Traditional power rate setting mechanisms are a very inefficient and expensive way to set electricity rates. These mechanisms can, and many times do, incentivize electric utilities to invest in the most expensive forms of power generation. This means that you and I pay way too much for electricity.
In Japan and many other countries/markets, electric utility rates are set through a “Cost Plus” system. As I wrote the other day, the Cost Plus system works like this:
Renewable energy FITs are in the news a lot these days here in Japan. “FIT” is the acronym for Feed-In Tariffs – a mechanism for paying for production of renewable energy at a guaranteed price. FITs are designed to encourage both investment in renewable energy production by allowing an energy producers to have a sure fire way to make money off their investment. FITs have proven extremely successful in developing the renewable energy market in a large number of countries.
A silly man commented to me online that FITs are somehow very bad. Initially I thought that this silly person must be misinformed, but upon looking up his name online, I discovered he works in the nuclear industry. FITs are not so good for people with vested interests in nuclear as FITs enable countries to get by without nuclear plants.
UPDATE: I recommend anyone who is interested in this post to read this at Lenz Blog. There is a fantastic short video interview with the German parliamentarian in charge of energy and the environment on FITs and why they’re so successful. It’s highly related to this post!
The major media covering the Japanese feed-in-tariffs (FITs) are missing an angle which I believe is significant. The democratization of energy is going to be a huge change in Japan. Individuals will be taking a major share of the power generation market for the first time in Japan’s history.
Many pundits in the Japanese media are discussing the large business opportunities for companies afforded by the FITs system. Of course there will be massive entrepreneurial opportunities for new players, and legacy energy companies will also participate.