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Feed-in tariffs for promoting solar PV: progressing from dynamic to allocative efficiency

Bell, William and Foster, John (2012): Feed-in tariffs for promoting solar PV: progressing from dynamic to allocative efficiency.

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Abstract

The International Energy Agency has observed that nearly all countries now offer, or are planning, feed-in tariffs (FiTs) for solar PV but the debate has shifted from ‘if or how to implement a FiT’ to ‘how to move to a self-sustaining market post FiT’. The aim of this paper is to explain how a sustainable FiT can be designed for residential solar PV installations to simultaneously enhance the diffusion of other distributed resources, such as energy storage, focusing on the case of ‘solar rich’ Australia. Solar PV is approaching price parity at the retail level where the electricity price charged includes both transmission and distribution costs, in addition to the wholesale price. So the economic rationale for paying a FiT premium above market rates to achieve dynamic efficiency is no longer warranted. However, there is justification pay a premium to encourage dynamic innovation in energy storage. Socially, FiTs can be a problem because they tend to exacerbate social inequality by providing a transfer of wealth from poorer to richer households. Additionally, new investment in distribution and transmission driven by peak demand spikes from air conditions acts a further transfer of wealth from poorer to richer households. Environmentally, FiTs can also fall short of their full potential to cut emissions if they lack ‘time of day’ price signals that reflect movements in the wholesale price and lack a price signal to defer investment in distribution and transmission. We provide a framework in which a sustainable FiT can be designed that positively addresses all three areas of concern: social, environmental and economic. This framework identifies the market failures that exist in the residential solar PV electricity and other distributed resources, which include exacerbating inequity, poorly targeting myopic investment behaviour, inadequate transmission and distribution investment deferment price signals and inappropriate infant industry assistance. We argue that these market failures require addressing before the market can operate in an allocatively efficient manner. The sustainable FiT that we propose would lead to improvements in environmental, social and economic factors. The resultant transmission and distribution investment deferment would meet both environmental and economic objectives. Directly providing finance for solar PV and other distributed resources in rental properties would address both social equity and investment myopia. We argue that introducing appropriate pricing signals for solar PV and other distributed resources would be in the ongoing interest of customers. It is time to progress from FiTs focused on dynamic efficiency to a sustainable FiT for solar PV that emphasises allocative efficiency as an explicit goal and introduce support for other distributed resources to encourage dynamic efficiency. The proposed framework provides appropriate prices signals for the assimilation of other distributed resources.

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