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Concept
Feed-in tariff
Summary
A feed-in tariff (FIT, FiT, standard offer contract, advanced renewable tariff, or renewable energy payments) is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. This means promising renewable energy producers an above-market price and providing price certainty and long-term contracts that help finance renewable energy investments. Typically, FITs award different prices to different sources of renewable energy in order to encourage the development of one technology over another. For example, technologies such as wind power and solar PV are awarded a higher price per kWh than tidal power. FITs often include a "digression": a gradual decrease of the price or tariff in order to follow and encourage technological cost reductions.
FITs typically include three key provisions:
guaranteed grid access
long-term contracts
cost-based purchase prices
Under a FIT, eligible renewable electricity generators are paid a cost-based price for the renewable electricity they supply to the grid. This enables diverse technologies (wind, solar, biogas, etc.) to be developed and provides investors a reasonable return. This principle was explained in Germany's 2000 Renewable Energy Sources Act:
The compensation rates have been determined by means of scientific studies, subject to the provision that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.
The tariff may differ by technology, location, size, and region and is typically designed to decline over time to track and encourage technological change. FITs typically offer a guaranteed purchase agreement for long periods (15-25 years) and give incentives to producers to maximize output and efficiency.
Official source
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