Feed-in tariff

A Feed-in Tariff (FiT, Feed-in Law, FiL, solar premium, Renewable Tariff or renewable energy payments) is an incentive structure to encourage the adoption of renewable energy through government legislation. The regional or national electricity utilities are obligated to buy renewable electricity (electricity generated from renewable sources, such as solar thermal power, wind power, biomass, hydropower and geothermal power) at above-market rates set by the government.

The higher price helps overcome the cost disadvantages of renewable energy sources. The rate may differ among various forms of power generation. A FiT is normally phased out once the renewable reaches a significant market penetration, such as 20%, as it is not economically sustainable beyond that point.

The feed-in tariff system has been enacted in some states in Australia, Austria, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iran, Ireland, Israel, Italy, the Republic of Korea, Lithuania, Luxembourg, the Netherlands, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and in some states in the United States.

Note that these countries all have different versions of the system. Some are only introducing part of the system, in an attempt to realize the success of FiT and keep the market for fossil energy suppliers the same. In the UK the name FiTino was introduced “Feed-in tariff in name only” Introducing FiT appears to be a learning process for some countries

History

This type of program was first implemented in the USA in 1978. President Jimmy Carter told Americans that the energy crisis was “a clear and present danger to our nation” and drew out a plan to address it. As reaction to a perceived energy crisis and growing concerns over air pollution, President Jimmy Carter signed the National Energy Act (NEA) and the Public Utilities Regulatory Policy Act (PURPA). The purpose of these watershed laws was to encourage energy conservation and the development of national energy resources, including renewables such as wind and solar.

Standard Offer Contracts for renewable power development were first introduced in California in the early 1980s in response to the state’s investor-owned utilities behavior toward small power producers. California’s Public Utility Commission ordered the utilities to offer standardized contracts and to offer one such contract, Standard Offer No.4 (SO4) with fixed prices. By the mid- 1980s, private power producers had installed 1,200 MW of wind capacity in California. Much of this capacity is still in service. For two decades these wind turbines have delivered about 1% of the state’s electricity.

But it is the German model, that began in 1990 (“Stromeinspeisungsgesetz”) and was refined in the year 2000 (“Erneuerbare-Energien-Gesetz”) when it became a Federally managed program that has proven to be the world’s most effective practice for boosting adoption of renewable energy technologies. Feed-In Tariffs (REFIT) have been associated with a large growth in solar power in Spain, Germany and wind power in Denmark. These countries now boast the supply of 9%, 5% and 20% of their electricity respectively. These systems involve fixed payments that are guaranteed in the long term; 20 years in the cases of Spain and Germany.

Principle

In the effort to combat climate change, the increased deployment of renewable energy sources is regarded by many as critical. One major obstacle to this adoption is the retail price of electricity generated from renewable sources, which is typically more expensive than the retail price of electricity generated from fossil fuels. A FiT is a revenue-neutral way of making the installation of renewable energy more appealing. The electricity that is generated is bought by the utility at above market prices. For example, if the retail price of electricity is 10¢/kWh then the rate for green power might be 40¢/kWh. The difference is spread over all of the customers of the utility. For example, if $100,000 worth of green power is bought in a year by a utility that has 1,000,000 customers, then each of those customers will have 10¢ added on to their bill annually.

Thus, a small annual increase in the price of electricity per customer can result in a large incentive for people to install renewable energy systems. This is the essence of a FiT: it is a mechanism to instigate a change in the way power is produced, gradually shifting from present polluting means to non-greenhouse methods. It is normally phased out once the change has occurred. In California it covers the first 500 MW of generation only. In Germany the FiT for roof top solar photovoltaics is reduced by 8% in 2009 and 2010 and then by 9% annually from 2011 onwards, instead of by 5% per year.

Policy Alternatives to Feed-in Tariffs

Schemes such as quota incentive structures (renewable energy standards or Renewable Portfolio Standards) and subsidies create limited protected markets for renewable energy. The supply of renewable energy is achieved by obliging suppliers to deliver to consumers a portion of their electricity from renewable energy sources. To do this, they collect green electricity certificates. Hence, a market is created in green electricity certificates which, according to the theory, generates downward pressure on the prices paid to renewable energy developers. This is based on the theory of perfect competition where there is a multiplicity of buyers and sellers in a market where no single buyer or seller has a big enough market share to have a significant influence on prices. Although, in practice, markets are very rarely perfectly competitive, the assumption is still that a relatively competitive market will produce a more efficient use of resources compared to a system where prices are set by Government fiat.

The fundamental problem with the quota scheme is that there is no long-term certainty. When a quota is set either for a period of time or for a quantity of power, once that goal is reached then there is nothing to keep the green power producers from becoming uneconomic in the face of power produced from coal fired power stations and hence collapsing as businesses. This inevitability with the quota method means that there is reluctance on behalf of investors to get involved in the first place. Those that do get involved are short-term speculators rather than long-term entrepreneurs and so instability is inherent in this system.

Quota systems favor large, vertically integrated generators and multinational electric utilities, and are more difficult to design and implement than a price system.

It has been argued that FiT is the most effective way to promote the uptake of renewable energy yet devised. Only Renewable Tariffs have a consistent record of offering equitable opportunity to all willing participants in the market, offering the freedom to produce and sell the own energy and stimulating rapid rates of growth. After investment subsidies it is the most widespread means of promoting renewable energy uptake in Europe.

Net Metering

The introduction of FIT is usually preceded by legislation allowing net metering. Net metering only requires one meter, whereas FIT requires two, one to measure consumption, the other to measure generation.