April 29. 2001

Full Cost Rates provide a full reimbursement of the money invested by a private or business in a grid-connected photovoltaic system. The utility buys the solar electricity fed into the public grid at a price that makes it possible for the owner to finance and maintain the photovoltaic system. The costs arising for the utility due to this payback rate are financed by a slight increase in electricity rates. The utility rate base is the sole source of funding. There is no need for subsidies from the state or taxpayer funding.

The greenhouse effect and the resulting climatic changes increasingly question the conventional ways of producing energy by burning coal or other fossils. Nuclear energy with its incalculable risk and the still unsolved problem of where to store the nuclear waste doesn't seem to be a pleasant alternative.
Nearly everybody seems to agree that at some time in the future the energy demand has to be met entirely by renewable energy. The question is: How to get there? What is the best way of promoting photovoltaic (PV), wind and water power or biomass?

In Germany a new form of market development is growing. "Full Cost Rates" is the keyword. The purpose of this paper is to explain this new kind of promotion and to point out its advantages in comparison with other market mechanisms.

2 How to promote solar energy

2.1 Decentralization is important

Solar cells transfer the light of the sun directly into electricity. Therefore PV is a very practical source of environmentally friendly energy. The energy industry doesn't have the necessary space and also lacks the economic interest to build huge solar energy plants. Acquiring additional land is expensive and a further sealing of the surface is also undesirable. For private individuals, however, there is lots of space available: on top of their roofs.
The energy supply system of the future consist of many small or medium-sized systems: solar plants, wind power, small water power stations and biomass, distributed over the country. All of them feed the energy produced into the public grid. The utilities are to run the public mains and distribute the energy. For the local utilities not much would change. An investigation into the city of Aachen showed that 60% of the annual electricity could be covered by solar energy.

2.2 Conventional market mechanisms

It's true that there are relatively few solar systems in operation today. Perhaps 300 000 in Germany. Solar energy is still rather expensive. Only by mass production will photovoltaic become cheaper.

There were several state funded investment allowance programmes available, i.e. the 10000 Roof Programme of the Federal Government and also programmes organized by most of the federal states. They were tax-based and, unfortunately, quite unreliable. Frequently they are suspended for an indefinite time, which causes irritation and people then postpone the purchase of a solar system. Regarding public money there is always the danger of budget cuts. These schemes will therefore fail to make anybody invest in bigger manufacturing facilities. These government funded subsidy schemes could naturally only provide for part of the costs, usually between 30% and 50%, so that people not investing in solar energy were still better off.

Germany solved this problem by introducing a cost-covering rate-based reimbursement of solar electricity fed into the public grid. It was the Solarenergie-Förderverein e.V. who invented this model. In the Year 2000 the model became a Law in Germany - The Erneuerbare Energien Gesetz (EEG). Now it doesn't make a difference to the owner of a house whether he or she puts money into a bank or invests it in a solar system on his or her roof. Solar energy is then not only an option for idealistic people.

2.3 Full Cost Rates

The main idea of this is that private owners are treated equally to the utilities. Like everybody else who runs a power station, they feed the electricity into the public grid and get a payback rate that allows them to finance and to maintain their systems. Then the electricity in the grid is a mixture of fossil, atomic and regenerative energy. The costs for the latter are to be included in the electricity rates, which are slightly increased by this. Everybody consumes a part of the clean energy and everybody pays for it via their electricity bill. This fits well into the conventional rates system.

The main differences to the conventional form of promotion are that this method is rate-based instead of being tax-based and that the owner gets money for the electricity produced and not for the system itself. There is no need for state funded subsidies or new taxes.

In Germany, Full Cost Rates at first were introduced by the city councils. Full Cost Rates were first implemented in the German city of Aachen Freising and Hammelburg. Now they are implemented in the whole of Germany by the EEG.

For the calculation of the actual payback rate the amount of electricity produced by an optimized model system during its 20 year lifetime is estimated. As the average conditions don't vary very much this only has to be done once. Then you calculate a fee that leads to full reimbursement over the lifetime of the system both of the costs for the system and the interest rates one has to pay for organized the capital.

When after some time the costs for solar systems decrease due to mass production owners of newly built PV plants will get smaller payback rates. The solar "pioneers" who run the old systems still get 1.89 DM/kWh (since 1.1.1999 only 1.76 DM/kWh). People who buy a new PV plant in 2006 get 51,80 EuroCent/kWh until 2026.

3 Advantages and arguments

3.1 Price competition is encouraged

If someone manages to build a cheaper or more efficient solar system than the model he or she can gain a moderate profit. A person who builds more expensively won't fully cover the costs and therefore is "punished". This leads to a competition between both traders and installers of PV systems.
Consequently the next model system will be cheaper. in contrast to this, if in a government subsidy programme a person building a PV system were to get 40% of the costs right at the beginning, the higher the cost of the system, the higher the subsidy. This would create an incentive to buy expensive systems.

3.2 PV system maintenance

If, for instance, the converter fails after twelve years there is no incentive for the owner of a solar system subsidised by an investment allowance to replace it. Only environmentalists will do so. If, on the other hand, the owner gets rate-based reimbursement there are economic reasons to keep the system running: only the electricity actually produced is paid for.

3.3 A reliable market development programme builds sustainable volume

Tax-based governmental programmes are subject to unstable political cycles and budget constrains. Once implemented, Full Cost Rates leads to predictable market development. This can induce long-term investments in the solar industry. With sustainable marked demand, manufacturers can confidently invest in production scale-up and reduce the cost of PV.

3.4 How much does it cost for the residential customers?

Due to limited production capacities only a limited number of PV systems can be built at once. Electricity rates will therefore increase slowly. The annual consumption of electricity per person is on average 1000 kWh. The current rate is about 15 EuroCent/kWh, which leads to an annual electricity bill of 150 Euro for one person. About 3 % of this is 4,5 Euro yearly which does not hurt the customers.

3.6 Further Information

For further information please contact the Solarenergie-Förderverein Germany (Solar Promotion Association).

Solarenergie-Förderverein Deutschland e.V.
Bundesgeschäftsstelle
Herzogstr. 6
52070 Aachen
Germany
zentrale@sfv.de
Fax: ++49 241 535786