A payment or installment made to family units or organizations generating their own electricity through the use of methods that do not contribute to the depletion of natural resources, corresponding to the amount of power generated. The policy mechanism designed to accelerate investment in renewable energy technologies. It achieves this by offering long-term contracts to renewable energy producers, typically based on the cost of generation of each technology. Rather than pay an equal amount for energy, however, generated, technologies such as wind power and solar PV for instance, are awarded a lower per-kWh price, while technologies such as tidal power are offered a higher price, reflecting costs that are higher at the moment.
The goal of feed-in tariffs is to offer cost-based compensation to renewable energy producers, providing price certainty and long-term contracts that help finance renewable energy investments. In addition, feed-in tariffs often include “tariff digression”, a mechanism according to which the price (or tariff) ratchets down over time. This is done in order to track and encourage technological cost reductions. The goal of feed-in tariffs is to offer cost-based compensation to renewable energy producers, providing price certainty and long-term contracts that help finance renewable energy investments. The feed-in tariff can be earned by installing a solar and/or wind power renewable energy system on your premises. The feed-in tariff is a price-based support instrument.
It is consist of at least the following design options: a purchase obligation, and a stable tariff payment which is guaranteed over a long period of time. First, the purchase obligation obliges the nearest grid operator to buy all renewable electricity – independent of electricity demand. Second, the renewable power producer is guaranteed a certain amount of money per unit of electricity that is produced. Third, this payment is guaranteed over a long period of time (usually 15 to 20 years), which increases investment security and allows for cost amortization.
Well, functioning feed-in tariff mechanisms are calculating the tariffs based on the technology-specific generation costs. In order to do so, the legislator needs to analyse the costs for renewable power generation based on a large number of costs components, including investment costs (together with material and capital costs), grid-related and administrative costs (grid connection cost, costs for the licensing procedure, and so on), operation and maintenance costs, and fuel costs (in the case of biomass and biogas). This way, the legislator can calculate the tariff level a renewable electricity producer needs to reach a certain profitability threshold.
In addition to tariff differentiation according to technology, more mature feed-in tariff mechanisms also offer differentiated tariffs depending on the size of the power plant or even the location in order to avoid windfall profits. Moreover, the automatic, annual reduction of feed-in tariffs has become international best practice, at least in the case of technologies such as solar photovoltaics (PV). Through this so-called tariff digression, the legislator aims to anticipate technical progress, economies of scales, rationalization and the overall learning potential of a given technology. Some countries have also indexed their tariffs to national inflation in order to further increase investment security.
The core benefits of tariffs are :
- The most successful support instrument for renewable electricity.
- Feed-in tariffs can be designed flexibly according to the framework conditions of the national electricity markets and according to the specific national energy policy objectives. They can be designed in order to include an increasing share of renewable electricity and according to the needs of developing countries and emerging economies.
- Feed-in tariffs have helped to create national markets for the manufacturing industry, thus leading to a number of secondary macro-economic benefits such as job creation. Finally, they have also helped to ‘democratize’ energy markets by allowing a large number of market players to participate in the power generation business, including small and medium size organizations, farmers and households.