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Feed-In Tariffs

A feed-in tariff (FIT) is an energy supply policy that promotes the rapid deployment of renewable energy resources. A FIT offers a guarantee of payments to renewable energy developers for the electricity they produce. Payments can be composed of electricity alone or of electricity bundled with renewable energy certificates. These payments are generally awarded as long-term contracts set over a period of 15-20 years.

FIT policies are successful around the world, notably in Europe. Currently there are six U.S. states (California, Hawaii, Maine, Oregon, Vermont, and Washington) that mandate FITs or similar programs. A few other states also have utilities with voluntary FITs. There is growing interest in FIT programs in the United States especially as evidence mounts about their effectiveness as framework for promoting renewable energy development and job creation.

Background

FIT policies can be implemented to support all renewable technologies including:

  • Wind
  • Photovoltaics (PV)
  • Solar thermal
  • Geothermal
  • Biogas
  • Biomass
  • Fuel cells
  • Tidal and wave power.

So long as the payment levels are differentiated appropriately, FIT policies can increase development in a number of different technology types over a wide geographic area. At the same time, they can contribute to local job creation and increased clean energy development in a variety of different technology sectors.

FIT policies are successful around the world, notably in Europe. Currently there are six U.S. states (California, Hawaii, Maine, Oregon, Vermont, and Washington) that mandate FITs or similar programs. A few other states also have utilities with voluntary FITs. There is growing interest in FIT programs in the United States, especially as evidence mounts about their effectiveness as framework for promoting renewable energy development and job creation.

Benefits

Some of the benefits and impacts of FIT policies include:

  • The rapid renewable energy development seen in jurisdictions with FIT policies has helped reduce the environmental impacts of electricity generation, while providing valuable air quality and other environmental benefits.

  • Fixed prices created by FITs for renewable energy sources can also help stabilize electricity rates which can entice new business and attract new investment.

  • Due to the guaranteed terms and low barriers to entry offered by FIT policies, they have been highly successful at driving economic development and job creation.

  • Data from countries like Germany and Spain demonstrate that well-designed FIT policies can positively impact job creation and economic growth. A growing body of evidence from Europe and Ontario, Canada demonstrates that FIT policies have on average fostered more rapid RE project development than other policy mechanisms.

Implementation Issues

Despite the many benefits, FIT policies pose a few challenges as well.

  • FIT policies do not address the barrier posed by the high up-front costs of RE systems, in contrast to rebate programs and other up-front "capacity-based" incentives. FIT policies are designed to offer stable revenue streams through long-term purchase contracts, requiring that the high up-front costs be amortized over a long period of time.

  • Well-designed FIT policies require a significant up-front administrative commitment to design the policy and to establish FIT payments based on the levelized cost of renewable energy generation. Detailed analyses on technology cost and resource quality are needed to ensure FIT payments are adequate to guarantee cost recovery without leading to windfall profits.

  • FIT policies designed to include guaranteed grid interconnection, regardless of location on the grid, could lead to less-than-optimal project siting. Accordingly, if projects are sited far from load centers or transmission or distribution lines, interconnection costs increase. This puts upward pressure on policy costs. However, this challenge can be largely overcome if FIT policies encourage siting projects near load centers by creating an incentive—either a bonus or a higher price based on higher spot-market prices—or if the policies require developers to bear a portion, if not the entirety, of the costs of grid connection.

  • Due to changes in technology costs and market prices over time, FIT policies must be adjusted periodically to account for these changes. Accounting for changes in technology costs accurately remains a challenge. Changing payment levels too often can be undesirable as well, as it creates investor uncertainty and increases overall market risk. One way to resolve this issue is to adjust the policy through a tariff degression, where the FIT payments decline by a pre-determined percentage each year. This can be coupled with periodic policy adjustments that occur every several—three to four—years. To be successful, these adjustments require a detailed methodology to track market changes effectively from year to year. Ultimately, the challenge is to provide a flexible policy framework without jeopardizing investor confidence.

Design Best Practices

Many successful FIT policies base the prices offered to suppliers on the levelized cost of renewable energy generation to ensure a reasonable rate of return. Other design best practices include:

  • Offering long-term, must-take contracts
  • Differentiating FIT prices by technology type, project size, and resource quality
  • Including a design feature that incorporates an incremental decrease in the FIT prices over time to encourage innovation and accelerate the pace of deployment
  • Incorporating the costs of the policy into the electricity rate base
  • Minimizing transaction costs by providing streamlined administrative procedures.

Source

The information for this summary about FITs comes from an NREL technical report, State Clean Energy Policies Analysis Project: An Analysis of Renewable Energy Feed-in Tariffs in the United States.

Additional Resources

Descriptions of current Feed-in Tariffs and Similar Programs (source: EIA)

The following NREL technical reports provide more information on FITs:

The following databases provide information about policy implementation and the status of legislation in the states: