FIT as an efficient auction

The cost case for phasing out feed-in tariffs in Germany and replacing them with auction models is not applicable in reality.

Lenz Blog

Craig Morris at Renewables International kindly quotes my recent blog post about the recent German reform of the feed-in tariff. And he makes a very interesting point in closing his post:

No problem – show me a bidding process that is more cost-effective than feed-in tariffs and provides greater competition between market players large and small (not between energy sources; solar and wind complement each other, they do not compete with each other), and we can throw out feed-in tariffs. If the Commission is saying that we have to transition from FITs to bidding processes that are better, then there will be no such transition at all, for no such bidding processes exist.

The case for phasing out feed-in tariffs and replacing them with auction models is based on the idea that this will reduce costs. There is a true core to that idea. If you hand out feed-in tariffs that are higher than what is necessary under market conditions, electricity consumers will end up paying higher surcharges than needed.

But actually the present system (especially after the last reform) already makes sure that the feed-in tariffs are not above what market conditions require.

That’s because they are based on deployment records. If those are high, the feed-in tariffs get slashed. If they are too low, they stay constant, or may even increase.

That clearly is a reaction to market conditions.

And in contrast to auctions, there is no need for a complicated process to auction off individual projects, something that certainly won’t work for small rooftop solar.

We also know that the feed-in tariff has actually a rather good track record in reducing costs, to the point that it won’t matter ever so much that those costs will go up again slightly under the failed auction model Germany just introduced, with the EU Commission illegally requesting that to happen.

While I think it is a great point Morris made here and I agree completely with that, there is one technical detail where I disagree with his post. Morris writes:

Essentially, the ECJ made a distinction in its ruling of 2001 between 'illegal state aid' and 'legal state aid', with German feed-in tariffs from the 90s constituting a legal form.

That’s not how I see the PreussenElektra case. In that case, the court decided that the German system is not 'state aid' in the first place. They did not say it is state aid, but should be allowed anyway.

That was the reasoning in PreussenElektra as well as in the recent Ålands Vindkraft case concerning measures of equal effect as quantitative restrictions (Article 34 of the Treaty on the Functioning of the European Union). The fact that the German system as well as the Swedish one does not allow electricity generated in other Member States is a restriction, but it is justified by an overriding purpose of environmental protection.

Karl-Friedrich Lenz is a professor of German and European law, Aoyama Gakuin University, Tokyo.  A free PDF file of his third global warming science fiction novel 'Last Week' is available here.

Originally published on the Lenz Blog. Reproduced with permission. 

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