Feed-in tariff (FIT)
A Feed-in Tariff (FIT) is a government initiative that guarantees renewable energy producers a fixed payment for each kilowatt-hour of electricity they generate and contribute to the electricity grid, typically over a long-term contract lasting 10 to 25 years. FIT programs are designed to foster the growth of renewable energy technologies, aiming to make them more economically viable in comparison to traditional energy sources. Various motivations drive jurisdictions to implement FITs, including rising energy demands, the depletion of non-renewable resources, and commitments to climate change policies.
These programs primarily support technologies such as biomass, wind, solar, and hydropower, with eligibility extended to various stakeholders, including homeowners, businesses, and governments. FITs utilize different approaches to set tariff rates, including estimating the societal value of renewable energy, ensuring a fair return on investments, and employing auction-based mechanisms. Additionally, FIT programs can incorporate adjustments to tariff levels to reflect changes in generation costs, often referred to as tariff degressions. Historically, the concept of FITs has evolved from earlier policies implemented in the United States and has gained traction in several countries worldwide, including Germany and Canada.
Subject Terms
Feed-in tariff (FIT)
Summary: A feed-in tariff program is a government program in which generators are paid a set price for every kilowatt-hour of electricity produced from renewable energy sources and delivered to the electricity grid over a guaranteed minimum length of time.
Feed-in tariff (FIT) programs are one of the most widely used energy supply programs designed to support the development of new renewable energy generation projects. They aim to reduce the cost of renewable energy generation toward grid parity, thereby enabling these technologies to be commercially competitive with more traditional sources of power generation. Jurisdictions seek to do this for a variety of reasons, some of the more common ones include meeting an increasing demand for energy, depletion of traditional fuels, decommissioning of older and less environmentally friendly generation facilities, and meeting international or domestic climate change policy commitments.
Renewable energy technologies that have historically benefited from FIT programs include biomass, concentrated solar, geothermal, hydropower, wind (on- and offshore), solar photovoltaic (PV) and solar thermal technologies. Consideration has also been given to using FITs to support combined heat and power (CHP) and storage technologies.
FIT programs employ various schemes and designs, but most provide three key elements to renewable energy generators: (1) a guaranteed grid connection requiring utilities or transmission system operators to connect eligible generators to the grid; (2) a guaranteed long-term contract, typically ranging from 10 to 25 years; and (3) a fixed or predictable price (tariff) paid for all the electricity produced. Building on these elements, a FIT program also provides standardized program rules, prices, and contracts to generators.
Payment Options
FIT programs arrive at their tariff rates through the following four main approaches:
Value estimation: Generators are paid a tariff for the estimated value to society or to the utility. Value to society is typically viewed in terms of the value of the electricity plus accompanying environmental benefits, such as climate change mitigation, improved health impacts, and energy security. Value to the utility can be understood in terms of avoided generation and transmission costs. Some jurisdictions use a “bonus system” or “hybrid support mechanism” and pay a wholesale price for renewable generation plus a bonus, representing the environmental values.
Return on investment: Tariff payments are based on the cost of generation, plus a targeted return, typically set by policymakers or regulators.
• Fixed price: A tariff that is not based on either estimated value or costs. One modified form of this approach is to offer a tariff rate based on a fixed percentage of the retail price of electricity. As the retail price is adjusted, so is the tariff paid for renewable generation.
• Auction-based mechanisms: A method to set payment levels in jurisdictions that are experimenting with this approach.
Whichever tariff payment approach is adopted, the tariff schedule may be tailored to promote more than just an overall installed generation capacity. Policy goals may also incorporate the deployment of a diversity of technologies, project sizes, and locations by differentiating tariffs according to technology type, project size, resource quality, and specific location. This approach can also be employed to provide a return that better reflects actual project costs and prevents financial windfalls.
A FIT program can be funded using a variety of options. The added incremental costs may be spread among electricity ratepayers, paid for with tax revenue, paid with a combination of these, or paid by alternative means, such as carbon auction revenues and utility tax credits. In addition, FIT program designers can include measures to ensure that costs are shared across utilities and different regions of a given jurisdiction.
Eligibility
Eligibility is typically extended to anyone with the ability to invest, including homeowners; commercial businesses; religious institutions, schools, aboriginals, and other community groups; local, state, and federal governments; and utilities. Eligibility requirements may also address whether there are limitations on project types arising from technology, project size, location, and in-service date.
Limitations on project type may arise from whether policymakers have imposed program or project caps. Caps can be imposed on the total available generation capacity (differentiated by technology type), on the maximum individual project size (also often differentiated by technology type), or according to the total program cost (either total dollars per year or for the multiyear program).
Policy Adjustments
FIT policy designers may incorporate program design adjustments as part of the program framework. The most frequent adjustments are to tariff levels for new projects to address changes in generation costs over time. Sometimes referred to as “tariff degressions,” these adjustments are made to avoid windfall profits and anticipate technological learning and developments. The degression rates can be determined administratively following a set schedule, adjusted as predetermined capacity milestones are reached, or adjusted based on the market growth of a certain technology.
Degression rates may be reviewed independently or as part of a regular periodic review and revision of the entire program, which tends to occur every two to four years. The latter revisions may also consider changes to eligibility protocols and the inclusion of new technologies. However, any changes are not intended to affect established contracts or those installed prior to the revisions taking effect.
History
The widely acknowledged forerunner to the modern FIT program was adopted by the United States in 1978 under its Public Utility Regulatory Policies Act, which required utilities to buy electricity from qualifying facilities at rates that were based on the utilities’ “ avoided costs.” The concept was eventually adopted, refined, and popularized in European jurisdictions such as Denmark, Germany, and Spain.
As FIT programs evolved, a variety of terms emerged to refer to the concept. The English origin of the term is a literal translation of Germany’s 1991 Stromeinspeisungsgesetz (StrEG), which means “electricity in-feeding law.” Other terms that have enjoyed some usage include standard offer contract, fixed-price policy, feed law, feed-in law, advanced renewable tariff, and renewable energy payment. Despite this proliferation of terms, feed-in tariff remained the favored umbrella term for this type of policy.
The German introduction of the StrEG was patterned on an earlier Danish policy enabling access to the grid and stipulated a price to be paid for renewable generation that was a percentage of the prevailing retail electricity rate. The StrEG offered a more streamlined approach than its Danish predecessor, yet a variety of challenges during the 1990s, including regional imbalances in the costs to ratepayers and insufficient incentive for solar photovoltaic investment, led to the passage of a new German feed-in law in 2000: The German Parliament introduced what would become the first advanced renewable tariff with its Renewable Energy Act (Erneuerbare-Energien-Gesetz).
The FIT program ultimately returned to the continent of its origin and was being adopted or considered by US states and Canadian provinces. The Canadian province of Ontario introduced the first FIT program of its kind in North America in 2009. By the 2020s, only a small number of states had the FIT program, mainly because of the availability of other programs. However, countries throughout the world still offered the FIT program.
Bibliography
Couture, Toby D., et al. A Policymaker’s Guide to Feed-In Tariff Policy Design. National Renewable Energy Laboratory, 2010.
"Feed-In Tariff: A Policy Tool Encouraging Deployment of Renewable Electricity Technologies." EIA, 30 May 2013, www.eia.gov/todayinenergy/detail.php?id=11471. Accessed 8 Aug. 2024.
"The German Feed-in Tariff." FuturePolicy.org, World Future Council, www.futurepolicy.org/climate-stability/renewable-energies/the-german-feed-in-tariff/. Accessed 8 Aug. 2024.
Gipe, Paul. “Renewable Energy Policy Mechanisms.” Author, 17 Feb. 2006.
International Energy Agency. Deploying Renewables: Principles for Effective Policies. OECD/IEA, 2008.
Mendonça, Miguel. Feed-In Tariffs: Accelerating the Deployment of Renewable Energy. Earthscan, 2006.