Star wars log – “Heads I win, tails you lose”

On tv yesterday, I heard an argument in favor of early rather than delayed installation of renewable energy (RE) capacity to produce electricity. 

from canonsnapper at flickr

The argument is this. The price of fossil fuels is now high and continuing to rise. If we don’t go with renewables now, we will be at the mercy of producers using fossil fuel who will pass on the cost of fuel into the price of electricity.

But this argument is intellectually dishonest.

It ignores the concept of grid parity, a concept that is good for green energy but would make the feed-in-tariff (FIT) scheme obsolete. It also glosses over the fact that the FIT scheme apparently involves long-term contracts with big producers (proposed at 20 years) during which consumers will have to pay for green energy at a price that has been set above the cost of producing electricity from fossils.

Please, to let explain.

As to grid parity, it is a “kodak” moment in ecological circles because it is when going green has become cheap enough that it competes with fossil. Clearly, at grid parity, we can all simply tap the sun or wind or water, and we don’t have to rely on the grid. After all, the cost is the same either way.

Grid parity arrives because green energy gets cheaper (which is aided by technological innovation), or when fossil fuel prices rise (which is expected in the long run as such fuels run out), or when there is a combination of these two events.

Imagine that grid parity is practically at hand. Imagine that it arrives next year. Imagine that we implemented the FIT scheme, giving some “lucky” producers a long-term contract at a FIT price above the fossil price. This means we pay for the higher FIT price for one year. What happens when grid parity arrives, or when green energy becomes cheaper than fossil? The FIT scheme does not require the RE producer to sell at the FIT price. Under the RE Act of 2008, the FIT is an option: the RE producer on a FIT contract can decide to sell to the grid at a price higher than the FIT! It is in fact a case of “heads I win, tails you lose” for the RE producer on the FIT scheme.

What happens if, for some reason, fossil fuel prices stay constant or even decline? This is not far-fetched. If grid parity arrives, more electricity will be produced from renewables, and there will be less demand for fossil fuels, and by basic economics the price of fossil must fall. But now, the RE producer on a FIT has a guaranteed price above the price of fossil. Again, he can never lose. But the hapless consumer would be scratching his head. If the FIT scheme had not been implemented, he could in fact benefit from the lower fossil fuel price! That would be a sad outcome in a country like the Philippines that is way ahead of the industrial world in having a green footprint. Go figure.

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