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Feed-In Tariff

Updated on January 29, 2024
Article bySusmita Pathak
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Feed-In Tariff?

The Feed-in Tariff is a policy mechanism that encourages renewable energy investment by paying producers or users to transfer excess electricity to the grid. It, thus, rewards entities for developing, installing, using, and conserving energy resources, such as wind and solar power. It typically involves long-term contracts and cost-based compensation.

Feed-in tariff

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Renewable energy producers receive a fixed, above-market electricity cost from the service provider or grid operator for each unit of energy they produce and deliver to the grid as part of this performance-based incentive program. The tariff supports the development of low-carbon power generation technologies and renewable energy generation.

Key Takeaways

  • Feed-in tariff meaning describes a policy that encourages renewable energy investment by compensating renewable energy producers or consumers for transmitting electricity to the grid.
  • It normally comprises a long-term contract that lasts between 15 and 20 years and guaranteed grid access. In addition, the above-market per unit electricity price paid to energy producers is proportional to the cost of producing the energy.
  • The cost level may change, depending on the program’s goals. Wind and solar power technologies offer lower per-kWh rates than tidal, wave, and photovoltaic energy technologies.
  • The scheme encourages renewable energy generation and conservation by incentivizing the development of low-carbon power generation technology.

How Does Feed-In Tariff Work?

A feed-in tariff (FIT) compensates small renewable energy producers for generating or preserving excess renewable energy. They receive the above-retail electricity price per kWh for the energy produced and fed into the grid. Both solar or wind energy producers and consumers, be it households or businesses, are eligible for this incentive scheme and access to the grid. The energy supplier, service provider, or grid operator determines the payment based on the meter reading.

Feed-in tariff Provision

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It includes a long-term agreement that usually lasts between 15 and 20 years. Furthermore, the compensation that energy producers receive is the proportion of the cost of producing the energy. Thus, they gain a sense of security and transparency regarding their investments and returns. Energy producers can use cost-based remunerationRemunerationRemuneration refers to overall monetary and non-monetary compensation that employees or independent contractors receive for providing services to an organization or company.read more to implement innovative and sophisticated renewable electricity technologies to produce more energy.

Goals

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FITs are widely employed in the United States, Germany, Japan, China, and Europe. Having a thorough understanding of the costs of renewable energy generation projects is essential for obtaining a decent return. However, the information gap between the public and private sectorsPrivate SectorsThe private sector is a section of the national economy that the government does not own. The business conducted under this sector is carried out by companies or entrepreneurs who focus on profit maximization and customer satisfaction.read more and political influence can affect the FIT policy.

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Goals

  1. Supports the development of low-carbon power generation technologies
  2. Encourage renewable energy generation and conservation through incentive

Provisions

  1. Long-term contracts
  2. Guaranteed grid access
  3. Fixed, cost-based compensation

Feed-In Tariff Rates

FIT rates are predetermined per unit of electricity over the retail price that encourages renewable energy generation. However, the pricing level may vary depending on the program’s objectives. For example, wind and solar power technologies have lower per-kWh tariffs than tidal, wave, and photovoltaic energy technologies.

There are two types of the feed-in tariff for solar energy:

  1. Net feed-in tariff is paid to energy producers or customers who produce extra renewable energy and conserve it for later feeding to the grid.
  2. Gross feed-in tariff is paid for every unit of renewable energy generated by a solar panel and supplied to the grid by the user.

For example, the incentive is paid for each unit of electricity produced in the case of the feed-in tariff UK. However, various factors impact this rate, including:

  • System type (e.g., solar panel or wind turbine)
  • Technology employed
  • Time of system installation
  • Energy efficiency of the producer

When it comes to the FIT rate, the tariff goes through degression. In some cases, it denotes a gradual decline in the price to assure technical cost reductions.

Feed-in Tariff Examples

Let us consider the following examples to understand the concept of feed-in tariff better:

Example #1 (Conceptual)

Stella and John installed solar panels to save energy but were unsure how to continue to get the feed-in tariff. As a result, they seek advice from a specialist. The consultant, Mary, informs them that if the power generated exceeds what they consume, they are eligible for the tariff.

She clarifies that the rates will be determined based on the Energy Performance Certificate (EPC) they acquire. Therefore, if the performance is high, so will the FIT and vice versa. As a result, Stella and John contacted the grid operator to determine how well the sources they feed into the grid are doing.

Example #2 (Feed-in Tariff British Gas)

British Gas resources are also eligible for FIT. British Gas has a form that asks for several details to guarantee that an application is eligible for the same. The microgenerators must declare that the information they have entered is correct and accurate to the best of their knowledge. It also states that no changes have been made to the system installed since its registration.

Frequently Asked Questions (FAQs)

What is feed-in-tariff?

Feed-in tariffs are a type of incentive program in which renewable energy producers or customers are compensated for producing excess energy and feeding it into the grid. Solar and wind energy producers and users, whether residential or commercial, are eligible for this scheme and grid access. It entails long-term contracts and cost-based compensation. The payment is determined by the energy supplier or grid operator depending on the meter reading.

Why do feed-in tariff rates vary?

Feed-in tariff rates are set per unit of electricity above the retail price to encourage the use of renewable energy. However, based on the program’s goals, the cost may vary. For example, wind and solar power technologies offer lower per-kWh rates than tidal, wave, and photovoltaic energy technologies.

What are the pros and cons of a feed-in tariff?


Pros and Cons of Feed-in tariff

This has been a guide to feed-in tariff and its meaning. Here we explain how feed-in tariff works, along with examples, rates, goals, and provision. You may also learn more about financing from the following articles –

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