A feed-in tariff (FIT, FiT, standard offer contract,Couture, T., Cory, K., Kreycik, C., Williams, E., (2010). Policymaker's Guide to Feed-in Tariff Policy Design. National Renewable Energy Laboratory, U.S. Dept. of Energy advanced renewable tariff, or renewable energy payments) is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. This means promising renewable energy producers an above-market price and providing price certainty and long-term contracts that help finance renewable energy investments. Typically, FITs award different prices to different sources of renewable energy in order to encourage the development of one technology over another. For example, technologies such as wind power and solar PV are awarded a higher price per kWh than tidal power. FITs often include a "digression": a gradual decrease of the price or tariff in order to follow and encourage technological cost reductions.
Description FITs typically include three key provisions:Mendonça, M. (2007). Feed-in Tariffs: Accelerating the Deployment of Renewable Energy. London: EarthScan. guaranteed grid access long-term contracts cost-based purchase prices
Under a FIT, eligible renewable electricity generators are paid a cost-based price for the renewable electricity they supply to the grid. This enables diverse technologies (wind, solar, biogas, etc.) to be developed and provides investors a reasonable return. This principle was explained in Germany's 2000 Renewable Energy Sources Act:
The tariff may differ by technology, location, size, and region and is typically designed to decline over time to track and encourage technological change. FITs typically offer a guaranteed purchase agreement for long periods (15–25 years) and give incentives to producers to maximize output and efficiency.Klein, A.; Pfluger, B. Held, A.; Ragwitz, M.; Resch, G. Evaluation of Different Feed-in Tariff Design Options: Best Practice Paper for the International Feed-in Cooperation (Fraunhofer ISI) (October 2008). 2nd Edition. Berlin, Germany: BMU. Retrieved 1 November 2008
In 2008, a detailed analysis by the European Commission concluded that "well-adapted feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity."European Commission (COM), 2008. Commission Staff Working Document, Brussels, 57, 23 January 2008. Retrieved 17 November 2008 at: This conclusion was supported by other analyses, including by the International Energy Agency,International Energy Agency (IEA) (2008). Deploying Renewables: Principles for Effective Policies, .de Jager, D., Rathmann, M. (2008). Policy Instrument Design to Reduce Financing Costs in Renewable Energy Technology Projects. Work performed by ECOFYS, Ultrecht, The Netherlands. Paris, France: International Energy Agency – Renewable Energy Technology Deployment. Retrieved 9 March 2009 at: the European Federation for Renewable Energy,European Renewable Energy Federation (EREF 2007). Prices for Renewable Energies in Europe for 2006⁄2007: Feed-in tariffs versus Quota Systems – a comparison. Doerte Fouquet, editor, Brussels, Belgium, available at and by the Deutsche Bank. As of 2019, over 50 countries had enacted FIT policies.REN21 Global Status Report, 2010 , pp. 37–8, Tab. 2
In environmental economics, a FIT can be differentiated based on marginal cost. In this policy structure, the tariff price ranges from just above the spot rate to the price required to reach the government's optimal production level. Firms with lower marginal costs are offered lower prices, while those with higher marginal costs are subjected to higher tariff prices. This policy aims to decrease the profitability of certain production sites and promote a more widespread distribution of generators. However, it may result in less cost-effective production of renewable electricity as the most efficient sites might be underutilized.
The second objective of the differentiated tariff policy is to decrease the overall cost of the program. Under a uniform tariff system, all producers receive the same price, which can exceed the price necessary to incentivize production, resulting in surplus revenue and profit. A differentiated tariff seeks to provide each producer with the necessary incentives to maintain production, aiming to achieve the optimal market quantity of renewable energy production.
In the context of globalization, FITs pose challenges from a trade perspective, as their implementation in one country can impact the industries and policies of others. Ideally, these policy instruments would fall under a globally-coordinated body overseeing their implementation and regulation, which could be facilitated through the World Trade Organization.
Compensation
There are three methods of compensation. Feed-in tariff – compensation is above retail and, as the percentage of adopters increases, the FIT is reduced to the retail rate. Net metering – allows producers to consume electricity from the grid, e.g., when the wind stops. Credits typically roll over to future periods. Payments (to the utility or the consumer) depend on net consumption. Power Purchase Agreement (PPA) – pays for the generation of electricity and is normally below the retail rate. Although, in the case of solar, it can be higher in some countries because solar would be generated in times of peak demand.
History
United States The first form of feed-in tariff (under another name) was implemented in the US in 1978 under President Jimmy Carter, who signed the National Energy Act (NEA). This law included five separate acts, one of which was the Public Utility Regulatory Policies Act (PURPA). The purpose of the National Energy Act was to encourage energy conservation and develop new energy resources, including renewables such as wind, solar, and geothermal power.Hirsh, R. F. (1999). " PURPA: The Spur to Competition and Utility Restructuring," The Electricity Journal, Vol. 12, Issue 7, pp. 60–72.
Within PURPA was a provision that required utilities to purchase electricity generated from qualifying independent power producers at rates not to exceed their avoided cost. Avoided costs were designed to reflect the cost that a utility would incur to provide that same electrical generation. Different interpretations of PURPA prevailed in the 1980s: some utilities and state utility commissions interpreted avoided costs narrowly to mean avoided fuel costs, while others chose to define "avoided costs" as the "avoided long-run marginal cost" of generation. The long-run costs referred to the anticipated cost of electricity in the years ahead. This last approach was adopted by California in its Standard Offer Contract No. 4.Guey Lee, L. (1999). Korean Energy Economics Institute (KEEI). Retrieved 19 August 2009 Renewable electricity purchases: History and recent developments Another provision included in the PURPA law was that utilities were prevented from owning more than 50% of projects, to encourage new entrants.
To comply with PURPA, some states began offering Standard Offer Contracts to producers. The California Public Utility Commission established a number of Standard Offer Contracts, including Standard Offer fixed prices on the expected long-run cost of generation. The long-run estimates of electricity costs were based on the belief (widely held at the time) that oil and gas prices would continue to increase.Rickerson, W.; Grace, R.C. (March 2007). Washington, DC: Heinrich Boll Foundation. Retrieved 16 March 2009 The Debate over Fixed Price Incentives for Renewable Electricity in Europe and the United States: Fallout and Future Directions This led to an escalating schedule of fixed purchase prices, designed to reflect the long-run avoided costs of new electrical generation. By 1992, private power producers had installed approximately 1,700 MW of wind capacity in California, some of which is still in service today. The adoption of PURPA also led to significant renewable energy generation in other states such as Florida and Maine.
This notwithstanding, PURPA retains negative connotations in the U.S. electricity industry. When oil and gas prices plummeted in the late 1980s, the Standard Offer Contracts that were signed to encourage new renewable energy development seemed high by comparison. As a result, PURPA contracts came to be viewed as an expensive burden on electricity ratepayers.
Another source of opposition to PURPA stemmed from the fact that it was designed to encourage non-utility generation. This was interpreted as a threat by many large utilities, particularly by monopolistic suppliers. As a result of its encouragement of non-utility generation, PURPA has also been interpreted as an important step toward increasing competition.
Europe In 1990, Germany adopted its "Stromeinspeisungsgesetz" (StrEG), or "Law on Feeding Electricity into the Grid".Germany, Stromeinspeisungsgesetz (StrEG) (1990). Germany's Act on Feeding Renewable Energies into the Grid of 7 December 1990," Federal Law Gazette I p.2663, unofficial translation. Retrieved 9 July 2009 at: The StrEG required utilities to purchase electricity generated from renewable energy suppliers at a percentage of the prevailing retail price of electricity. The percentage offered for solar and wind power was set at 90% of the residential electricity price, while other technologies such as hydro power and biomass sources were offered at percentages ranging from 65% to 80%. A project cap of 5 MW was included.
While Germany's StrEG was insufficient to encourage costlier technologies such as photovoltaics, it proved relatively effective at encouraging lower-cost technologies like wind, leading to the deployment of 4,400 MW of new wind capacity between 1991 and 1999, which represented approximately one-third of total global wind capacity by 1999.
An additional challenge that StrEG addressed was the right to connect to the grid. The StrEG guaranteed renewable electricity producers grid access. Similar percentage-based feed-in laws were adopted in Spain and Denmark in the 1990s.
Germany's Renewable Energy Sources Act
Germany's feed-in law underwent a major restructuring in 2000 to become the Renewable Energy Sources Act (2000) ( or EEG). The title is an act on granting priority to renewable energy sources. In its new form, the act proved to be a highly effective policy framework for accelerating the deployment of renewables. Important changes included:
purchase prices were based on generation costs – this led to different prices for different technologies and for projects of varying sizes utilities were allowed to participate rates were designed to decline annually based on expected cost reductions, known as 'tariff digression'
Since it was very successful, the German policy (amended in 2004, 2009, and 2012) was often used as the benchmark against which other feed-in tariff policies were considered. Other countries followed the German approach as well. Long-term contracts are typically offered in a non-discriminatory manner to all renewable energy producers. Because purchase prices are based on costs, efficiently operated projects yield a reasonable rate of return. This principle was stated in the act:
Feed-in tariff policies typically target a 5–10% return. The success of photovoltaics in Germany resulted in a drop in electricity prices of up to 40% during peak output times, with savings between €520 million and €840 million for consumers. Savings for consumers have meant conversely reductions in the profit margin of big electric power companies, who reacted by lobbying the German government, which reduced subsidies in 2012. The increase in the solar energy share in Germany also had the effect of closing gas and coal-fired generation plants.