The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States

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The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States:

By Wilson Rickerson and Robert C. Grace

The diffusion of renewable energy policies around the world has prompted dialogue and debate on the comparative merits of different policy schemes. The most prevalent policies for supporting new renewable electricity are variations of the feed-in tariff  and the Renewables Portfolio Standard  (RPS).  Feed-in tariffs offer a long-term, fixed price payment to renewable energy generators, whereas the RPS seeks to create price competition between renewable energy generators to meet defined targets at least cost, and typically define a maximum cost through a price cap instrument.

The European Union has substantial experience with both approaches. Feed-in tariffs have thus far driven rapid renewable energy capacity expansion in several European Union member nations while RPS polices have not. The perceived success of feed-in tariffs has inspired the adoption of similar laws by other countries, and feed-ins are currently world’s most widespread national renewable energy policy. As of 2007, feed-in tariffs had been adopted by eighteen EU countries, Brazil, Indonesia, Israel, Korea, Nicaragua, Norway, Sri Lanka, Switzerland, and Turkey.

Experience with feed-in tariffs in the United States is limited, and US states have instead focused primarily on RPS policies.  RPS policies require utilities (in integrated monopoly service territories) or generation service providers (in states with retail competition) to supply a minimum percentage of their electricity from renewable sources. RPS policies have diffused rapidly around the United States, but the momentum and impact of European feed-in tariffs is beginning to attract the interest of US policy makers. Commissioner John Geesman, of the California Energy Commission, recently stated that "Germany's renewable feed-in tariff has revolutionized the market for wind and solar energy…Those are things that California is directly looking at (Nicola, 2006)." Statements like Commissioner Geesman’s raise questions as to whether feed-in tariffs could be an appropriate tool for the United States given the country’s political and regulatory landscape.

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