Feed-in tariffs are commonly applied in support of greater adoption of renewable energy generation by a country, state or city. Briefly, feed-in tariffs pay for the difference in price between the production cost of renewable energy and the price of grid electricity. However, are they essential or could renewable energy compete competitively with non-renewable energy sources without the support of feed-in tariffs? The answer is yes due to the essentially free nature of renewable energy such as wind and solar even though there is capital investment cost involved for the physical infrastructure needed for renewable energy generation. The cost of the physical infrastructure would gradually depreciate over the life-cycle of the energy project.
The common argument in favour of feed-in tariffs posits that renewable energy could not compete with non-renewable energy due to the higher cost of production of renewable energy. However, this argument fails to take into account the essentially free nature of renewable energy such as wind and solar. Specifically, the cost of producing renewable energy comes from the investment needed for the physical infrastructure needed for the generation, storage and distribution of renewable energy. These costs are also present in the case of non-renewable energy in the form of generation and distribution costs. However, renewable energy has the advantage that it is free compared to the price of fossil fuels such as coal, oil and natural gas which has to be purchased by the power generation companies. Thus, renewable energy generation enjoys a competitive advantage over non-renewable energy production. Hence, feed-in tariffs are not necessary for the support of renewable energy especially in the current climate where the cost of equipment for the production of solar energy is declining with advancement in manufacturing technologies and reduced material cost.
Category: environmental economics, environmental engineering,
Tags: feed-in tariffs, renewable energy, physical infrastructure, breakeven cost,
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