Chapter Five: Electricity and How Politics can Incentivize a Shift to Renewable Energy Sources
Overview of the Episode
Episode 5 of the podcast focuses on a specific economic policy initially implemented in Germany: the feed-in tariff (FiT). The FiT incentivizes citizens to invest in renewable energy sources by providing an above-market price for producers. That price is achieved by letting electricity consumers pay an extra tariff on their electricity bills. In that sense, it works as a stick for people who are not investing in renewable energy and a carrot for those who do.
It was exciting to have one of the originators of the feed-in tariff in the podcast: Hans-Josef Fell. He was in the German parliament (Bundestag) from 1998–2013, representing the Green Party. Today, he is the president of the Energy Watch Group, a global network of scientists and parliamentarians focusing on clean energy (Hornung, 2015). Mr. Fell is also considered one of the “fathers” of the Renewable Energy Act, of which FiT is a robust legislative framework (Appunn, 2020). Mr. Fell is talking warmly about the FiT, so I brought Merethe Dotterud Leiren into the conversation to complement his view on the tariff. She is a political scientist focusing on green electricity policies, and she has written multiple papers on the FiT. Mrs. Dotterud Leiren added some additional views on FiT. For example, she mentioned that the main issue with the feed-in tariff is that it is challenging to select which technologies to choose for the tariff.
Evaluating the Success of Economic Policies
There are various methods to evaluate the success of economic policies. In a comparative analysis of the OECD countries, the absolute majority showed a strong commitment to policy evaluation. Some countries, among them Germany, anchored policy evaluation as a constitutional duty, which is evidence of an intention to consistently evaluate policies (Jacobzone, 2020). There are various ways to do it — one way is to use randomized controlled trials (RCT) to evaluate interventions. The issue with that is that it takes time, and it may not have the market impact which the FiT was meant to have. Meaning, the goal with FiTs was to bring down costs of renewable energy, and the long-term effect of economies of scale may not appear in a small-scale RCT. Instead, natural experiments can be used when randomization is not possible or desirable, in combination with economic theory and empirical evidence (Kraay, 2020). For the FiT to be successful, it was critical to have a long-term impact on lower prices of renewable energy and adaptation of such.
Research on Causes of Cost Reduction of Solar Cells
Over the past 40 years, the cost of solar PV (solar cells) has dropped by around 99 percent (Roberts, 2018). It’s a dramatic decline- but it is essential to understand what contributed to this drop. Again, following the idea of green premiums, cost reductions to the point that solar cell-generated electricity is cheaper than coal-generated will drastically increase investments and adaptation. Kavlak et al. (2018) looked specifically at what drove the cost decrease of solar cells. They used a method that can quantify how “each change to a feature of the technology or manufacturing process contributes to cost reductions when many changes occur simultaneously” (Roberts, 2018). The team at MIT used a dynamic model that can quantify and distinguish the component causes of the drastic price decline.
When Kavlak et al. (2018) looked at high-level mechanisms, they found specific drivers contributing to the decrease in cost (Figure 2). R&D made up a more significant part of driving the costs down, as people spend money and time making panels better. During 2001–2012, however, the factor “economies of scale” leaped forward. Because of a rapid increase in demand, manufacturers could scale their facilities and decrease costs. This factor contributed more to the module cost change during the period when the FiT came into place.
What is most interesting is that the paper talks explicitly about FiTs as the primary catalyst of all of these driving factors, together with other market-stimulating policies. Such public policies can encourage innovative activity and drive costs down (Bettencourt et al., 2013).
The success of the FiT eventually led to Germany abandoning the policy in favor of the lowest-bid auctions. The reason is that the guaranteed price is too high today, which comes from renewable energy becoming cheaper than conventional alternatives. Simply put, legislators saw that the bulk of the costs paid by consumers with their power bills goes to the tariff (Sutton, 2021). By shifting away from FiT, countries can also control the supply of how much renewable energy is produced and ensure sustained energy production (Kenton, 2021). However, FiT still has more profound benefits, such as citizen participation that promotes democratic values and strengthens communities. In contrast, oil- and coal companies producing electricity tend to allocate the monetary value to their investors, creating benefits for fewer people (AEE Podcast, 2020).
The Remaining Issues with FiT
The FiT has had some unintended consequences. For example, because of technological improvements and amendments to the law, the surcharge on Germany’s electric bills has been increasing. Germany is one of the European countries with the highest electricity bills (Amelang, 2019). This can have secondary effects on the environment. Higher prices can make it more expensive for electric cars manufacturers or green technology companies, moving production to low-cost countries using coal-generated electricity. It can also become a burdensome expense for some German citizens (as discussed in the episode). People may look for other, less effective policies that do not decrease the well-being of poorer people.
Policy Innovation: Using FiT in Other Industries to Drive Development
There are opportunities to learn from FiT and induce the concept into other industries. Kavlak et al. (2018) talk about how the decreasing cost in the early years is attributed to solving engineering challenges and improvements in the supply chain. There are simply many knobs to turn in new industries, which allows for simultaneous solutions (Figure 3). The same goes for other early-stage technologies, such as fuel cells cars.
The market-stimulating policy FiT creates legal and economic incentives for private actors to develop, research, and invest in technologies. Kavlak et al. (2018) attribute 60% of the cost decline in PV modules between 1980 and 2012 to market-stimulating policies. Policies incentivize investors to develop and deploy solar panels: and they are responsible for more than half of the decline in solar cell costs.
It should be possible to induce what we learned from the FiT onto other technologies, which I also asked Mr. Fell. He said that it should be possible to apply the same tariff on, for example, plastics. Specifically, those innovating new ways to improve plastic to make it degradable in the soil should get paid for this, while those producing oil-based plastics should pay a small cut into the system. However, such systems do not yet exist, and policymakers have room for innovation. History has shown that policymakers can kickstart the process of bringing down green premiums, and it is partly up to them to find ways of doing it in the future.
AEE Podcast. (2020). S1 E10: The future of (community) renewables. https://soundcloud.com/user-528766714/s1-e10-the-future-of-community-renewables
Amelang, S. (2019, January 10). German households and industry pay highest power prices in Europe. Clean Energy Wire. https://www.cleanenergywire.org/news/german-households-and-industry-pay-highest-power-prices-europe
Appunn, K. (2020, September 10). What’s new in Germany’s Renewable Energy Act 2021. Clean Energy Wire. https://www.cleanenergywire.org/factsheets/whats-new-germanys-renewable-energy-act-2021
Bettencourt, L. M. A., Trancik, J. E., & Kaur, J. (2013). Determinants of the Pace of Global Innovation in Energy Technologies. PLOS ONE, 8(10), e67864. https://doi.org/10.1371/journal.pone.0067864
Hornung, C. (2015, June 4). Hans-Josef Fell. Clean Energy Wire. https://www.cleanenergywire.org/experts/fell
Jacobzone, S. (2020). How can governments leverage policy evaluation to improve evidence informed policy making? OECD, 28. https://www.oecd.org/gov/policy-evaluation-comparative-study-highlights.pdf
Kavlak, G., McNerney, J., & Trancik, J. E. (2018). Evaluating the causes of cost reduction in photovoltaic modules. Energy Policy, 123, 700–710. https://doi.org/10.1016/j.enpol.2018.08.015
Kenton, W. (2021, February 24). Feed-In Tariff (FIT). Investopedia. https://www.investopedia.com/terms/f/feed-in-tariff.asp
Kraay, A. (2020, January 30). Thirteen insights for successful development policies. World Bank Blogs. https://blogs.worldbank.org/developmenttalk/thirteen-insights-successful-development-policies
Roberts, D. (2018, November 20). What made solar panels so cheap? Thank government policy. Vox. https://www.vox.com/energy-and-environment/2018/11/20/18104206/solar-panels-cost-cheap-mit-clean-energy-policy
Sutton, I. (2021, June 3). Germany: Will the end of feed-in tariffs mean the end of citizens-as-energy-producers. Energy Post. https://energypost.eu/germany-will-the-end-of-feed-in-tariffs-mean-the-end-of-citizens-as-energy-producers/