Community Power – An Alternative Path?

Blog, Energy, Les Routledge

Caution: Readers who reject the concept of feed in tariffs are advised to hide any objects that can be damaging to a computer before reading the following post.

Paul Gipe has produced an interesting article profiling the state of energy development in the German state of Schleswig-Holstein.  This state has migrated towards a quite different model of utility asset ownership and control, one with broad-based participation by independent power producers instead of one dominated by a handful of large corporations.

Nordfriesland has one of the highest concentrations of wind generating capacity on record: more than 400 kW per square kilometer. And more than 80% of that is owned locally, either directly by farmers, or by local investors.  In 2007 wind turbines owned by some 6,000 farmers and local investors–4% of the population–in Nordfriesland generated 1.3 TWh

The article goes on to indicate that there is growing support for the construction of a community-owned transmission line to connect the production capacity of locally owned operators to the grid.

While one can criticize the cost of the feed-in tariff program that makes this structure possible, it does present an interesting alternative to large, integrated utility operating models.  For example, it would be interesting to examine if increasing the number and diversity of investment groups seeking to develope new production capacity leads to a lower cost per unit of power produced over time.

To put it in another perspective, does increasing the number and diversity of producers competing for investment capital lead to more technology innovation and a lower cost of operation over time?

In concept, the German model of feed in tariffs is supposed to encourage this type of innovation at the producer level by reviewing the tariff rates on a periodic basis and decreasing them as average cost of production of all producers declines.  From a farmer’s perspective, it is sort of like a milk marketing board that works in reverse, as input and average cost of production costs decline, the price paid for their output also declines.  Perhaps the review period needs to be more frequent, but at least the concept is there to place constant pressure to adopt best practice in terms of construction techniques and use of investment capital.

The situation with solar producers is particularly interesting in how this approach to setting tariffs work.  In recent years, the cost to construct new solar capacity has declined substantially and is expected to fall even further in the future.  As a result, the price paid for the power produced by those new operators is also falling.  From 2004 to 2011, the rate has fallen from about 50 Euro cents per kwhr to around 25 to 30 Euro cents german solar tariffs .  Yes, that is still expensive power, but its cost if falling over time.

It is interesting to contrast that experience over time to the alternative presented in Manitoba.  With the Wuskwatim dam, input cost inflation has led to a steady increase in the cost of bring capacity on line.   Where is the pressure in this situation to search for techniques to reduce costs of construction?  Will the regulator or the government turn to an alternative supplier who can bring the equivalent capacity on line at a lower cost?

In concept, the attempt to increase the number of suppliers competing to supply power to the grid could be a worthwhile goal.  These more numerous competitors have to compete to access capital and they are not allowed to pass cost-inflation of an individual project onto consumers.  They are motivated to find methods to reduce cost of production because if cost of construction get out of hand, they and their investors lose money.

That is a very different dynamic compared to a situation where a limited number of power producers like Manitoba Hydro have the ability to pass increased costs onto consumer instead of absorbing the losses themselves.  If they had been operating under a feed-in tariff regime, the price offered to them for the power that could be produced by Wuskwatim would have been capped at the starting cost estimate of say 6.6 cents a kwhr.  Instead, Manitoba consumers and tax payers are on the hook to pay for their cost over runs.

Today, almost three years later, the worst has come to pass. It will cost in the vicinity of 9 to 10 cents a kilowatt hour to produce power from Wuskwatim, and the best we can sell it for is 2 to 3 cents on the spot market. Source: The Black Rod

Feed in Tariff systems may not be ideal, but perhaps there are elements of the model that merit more considered thought than an instinctive knee jerk rejection.