Will a feed-in tariff create the green jobs Australia is looking for?

The renewable energy industry and its supporters in Australia have claimed for years that a feed-in tariff will be the way towards grid parity as well as a way to build up a renewable energy industry and create thousands of jobs. This has been echoed particularly strongly by the local solar industry – quoting Europe – especially Spain and Germany – as examples of success.

Generally, a feed-in tariff is a policy mechanism designed to encourage the adoption of renewable energy sources and to help accelerate the move towards grid parity. It typically includes three key provisions: guaranteed grid access, long-term contracts for the electricity produced and purchase prices that are methodologically based on the cost of renewable energy generation and tend towards grid parity. Under a feed-in tariff, an obligation is imposed on regional or national electric grid utilities to buy renewable electricity (electricity generated from renewable sources, such as solar power, wind power, wave and tidal power, biomass, hydropower and geothermal power) from all eligible participants.

The cost-based prices, therefore, enable development of diversity of projects and ensure that investors can obtain a reasonable return on renewable energy investments. As of 2009, feed-in tariff policies have been enacted in 63 jurisdictions around the world, including in some states of Australia, around Europe (most notably Germany, Spain and Italy) as well as in Iran, Korea, Singapore, South Africa, and in about a dozen states in the United States. The concept is also gaining momentum in China, India and Mongolia.

But what has been hailed as the saviour for renewable energy around the world has recently proved to be fatal for the European solar industry due to poorly designed schemes. Let’s take a closer look at the often quoted success stories, firstly Spain.

Initially, the introduction of a generous feed in tariff of €0.44/kWh led to an explosive Spanish solar market. PV installations shot up from 88 MW in 2006 to 2500 MW in 2008. The reason for drastically reducing the tariff in 2008 was spiralling costs: Feed-in payments to the Spanish PV industry increased to €2.5 billion and even poorly designed systems could make a profit. The lower tariff combined with the effects of the global financial crisis proved to be a knockout blow for the industry. In 2009, installations fell back to earth with a mere 70 MW installed. Employment and investment followed a similar path, with the industry first adding jobs and then shedding as many as 25,000 jobs in 2009 as the global financial crisis peaked.

Germany had a similar experience. Its tariff was introduced in 2000 helped to prop up solar equipment manufacturers and saw installations soar making, Germany the world’s solar hot-spot. With a total installed capacity of 9.8 GW, Germany remains the largest solar energy market worldwide. 3.8 GW of this capacity were newly installed in 2009 alone. Last year, the German solar power industry and its suppliers generated sales of over €10 billion. Today, a total of 60,000 jobs are dependent upon the photovoltaics industry.

Thought as world class, many of those manufacturers were comfortably hiding behind a market distorted by too generous support. When other nations – most notably China – caught up with cheaper technology of similar quality, the so called “solar valley” in Germany’s East had to start shedding jobs by the hundreds. However, the government is about to cut the feed-in tariff to a more sensible level in July this year, which will reduce the number of installation jobs even further but should save the skills base of solar R&D and manufacturing for the future.

So what are the lessons learned for Australia?

Feed-in tariffs can actually support technologies on their way to grid parity and they can create “green” jobs – if used in moderation. They should not be utilized as long term tools to keep these industries alive – this will prove costly for the tax payer and will not create the sort of competition needed to create companies that can also compete on a global level. If used wisely and kept open for short term changes they have proven to be the stimulus for private capital investment that would otherwise not happen in the absence of government support. That investment will not only help to reduce Australia’s emissions – it will also create the green jobs we are longing for.