Feed-in-tariffs (FITs) increase shares of renewable power by providing long-term contracts for renewable electricity that is generated and “fed” into the grid. These long-term contracts build investor confidence and help project developers secure financing for new projects.
FITs are widely used by countries across the world and can be designed in a variety of ways to suit unique policy goals, objectives, and country contexts. For example, FITs can include different payment levels for particular renewable technologies, project sizes, and project locations.
FITs are especially useful for countries just starting to develop their clean power sector and can support both centralized and distributed clean power generation. This content is focused primarily on centralized generation. For FITs as applied to distributed generation, see this section of Develop Policies and Regulations to Support Distributed Energy Resources.
FITs are one of the most widely used clean power policy measures because they provide a consistent and stable income to generators and help increase investor confidence in clean power projects.
As of 2019, more than 100 countries adopted some form of a FIT policy.
The majority of FIT policies are designed as fixed FITs, however, some countries with more competitive markets have adopted variations of FIT policies, including a Feed-in-Premium (FIP) and Top-up Fit.
A guaranteed payment for electricity generated for a fixed amount of time that is not dependent on the market. Developers and investors have confidence in returns.
An additional payment on top of the price the project owner gets for electricity generated from the market. Developers can get high rewards from market price increases but can face risks when the market price decreases.
The premium for renewable power on top of the electricity provider tariff is covered by a third-party development partner.
There are six key features of a FIT policy that should be carefully designed during the policymaking process.
1. Setting and Revising FIT Payment Levels
To align with specific policy goals, policymakers can vary FIT payments by technology, project size, location and/or resource quality. In each case, project developers need to be assured a revenue stream at a predictable payment and terms to ensure a reasonable profit for the project.
To support scaled-up deployment and innovation, FIT payments for new projects should also be adjusted incrementally as technology costs change. However, payment changes should be made transparently and predictably, as erratic adjustments may increase project developer uncertainty and reduce investment. Policymakers may choose to address this challenge by establishing periodic FIT review periods or setting a pre-established percentage or level of capacity installed for annual declines in the FIT payment, as well as less frequent broader policy revisions (e.g., every 3–5 years). Payment adjustments can be informed by collecting detailed data related to technology market evolution and prices. Supporting a stable and predictable policy environment that is also flexible and iterative is critical for positive outcomes.
Setting the payment level is the most complex element of the FIT design process and requires robust analysis to balance cost recovery with avoiding excessive developer profits. Payments can be either dependent on or separate from the market price for electricity. A premium-price FIT combines the electricity market price and a premium (either stable for the life of the contract or designed to fluctuate), thus adding a degree of uncertainty for the developer due to varying market prices. A fixed-price FIT provides the same payment for the duration of the contract, which, although it is simpler, can result in excessive developer profits if electricity prices increase substantially. Ultimately, policy costs can be integrated with the electricity rate base.
2. Considering a Cost Containment Approach
If the FIT payment rate is set to be higher than the utility avoided cost, it may incur additional costs which will need to be recovered (e.g. from ratepayers). In order to limit these costs, policymakers may choose to place caps on project participation. However, it is important to recognize that cost containment options could introduce additional market uncertainty and inhibit investments. Cost containment options include:
3. Guaranteeing Grid Access
Many FITs are also coupled with guaranteed access to the grid. Guaranteed access can help to ensure electricity generated under the FIT is not stranded and is a protection for invested public funds.
4. Considering Forecasting Requirements
Under a FIT policy—and to support grid operators in balancing renewable energy generation with system demand—project developers can be required to provide project forecasts. This can be burdensome, especially for smaller plants, but it can be useful particularly for larger renewable energy projects.
5. Streamlining Administration and Approvals
To avoid bottlenecks and reduce the time and costs associated with approvals and administration, policymakers can establish a streamlined FIT processing approach that clearly identifies participating entities (e.g., individuals, corporations, nonprofits and government) and mandates specific roles and procedures.
6. Establishing Long-term Contracts and Guaranteeing Grid Access
In addition to setting the payment level, it is important to define the length of contracts. Under existing FITs, contract lengths typically range from 10 to 25 years, with longer contracts often resulting in lower cost of financing. Many FITs are also coupled with guaranteed access to the grid. Guaranteed access can help to ensure electricity generated under the FIT is not stranded and is a protection for invested public funds.
Text excerpt from Clean Energy Solutions Center website: Feed-in-Tariffs
FITs can be strategically designed to support a variety of policy goals.
Setting and adjusting the payment level for a FIT to address emerging technology and market developments can be a challenging and complex process.
Their main challenge involves getting the tariff or premium level just right, and adjusting it as needed. For example, an inefficient tariff can result in a price that is too low to attract developers or one that is too high – leading to windfall profits, potentially high consumer tariffs or a strain on the government budget. Where deployment rates are high, the effects of an inefficiently set tariff level increase. Also, tariff schemes are subject to the information asymmetry common to the power sector: regulators and policy makers may not have access to the industry information they need to make informed decisions. As new information comes to light, tariffs must be adjusted accordingly. Revisions must also reflect market developments and technological advancements.
Text excerpt from page 62 of IRENA, IEA, and REN21: Renewable Energy Policies in a Time of Transition
Some policymakers are exploring how FITs can be combined and used with other policy measures to achieve policy goals.
In some markets, policymakers are considering links between FITs and other support policies, such as tender and auction processes. For example, FITs and auctions can be coupled in relation to project size, with FITs supporting smaller projects and auctions supporting larger projects. As RE markets evolve differently in various country contexts, policymakers can consider links between FITs and other policies that may enhance deployment opportunities.
Text excerpt from Clean Energy Solutions Center website: Feed-in-Tariffs