Feed-in tariffs: a regressive tax?

Following the targets for renewable energy included in the recent Climate Change and Energy package, there has been debate about the role feed-in tariffs might play in the UK. Most environmentalists support a feed-in tariff, citing evidence from Europe that such schemes have increased renewable capacity. The government is going to investigate this summer.

Under a feed-in tariff, energy suppliers are obliged to buy surplus electricity from owners of small-scale generators at a premium fixed by the government, and share the marginal cost among their customers. This makes installing microgenerators on homes more attractive.

There are two issues with feed-in tariffs:

  1. It tends to be wealthier people that install microgenerators on their homes – partly because they have the available capital (a feed-in tariff would not reduce the capital investment required to install a solar panel or wind turbine – it would reduce the time over it pays back) and partly because they are more likely to be the kind of people who worry about the environment. A feed-in tariff as outlined above is a regressive tool because the overall effect is that poor consumers subsidise wealthy ones.
  2. Feed-in tariffs encourage microgeneration – not lower greenhouse gas emissions per se. Any intervention that is directed at a type of solution rather an outcome leads to inefficient and sometime counterproductive behaviour. It may be that the money could be better spent on large scale renewables or energy efficiency.

If private homes are a good site for small scale renewable generators, perhaps there is scope for the energy suppliers to make deals with homeowners. Suppliers could install, own and maintain generators on homes, and in return the homeowner would get cheaper energy. As owners of the generators, suppliers would be incentivised under the existing Renewables Obligation.

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3 Responses to “Feed-in tariffs: a regressive tax?”

  1. Thanks, that’s the clearest explanation of this I’ve seen.

  2. Even the large renewables projects work on a set tariff in Europe. Portugal’s huge solar farm for example. I understand the points you make but most new technologies need a lift up initially.

  3. To add, the internet is largely here today from its earlier incarnation via the US military, which in itself is government funded. A little help with feed tariffs is by comparison, peanuts.

    I do however take your point that wealther folk will take advantage of this. This does eventually contribute to unit price coming down however and eventually a technology becomes the norm for the majority.

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