Feed-in Tariff Summary
Renewable energy policy in the U.S. is a haphazard mix of tax incentives, rebates, state mandates, and utility programs. This complex maze of bureaucratic red tape is costly and challenging to deal with at best and often severely hampers the ability of states, communities and small generators to play a role in renewable electricity generation, and maximize the benefits of their renewable energy resources.
A much simpler and comprehensive policy structure known as the Feed-in-tariff (FIT) is able to achieve greater developments in renewable energy, but at a far lower cost and with greater economic and social benefits to the local environment. The FIT does this by establishing a pre-determined price for renewable energy high enough to attract investment without being so exorbitantly high that it allows for windfall profits.
Instead of mandating a specific quantity of renewable electricity based on the overall electricity consumption and leaving the market to determine the price with a plethora of financial mechanisms and incentives, FITs mandate a specific price (tariff) for renewable electricity sufficient to attract investors and leaves the market to determine quantity.
By establishing a price, FITs eliminate the need for multiple incentives and project financing based on their value in reducing tax liabilities. The price is then reevaluated every few years, and lowered or raised to adjust to the current state and scale of both established and emerging renewable technologies and the economic situation for investors. By evaluating it on a per-technology basis, the tariff can be varied to help incubate and spur new emerging technologies or technologies that help to achieve social, economic and environmental benefits like providing support for cooperatively and locally owned renewable energy projects and on site generation.
European nations additionally require utilities to take responsibility for interconnecting renewable energy projects on demand to higher voltage transmission lines and require them to offer uniform contracts that include these interconnection requirements so that projects are guaranteed a grid connection. A FIT thus provides a long term contract at a fixed price sufficient for a reasonable return on investment (ROI).
Unlike with net metering systems, FITs establish transparent and straightforward accounting methods where all renewable energy produced is purchased by the utility at a fixed price instead of a low and fluctuating market-based wholesale price. This ensures investors try to maximize for generation capacity and not just size generation to offset their own internal use.
European nations like Denmark and Germany have attested to the success of FITs which have led to the rapid deployment of renewable electricity generation and has given renewable energy more than 15 percent market share. The policy has also led to large-scale local ownership with almost 50 percent of German wind turbines and over 80 percent of Danish ones owned by residents of the region. States and provinces in the U.S. and Canada are starting to take note of and follow the success of the FIT models and many others are seriously considering FITs as a more practicable and effective mechanism for reaching their renewable electricity mandates.
Because of the stability, straightforwardness and transparency of the FIT, the net costs and benefits of transitioning to renewable energy generation are shared more uniformly between all rate payers and involved parties. Prioritizing renewables and ensuring their rapid deployment with the FIT will bring the net costs down quickly and in doing so will mitigate the need for peaking plants and help ensure that the benefits of renewable energy will be substantial and far-reaching.
Questions? See the FIT FAQ.
