Feed-in Premiums (FIP)

Overview

Under a feed-in premium (FIP) scheme, electricity from renewable energy sources (RES) is typically sold on the electricity spot market and RES producers receive a premium on top of the market price of their electricity production. FIP can either be fixed (i.e. at a constant level independent of market prices) or sliding (i.e. with variable levels depending on the evolution of market prices). Fixed FIP are simpler in design but there is a risk of overcompensation in the case of high market prices and of undercompensation in the case of low market prices. Therefore, fixed FIP are usually combined with predetermined minimum and maximum levels (“floor” and “cap”) either for the FIP or for the total remuneration (FIP + market price). Sliding (or “floating”) FIP are calculated on a continuous basis as the difference between (technology-specific) market prices (usually averaged over a certain period of time, e.g. one month) and a predefined reference tariff level (often corresponding to existing FIT). If market prices are higher than the reference tariff level, no FIP is paid. In some cases, there is also a minimum market price used for FIP calculation to increase sensitivity of RES operators to market prices and to reduce costs for the RES support scheme in the event of low or even negative market prices.

FIP can be differentiated according to technologies, size and location in the same way that this is being done for FIT. There is also the possibility to pay additional technology bonuses on top of the FIP. In some cases, a management bonus is paid in order to address the additional costs of the RES operator related to the direct sale of electricity on the spot market (cost of balancing services and administrative costs for electricity trading). Also, a degression mechanism for FIP or maximum remuneration levels is possible.

Advantages of feed-in premiums

FIP provide an incentive for RES operators to respond to price signals of the electricity market, i.e. to produce electricity when demand is high and/or production from other energy sources is low. They also encourage RES investors to consider expected load patterns in the engineering of the RES project (e.g. choice of site and turbine type for wind parks, orientation of PV modules). FIP therefore contribute to an increased integration of RES into the electricity market, resulting in a more efficient combination of electricity supply with demand. This is becoming increasingly important with rising shares of renewable energy in electricity generation.

Minimum levels (“floor”) for fixed FIP or for the total remuneration (FIP + market price) can reduce the market price risk for RES investors and provide security about minimum revenues that can be expected. This is also the case for sliding FIP schemes where a predetermined reference tariff similar to a FIT is guaranteed to RES investors. There is even the possibility to generate higher revenues compared to FIT in situations where market prices exceed the corresponding FIT level.

Disadvantages of feed-in premiums

Market-based RES support schemes such as FIP are well suited for dispatchable RES such as biomass and geothermal or RES that can be combined with storage (hydro-power, CSP). Variable RES such as wind and solar have only limited possibilities to adapt to market price signals by adjusting their supply. For these technologies, FIP schemes come with additional costs for the procurement of balancing services.

As with FIT, there is a risk of over- and undercompensation in FIP schemes that results from the need to determine the FIP level (in the case of fixed FIP) or the reference tariff level (in the case of sliding FIP) by an administrative decision of the public sector. The same applies to any minimum and maximum remuneration levels (“floor” and “cap”) or degression mechanisms that are introduced as part of the FIP scheme.

For RES investors, FIP schemes come with an additional element of uncertainty, including risks related to the evolution of market prices and the corresponding revenues, resulting in higher financing costs. These risks can however be mitigated by establishing “price corridors” with predetermined minimum and maximum levels (fixed FIP) or by adjusting the FIP based on the market situation (sliding FIP). Direct sale on the electricity market results in increased complexity and costs (for prognosis systems, balancing services and electricity trading), which makes it more difficult for small-scale RES operators to participate in a FIP scheme.

Experiences

Feed-in premiums (FIP) have been introduced in several EU member states in the course of the past few years as an option to existing FIT schemes. RES operators therefore had the choice between FIT and the FIP scheme, often in combination with additional incentives. In many cases, the RES operators had the flexibility to shift from the one scheme to the other and back again on an annual or even monthly basis. There is a general preference by EU member states for sliding FIP in comparison to fixed FIP. FIP schemes are currently used by the Czech Republic, Denmark, Germany, Italy, the Netherlands, Estonia, Finland, Slovenia, Slovakia and Spain for supporting RES.

Czech Republic

The Czech Republic has introduced an optional FIP scheme in 2006 under which operators of RES plants had the possibility to receive a FIP (“Green Bonus”) on an annual or hourly basis on top of the revenues they receive from the sale of their electricity production to an electricity trader or any other customer. Self-consumption of RES electricity is also entitled to the payment of these bonuses. FIT are only applicable to RES plants with an installed capacity up to 100 kW (30 kW for PV and 10 MW for hydro power). The Energy Regulatory Office determines the level of green bonuses for the different RES technologies in a way so that the green bonus is slightly higher than the difference between the FIT and the expected average hourly price of electricity for the following year, thus creating an incentive for RES producers to enter into the FIP scheme. Both FIT and FIP schemes have been recently been closed for new RES projects installed after the end of 2013.

Germany

In Germany, an optional sliding FIP has been introduced in 2012 under the so-called “market integration model”. This FIP is paid on top of the revenues from the direct sale of RES electricity on the spot market (EPEX). It is equal to the difference between the technology-specific reference values and the average monthly reference market value of electricity for the respective RES technology (solar and wind). The market value of dispatchable RES is equal to the monthly average of hourly contract values on the electricity spot market (EPEX). With the revision of the Renewable Energy Law in 2014, the FIP scheme has become compulsory for all new RES plants and the management premium has been abolished. Exceptions are only granted for small RES plants with capacities below 500 kW (from August 2014) and 100 kW (from 2016).

Italy

In Italy, RES plants with a capacity of above 1 MW (and those with a capacity below 1 MW not opting for the FIT) are required to sell their production on the electricity market. On top of these revenues, they receive a feed-in premium which is equal to the difference between the base FIT and the monthly zonal electricity price (for dispatchable RES) or the hourly zonal electricity price (for variable RES). These zonal prices take into consideration regional differences in the supply and demand of electricity. FIP for larger RES projects are determined by means of tenders.

Spain

Spain has been a pioneer in the use of FIP in Europe with the introduction of a sliding FIP scheme in 1998. RES operators generally had the choice between a guaranteed fixed FIT and a guaranteed FIP paid on top of the wholesale electricity price, except for photovoltaic projects where only the FIT was applicable. For RES projects with a capacity above 50 MW, the FIP scheme was compulsory. Maximum and minimum levels (cap and floor) for the overall remuneration level for each RES technology have been introduced with the Royal Decree 661/2007. Between these levels, the RES producer receives the reference FIP. Above and below these levels, the FIP is decreased or increased so that overall remuneration is always within the maximum and minimum levels. The calculation of the overall remuneration is done either on an hourly or on a monthly basis. In February 2013, all FIP have been reduced to zero, thus effectively abolishing this mechanism.

United Kingdom

The United Kingdom is currently in the process of introducing a sliding FIP scheme based on so-called “Contracts for Difference” (CfD) which will replace the current RES quota scheme until 2017. This scheme will provide financial incentives to low carbon technologies including RES, carbon capture and storage and nuclear energy. Under this scheme, a “strike price” is defined by the government and agreed in long-term (15 years) contracts between RES operators and the “CfD Counterparty Company Ltd”, a government-owned limited liability company. If electricity prices are lower than this strike price, the RES operator receives the difference in the form of a FIP payment. The reference electricity price is determined by short-term (daily) or long-term (annually) electricity prices depending on the RES technology. If the electricity price exceeds the strike price, RES operators need to pay back the difference to the government. Strike price levels have been defined at the end of 2013 for most RES technologies for the period of 2014-2019, in some cases including a predetermined degression. The first CfD application round will open in October 2014 with the first CfD to be concluded until the end of January 2015. It is envisaged to adopt a competitive bidding process for CfD for mature RES technologies. For small and medium scale RES projects below 5 MW, the existing FIT scheme will continue to be applicable.