Feed In Tariffs – An Overview
The concept of Feed in Tariffs was part of the of the original renewable energy friendly policies in the USA in the 1970's and then expanded and successfully implemented in Germany in 1990,
Governments the world over are now coming to see the wisdom of enabling everybody in their country to produce and sell electricity using renewable technologies, and setting prices that will attract new developments.
This policy mechanism is commonly known as "Feed In Tariffs" (FIT). In North America this simple idea is known by many different names: Electricity Feed Laws, Feed-in Laws, Advanced Renewable Tariffs (ARTs), Renewable Tariffs, and more recently Renewable Energy Payments. Regardless of the name, they are the world's most successful policy mechanism for stimulating the rapid development of renewable energy, and secondarily for creating a large and growing base of jobs and income for the people involved.
What are Feed-in Tariffs?Feed in Tariff policies typically include three key provisions:
1) Guaranteed grid access to all producers of electricity from approved renewable sources;
2) Long-term contracts (typically 20 years) to purchase the electricity produced at a set fixed price per killowat hour (kWh) produced; and
3) Published prices for the electricity sold, which are set to provide an attractive rate of retun at the time the project is built. These prices are periodically adjusted to reflect changing market and policy conditions.
Feed in tariffs are the most egalitarian method for determining where, when, and how much renewable generating capacity will be installed. Renewable Tariffs enable homeowners, farmers, cooperatives, and independent producers to participate on an equal footing with large commercial developers of renewable energy.
FIT permit the interconnection of renewable sources of electricity with the electric-utility network and at the same time specify how much the renewable generator is paid for their electricity and over how long a period.
Advance Renewable TariffsAdvanced Renewable Tariffs (ARTs) are the most modern version of Feed In Tariffs. ARTs differ from the simpler feed in tariffs in several important ways. Most importantly, FIT are differentiated by technology. There is one price for wind energy, another price for solar, and so on. Tariffs within each technology can also be differentiated by project size or, in the case of wind and solar energy, by the productivity of the resource.
Additionally, in the case of solar they can be further differentiated between tariffs for roof-top based; referred to as retrofit in the UK installations, which generally receive a higher price for the electricity; and ground-based installations that usually receive a slightly lower tariff rate.
Tariffs rate are subject to periodic review to determine if the tariff rates are sufficiently robust or appropriate to meet the targets desired in the time allotted, and reflective of current technologies, costs, and market conditions.
For purposes of this discussion when we use the term Feed In Tariffs or FIT, we are using the term synonymously with Advanced Renewable Tariff / ART.
How are Feed in Tariff Rates Calculated?In theory, FIT prices i.e., the price paid for electricity produced from renewable energy sources, are determined by the cost of producing the electricity, plus a reasonable profit to justify the expenditure. The cost-based prices therefore enable a diversity of projects (wind, solar, etc.) to be developed, and for investors to obtain a reasonable return on renewable energy investments. This principle was first explained in Germany's 2000 RES 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.” (RES Act 2000, Explanatory Memorandum A)
Not only do the costs of the equipment have to be considered – so does the availability of the natural resource (e.g., solar irradiation levels, wind measurements, labor costs, etc.). As a result, feed in tariff rates typically differ among various source of power generation, installation place (e.g. rooftop or ground-mounted), projects of different sizes and, sometime, by technology employed (solar, wind, geothermal, etc.), and by country.
Feed In Tariff rates are expected to decrease over time. This is consistent with keeping the payment levels in line with actual generation costs. As a result of changing rates, there is usually a big surge in projects prior to rate changes as developers push to get their projects accepted at the higher rates to lock in better pricing.
Governments continually review these rates to determine what changes to make and when they will implement the changes. Earlier this year, CDU politician Tanja Gönner, who is "tipped to become federal environment minister," made the following statement about the future of solar rates in Germany (which were set to change in April 2010 – but were postponed to July) in an interview:
"Any sudden change would be wrong. It is true that solar arrays have become much cheaper because the market collapsed. So we do have some leeway to reduce rates. But we have to be prudent about it - it has to be based on a market analysis. We cannot chase after the market by ramping rates up and down every six months. The solar market still needs proper incentives for people to want to install the systems."
In reality, as can be seen by the Feed In Tariffs adopted in different countries, government officials may set rates that are not completely cost-based depending on other objectives, such as their desire to create new jobs in their country (e.g., France & Italy), attracting outside investment to build up new electrical capacity (e.g., Czech Republic, Romania, etc.) or to encourage existing property owners to install solar and to reduce the risk from overbuilding ground based installations (e.g., Spain & Germany).
Typically, developers of medium and large sized projects monitor news about feed in rates continuously. When possible, most developers will choose to build new projects in countries with the highest Feed In Tariffs as this will allow them to achieve the highest rates of returns by so doing.
Who Pays For the Feed In Tariffs?Feed-in tariffs are not subsidies. They do not subsidize the cost of the equipment used to produce renewably-generated electricity, like solar panels or wind turbines, nor do the payments come from taxpayers. Instead, feed-in tariffs are simply payment for the generation of electricity.
The extra cost for the feed in tariffs is shared among all energy users, thereby spreading the costs. In Germany in the average household pays about €1.01 per month for the Feed In Tariff program.
A number of analyses have shown that these price increases, however, can be offset by the price-dampening effect that large amounts of lower cost renewable energy sources (such as wind power) can have on spot market prices. This has led to electricity price reductions in Spain, Denmark, and Germany.
The German government estimates the actual cost is near zero, because the benefits of reducing carbon emissions and other air pollutants as well as reducing the cost of expensive fossil-fired generation (and social health costs), offsets the cost of the renewable energy.
Who Benefits From Feed In Tariffs?
Property Owners & Project Developers benefit. Anyone who installs Renewable Energy (RE) can profit, spreading out the value among citizens and not just owners of large-scale power stations. They are more equitable than Renewable Portfolio Standards (RPSs) because homeowners, farmers, small and large businesses and cooperatives can all participate. To date more than 400,000 German households have installed solar PV.
The government benefits. Feed-in tariffs are designed to provide sufficient financial incentives without capital grants, rebates, or tax subsidies. Additionally, it's a very easy system to implement. Feed In Tariff policies are easy to implement: there is no monitoring, no penalties and no caps.
It's estimated by the end of 2010, more than €53 billion will have been invested in Germany on renewable energy projects. Germany has benefited from taxes it has collected on the income generated from the sale of the electricity.
Additionally studies have shown that money spent locally (e.g., for building new solar energy projects) re-circulates 300-600% more than money sent out-of-country for oil or gas, etc. This secondary affect also helps the economy grow.
Universities Benefit: Good FIT rates for renewable technologies increase the drive for innovation, and encourage investment in technologies such as wind, photovoltaic solar energy, or Concentrating Solar Power (CSP) that all have huge potential.
Businesses Benefit: In order to meet the demand, new companies have emerged, existing companies have expanded, and opportunities abound. In fact, this is one of the fastest growing industries in the world right now and most analysts say it is still only getting started.
Workers benefit. In Germany, for example, the renewable energy industry now employs about 234,000 people – almost 60% of whom were employed as a direct result of the German FIT law. It is expected that by 2020 the renewable energy industry will employ 500,000 people.
Banks benefit: Unlike lending money on real estate, which can change in value or be subject to defaults if the owners economic situation changes, the banks can accurately predict based on FIT rates and the performance of the specific solar module how much cash will be generated to repay any loans the bank makes. In other words, FITs make renewable energy projects bankable.
Everybody benefits: Feed In Tariffs have contributed significantly to Germany's ability to meet the targets set per the Kyoto accord. The greatest success in the efforts to reduce greenhouse gas emissions has come from the energy industry. Development of renewable energies has left positive traces. In 2008, some 20 million tons less CO2 than in the prior year were emitted to the atmosphere in the energy production process. This amounts to 66 million tons less CO2 over 1990 volumes.
Additionally, FITs have spurred competition and innovation in the renewables energy field. For example, within 20 years the cost of electricity produced from wind turbines is now less than the cost of electricity produced from lignite, especially if the environmental costs are factored in.
Benefits for Solar Energy Park Developers and Investors
The biggest benefit of Feed In Tariffs for developers and investors is that they can reliably predict (at least for the term of the Feed In Tariff) the projected cash flows that will be produced by each new Solar Energy Project and the financial risks associated with a such an investment are dramatically reduced.
For anybody considering investing in a Solar Energy Project, knowing that Feed In Tariffs are likely to decrease over time encourages people to move quickly to lock in the higher rates / rates of returns for new projects.
Since Feed In Tariff rates can change over time, it is important to understand that in most countries the Feed In Tariff rate applicable to a specific project is based on the Feed In Tariff rate as of the day the first electricity is delivered to the grid.
Consequently, as more countries adopt Feed In Tariff policies, the demand for renewable energy systems has risen dramatically and the installation costs are coming down fast. This financing model has now been taken up widely around the world.
The Success of the FIT Policy
Feed in Tariffs has proven to be one of the most effective policy instruments in overcoming the cost barriers to introducing renewable energy and making it economically viable. The simple guarantees that FITs provide – including access to the grid, a set price per Kilowatt Hour (kWh) that will cover the costs associated with electricity production, and a guaranteed term for which they will receive that rate has turned several European countries into world leaders in the renewables sector. This is the case for Denmark on wind energy and for Germany on solar energy.
FITs have been empirically proven to generate the fastest, lowest-cost deployment of renewable energy, and with this as a priority for climate protection and security of energy supply. FITs are the best vehicle for delivering these benefits, plus the highly desirable added benefits of new job creation and as a significant contributor to economic growth and prosperity. This conclusion has been supported by a number of recent analyses, including by the International Energy Agency, the European Federation for Renewable Energy, as well as by Deutsche Bank.
As of April 2010, feed in tariff policies have been enacted in 63 jurisdictions around the world, including in Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hungary, Iran, Republic of Ireland, Israel, Italy, the Republic of Korea, Lithuania, Luxembourg, the Netherlands, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, and in some (nowadays, a dozen) states in the United States, and is gaining momentum in other ones as China, India and Mongolia.
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