Feed-in tariffs and premiums
Feed-in tariffs (FIT) and feed-in premiums (FIP) are administratively set pricing mechanisms widely used to promote renewable energy (RE) adoption globally. They provide stable revenues to RE producers and help increase bankability of RE investment projects.
FITs are fixed electricity prices that are paid to RE producers for each unit of energy produced and injected into the electricity grid. The payment of the FIT is guaranteed for a certain period of time that is often related to the economic lifetime of the respective RE project (usually between 15-25 years). FITs are particularly effective in enabling small-scale producers, such as households and SMEs, to participate in the energy market.
The level of FIT is typically determined on the basis of calculation of the levelized cost of electricity (LCOE) produced from RE. This allows the RE investor to recover the costs (capital, O&M, financing) while realizing a return on investment. In some cases, FIT have been calculated on the basis of avoided costs for the electricity system or the society (including environmental costs) or determined by means of a tendering process.
Under FIPs scheme, electricity from RE sources is typically sold on the electricity spot market and RE producers receive a premium on top of the market price of their electricity production. FiP can either be fixed (at a constant level independent of market prices, and usually combined with a floor and cap to reduce risks) or floating (with variable levels depending on the evolution of market prices). Caps and floors are introduced to limit excessive profits or limit risks for producers when the electricity market price rises too high or falls too low.
FITs and FIPs can be differentiated according to:
- Technology, as various RE technologies (solar, wind, biomass, small hydropower) have differing generation costs
- Size or installed capacity, reflecting the higher generation costs of small and medium scale RE projects
- Project location, to address differences in RE resource potential and quality (e.g. average wind speed, insulation).
In practice, their main challenges involve getting the FIT or FIP level right, and then adjusting it to reflect market developments and technological advancements. 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 overcompensation, potentially high consumer tariffs or a strain on the government budget. Where RE deployment rates are high, the effects of an inefficiently set tariff level increase.
FITs were widely adopted in the early stages of renewable energy development, particularly in countries like Germany, Spain (which pioneered FITs) and Japan. As renewable energy technologies have matured and become more affordable financially, the use of FITs started to decline. Due to the need for greater market efficiency, their cost-effectiveness and market alignment, more advanced RE markets were increasingly transitioning to competitively set tariffs and auctions in the past decade. Emerging markets still favour FITs for initial market support and stimulation.
FIT and FIP continue to play a transformative role in scaling global renewable energy capacity. Both mechanisms remain popular today, with 63 countries using this policy measure as of 2023[1].
[1] REN21. 2024. Renewables 2024 Global Status, Report Collection: Energy Supply
