoped will capture the carbon and store it into the ground under high pressure, but whose future is still unknown and whose cost is expected to make coal more expensive to operate.
While a purely competitive electricity market approach is fine if the only consideration is cost, let us not forget that climate change is a tragedy of the commons that is waiting to happen if we do not have some sort of artificial intervention in the market.
If opponents of this measure really want a toe-to-toe competition of the various energy sources, then it is either a carbon tax or cap and trade measure be passed and subsidies for fossil fuels be removed to reflect the true cost of fossil fuels vis-à-vis renewable energy, or we accept the fact that if fossil fuels are subsidized and without a carbon tax, then renewables should also be allowed the feed-in-tariff, so that a more equitable competitive playing field is possible.