Feed-in Tariffs (FIT)

Feed-in tariffs (FIT) are fixed rates paid power plants / electricity producers for feeding electricity into the grid, whereas power purchasing agreements (PPA) are bilateral contracts between the producer and the grid / system operator. FITs are typically used to incentivize the production of electricity on the basis of renewable energy (RE-FIT). FIT set a price, other incentive schemes set a quantity (quota regulation), markets react accordingly (...).

Design options 

The following design options exist:

• Purchase obligation
• Stepped tariff
• Tariff digression
• Premium option
• Equal burden sharing
• Forecast obligation

Experiences 

Germany has made good experience with feed-in-tariffs. Nevertheless it is necessary to analyze the situation in each country to find out the best way to improve renewable energy power generation under the given framework set. The feed-in-tariff works well with an extended grid system. Therefore it will have to be combined with other measures or replaced by other options for a rural electrification strategy, where there often isn’t any grid at all.

Germany

Germany started supporting renewable energies in 1991 with the first legally binding act that enabled producers to feed their renewable energies into the grid. In 2001 the first version of the now called Renewable Energy Sources Act (EEG) entered into force and was designed to provide an adapted tariff to the different renewable energy systems in dependence to their status of technology development and prices for production of power and to ensure compliance with sustainability criteria. The latest version of this act entered into force in January 2009. It is the most important instrument and driving force in the expansion of renewable energies in the electricity sector because it provides investment securities.

How does the Renewable Energy Sources Act (EEG) work?
Basically, the EEG obligates that all generators of electricity are guaranteed access to the integrated electrical grid to a fixed price on base of a feed-in tariff scheme for the time span of 20 years beginning at the point of installation.
The exact amount of the feed-in tariff depends on the starting date of feeding in and drops by a fixed percentage each year. This encourages technological improvements and cost decreases (degression rate). The prices furthermore vary with the amount of energy generated by the producer and the type of renewable energy source. (Landfill gas, sewage treatment plant gas, mine gas, biomass, geothermal, energy from solar radiation (solar photovoltaic, solar thermal), hydropower and wind power).

The additional costs that arise are distributed equally among all energy utilities in Germany (off-budget incentive scheme). They in turn pass the costs down to the end consumer, according to their demand on electricity (cross subsidisation).

Therefore, the fixed prices are intended to level costs for energy derived from renewable energy sources with energy from traditional resources.
The fixed-tariffs give further more security to providers of electricity and stimulate investments into the sector. It creates an equal level “playing field” for renewable energy technologies that also enables small and medium sized producers to participate in the energy market and to develop new and innovative solutions.

Therefore, the EEG it is especially favouring small producers in decentralised (grid connected) areas to invest into renewable energies. The individual support for every single source of renewable energies furthermore encourages the decentralized approach.

Expansion of renewable energies in the power generation sector: Since the beginning of the support, wind power has developed strongly and hydropower has been maintained at a high level. A similar boom occurred in the use of biomass, photovoltaic and geothermal energy.

Brazil

1. FITs are politically not feasible in Brazil.

2. Due to high retail electricity rates it is expected that grid parity will be attained 5-7 years.

3. The regulator is repsonsible for tariff adjustments.

Feed-in tariff funds 

Overview of proposed feed-in tariff funds

Name of organization	Capitalization / Source of funds	Governance Structure	Target / Services provided	Annotation
Deutsche Bank - Global Energy Transfer Feed-in tariffs for Developing Countries (GET FiT)	carbon credits, ODA, private capital	global	renewable energy and off-grid premium (incremental costs); policy advise; project preparation	GET FiT is proposed by Deutsche Bank Climate Change Advisors. Stage: Greenpaper (study), available on http://www.dbcca.com/research

Further Reading

• Arne Klein, Benjamin Pfluger, Anne Held, Mario Ragwitz (Fraunhofer ISI), Gustav Resch, Thomas Faber (EEG); Evaluation of different feed-in tariff design options – Best practice paper for the International Feed-In Cooperation; A research project funded by the German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU); 2nd edition, Karlsruhe, October 2008
• John Besant-Jones, Bernard Tenenbaum, Prasad Tallapragada (ESMAP / World Bank); Regulatory Review of Power Purchase Agreements: A Proposed Benchmarking Methodology; Washington DC, October 2008
• DB Climate Change Advisors; Greenpaper GET FiT Program - Global Energy Transfer Feed-in Tariffs for Developing Countries; London April 2010