Unlocking Commercial Financing for Clean Energy in East Asia by Xiaodong Wang; Richard Stern; Dilip Limaye; Wolfgang Mostert; Yabei Zhang

Author:Xiaodong Wang; Richard Stern; Dilip Limaye; Wolfgang Mostert; Yabei Zhang
Language: eng
Format: epub
Publisher: The World Bank

Adjusting FITs to the Downward Trend in RE Costs

During the 1990s, neither Germany nor Denmark changed FITs for new wind farms although the cost of production per kWh dropped steadily, by a total of 40 percent by the end of the decade. This led Germany to a pre-announced multiyear digression of tariffs in which the tariff for new plants is reduced by a certain percentage each year based on empirically derived progress ratios and forecasts for the different technologies. The digression system was expected to reduce the scope for investment bubbles caused by windfall profits. The failure of the approach to control solar PV led some experts to declare the death of the feed-in system. That is premature for three reasons:

• First, policy makers do not normally jump from one method to another when the alternative has its own weaknesses; instead, they adjust a given method in light of experience.

• Second, the multiyear price forecasts based on learning curve theory did not factor in either demand shocks (German PV demand leading to supply bottlenecks from 2004 to 2006; Chinese demand for commodities pushing up prices for metals used in wind turbines, while a jump in international demand led to bottlenecks in the manufacturing of wind turbines) or supply shocks (the entry of Chinese PV module manufacturers into the world market). Policy makers have learned the lesson: pricing formulas with fixed multiyear digression rates are out; tariff adjustments based on market monitoring are in.

• Third, the volatility of prices caught policy makers off guard. However, one must assume that the severity of the disequilibrium was abnormal.9

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