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 can be understood as an advanced form of production-based incentive (PBI), where a payment is awarded for the actual electricity produced ($/kWh). PBIs are distinguished from capacity-based incentives like rebates, where a payment is awarded on the basis of how much capacity is installed ($/Watt).
FIT policies can be implemented to support all renewable technologies including:
- Photovoltaics (PV)
- Solar thermal
- 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. This suggests that they will continue to grow in importance in the United States, especially as evidence mounts about their effectiveness as framework for promoting renewable energy development and job creation.
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.
FIT bills proposed in Michigan, Illinois, Minnesota, and Indiana cite economic development and job creation in the clean energy sector as a leading reason for implementing a FIT policy. Data from countries like Germany and Spain demonstrate that well-designed FIT policies can positively impact job creation and economic growth. This opens up the prospects for significant expansions of future export opportunities.
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.
FIT policies can put near-term, upward pressure on electricity rates, particularly if high-cost technologies like PV are included in large amounts (i.e., thousands of megawatts). The risk of cost impacts grows in proportion to the rate and scale of deployment of these costlier technologies. One way to resolve this issue is to cap the total annual capacity of high-cost renewable energy resources. It is also important to weigh the broader social and economic benefits of the rapid renewable energy development generated under successful FIT policies against any near-term pressure on rates.
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.
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.
The following NREL technical reports provide more information on FITs:
- So you have questions about...Interconnection & Net Metering: Resources & Technical Assistance
- Innovative Feed-In Tariff Designs That Limit Policy Costs
- Renewable Energy Cost Modeling: A Toolkit for Establishing Cost-Based Incentives in the United States
- Policymaker's Guide to Feed-In Tariff Policy Design
- Feed-in Tariff Policy: Design, Implementation, and RPS Policy Interactions
The following databases provide information about policy implementation and the status of legislation in the states:
- Database of State Incentives for Renewable and Efficiency
- National Conference of State Legislatures' Energy and Environment Legislation Tracking Database