Notes on Evolving Tariffs in China and Japan

Subsidizing solar power based on the amount of electricity generated is easier to control by the government. One-time incentives don’t give regulators much margin to ensure the quality of power plants.

Meng Xiangan, vice chairman of the China Renewable Energy Society in Beijing

Government policy is in clear support of these projects (Feed in Tariffs for large projects) while the country grapples with severe energy shortages following its shunning of nuclear power. However, this is likely to be short-lived and decline after 2014 once the current pipeline of approved projects is completed, largely because of a shortage of land in the country.

Frank Xie, IHS senior analyst for PV and solar research - commenting on Japanese market

I like the quote from Xiangan - it's clear and to the point. It would be great if the US woke up and shifted subsidies away from a front loaded (AKA: one-time) Investment Tax Credit structure. Distributing the front loaded ITC over a 10 year depreciation period for all photoelectric development (residential, commercial and utility) would accomplish this.

I like the quote from Xie as well. On one hand I don't think he goes far enough but I suppose the available land argument allows him to make his point without ruffling any feathers. In my opinion the greater reason for curtailing subsidies on mega-projects has to do with the fact that these projects never become competitive. It's better to focus deployment on residential and commercial customers who can self-consume electricity. This policy strategy has the additional benefit of encouraging the development of an energy management market which spills over into improving system efficiency.

You want a policy that gives the developer of a photoelectric system more responsibility and control over profits. The policy should evolve in stages.

1st stage. Throw money at the problem. Offer a generous FiT to get the ball rolling. Supply chains get built and/or reinforced during this stage. The market has limited information on the present and future costs of deployment. This stage of development needs to generate the info required to make people comfortable with the technology and its economics.

2nd stage. Start reducing subsidies and experimenting with self-consumption bonus policies. You'll expect system costs to fall to keep the photoelectric system profitable. Regulators can look at markets like Italy, Germany and Australia to get an idea for how fast they can reduce subsidies. Market participants can do the same. During this stage of development you can expect the installers and the industry associations to cry bloody murder when subsidies are reduced. It's all a show for the cameras. 

3rd stage. You start hitting parity with retail.  Keep reducing subsidies and fine tune the self-consumption policies. Restrict subsidies on utility type systems. During this state you kill off unsustainable developers.

4th stage. Transfer to value of electricity tariffs (VETs). If you've done things right you should have a large  potential customer base capable of economically installing photoelectric systems and you should have plenty of information available to the market detailing the expected system costs, system performance, self-consumption rates and so on.