Renewable Energy Support Mechanisms: Feed-In Tariffs and Auctions

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Introduction/Background

Energy policies set the goals for a country’s energy future. They create stability in the market, increasing the confidence of investors and thereby allow for energy support to be realised. Therefore, policies play an important role in the future development of (renewable) energy technologies. Renewable energy technologies are widely seen as the future. They provide clean energy using non-finite resources, help mitigate climate change, increase countries’ energy independencies and can improve energy security. However, many renewable energy technologies are relatively new and not yet as established as ‘convention’ energy generation technologies which burn fossil fuels. By choosing to shift their support mechanisms away from fossil fuels and towards renewable energy technologies governments can help boost these technologies in their countries. For an overview of all of the different renewable energy support mechanisms and their strengths and weaknesses have a look at the article Comparison of various Policy Tools for Promoting Renewable Energies.

This article looks in detail at two of the main support mechanism, Feed-In Tariffs (FITs) and auctions. After a short definition and overview of each policy type the article examines how these policies can be implemented and looks at the effectiveness of each policy type at achieving certain objectives. Due to the complexity of renewable energy support mechanism it can often be difficult to judge which policy type might offer the most advantages for a given country. Especially for newly emerging and developing policies there are not yet that many case studies available which show the effects of a certain policy on the development of renewable energy technologies. Therefore, this article aims to provide a short guide on the benefits and disadvantages of FITs and auctions, based on a literature review and selected country examples.

 

Background

There are two main categories of regulatory generation focused renewable energy support mechanisms; Tariff-based Instruments and Quantity-based Instruments. Tariff-based instruments provide an economic incentive for generating electricity using renewable energy sources. Usually this takes the form of investment subsidies or payments for energy generated. The Feed-In Tariff (FIT) is an example of a tariff-based instrument. A FIT guarantees a fixed price for renewable energy which is fed in to the grid. (Barroso, et al., 2015a). On the other hand, Quantity-based instruments work by setting minimum targets for renewable energy in the energy mix and holding certain parties in the energy supply chain responsible for these targets. An example of a quantity-based instrument is a Renewable Purchase Obligation (RPO) which “imposes a minimum quota or a share of renewable energy production on electricity suppliers, and is often supplemented by a renewable energy market allowing for the trading of renewable energy certificates (RECs)“ (Barroso, et al., 2015a) (Wind Energy, The Facts, n.d.)

FIT are the most established renewable energy support mechanism. However, in recent years many countries have started to implement a blend of different policies, allowing them to profit from the benefits offered by a range of different policies. Such a mix of policies can be described as Hybrid Instruments. Hybrid instruments are support mechanisms which combine aspects from tariff and quantity-based instruments. Renewable energy Auctions (sometimes also called tenders) are an example of hybrid instruments. In auctions both the price and the quantity are determined through a price bidding process, before the project start. This allows auctions to provide a “stable revenue guarantee for the project developers (similar to the FIT mechanism), while at the same time ensuring that the renewable generation target will be met precisely (similar to an RPO).” (Barroso, et al., 2015a).

International Trends

The number of countries with at least one type of renewable energy target rose from 43 in 2005 to 164 in 2016. (Wuester, 2016) “By early 2012, 109 countries had some type of policy to support renewable power generation, up from 48 countries in 2005. More than half of these countries are developing countries or emerging economies.” (IRENA, 2012) The joint IEA/IREAN Country Policy Database for Global Renewable Energy currently stores information on 117 countries (status 2016).

Figure 1 and Figure 2 show the development of different support mechanisms since 2005. As can be seen in 2005, FITs used to be the most popular support mechanism by far, while only 6 countries at the time had implemented auctions. Even today the FIT remains the most common support mechanism, however, auctions have seen a very strong growth and where implemented in over 60 countries by early 2015. (Ferroukhi, et al., 2015)


Figure 1: Number of countries with renewable energy policies by type (Wuester, 2016)


Figure 2: Development of FIT and Auctions in the past years (Lucas, et al., 2013)

 

Feed-In Tariff

Definition

A Feed-In Tariff (FIT) provides renewable energy generators with a fixed price for the energy which they produce. The FIT is set for each technology individually and is paid for a fixed number of years. This increases the stability and allows for long-term planning, which encourages investment in to renewable energy projects. In some countries the FIT is funded through the electricity utility bills, which means that the costs are passed down to the consumers. However, in other countries, where an increase in consumer bills was deemed unacceptable government budgets have been set aside for the FIT. (Passey, et al., 2014)

 

Overview of Different FIT models

Gross FIT: The FIT is paid for all of the renewable energy which is being generated, independent of whether this energy is being exported to the grid or used on-site.

Net FIT: The FIT is only paid for the renewable energy which is being exported to the grid. Even though the FIT is not paid for generated electricity which is being used on site, this energy is offsetting the cost of bills which would normally have to be paid. Therefore, in order to determine whether the Gross FIT or the Net FIT model will be more profitable, the price of the FIT and of the grid retail price per unit of electricity has to be compared.

Net Metering: The current retail price is paid for all renewable energy which is being exported to the grid. Electricity used on site reduces the electricity bills, which would normally also have to be paid at the retail price. Therefore, this model effectively means that all renewable energy which is being generated gets paid the current retail price.

Net Billing: The payments for electricity generated and electricity consumed are netted out over a certain period of time. This can be applied using either the gross FIT or the net FIT model. (Passey, et al., 2014)

 

Advantages and Disadvantages

Advantages

Disadvantages

  • Simple policy model, however, can be customised to target specific technologies.
  • Limits the risk for investors.
  • Due to long term security FITs drives technological development.
  • Facilitates the entry of new players in the market.
  • Because the FIT is output based it provides an incentive to maximise productions.
  • When funded by the consumers, the FIT imposes no burden on the public budget.
  • Tariff structure can be adapted to impact on customer load patterns.
  • Tariffs are linked to a fixed timeframe.
  • Well established and successful policy method.
  • While the policy structure is simple, finding the best FIT level and digression mechanism for each country is difficult.
  • With a fixed FIT, project do not need to respond to price signals from the market, resulting in bad market integration.
  • The FIT only supports grid connected generation.
  • FIT can be very costly for a country.
  • Badly designed FIT can result in high utility costs for the consumers.
  • When funded through a budget the stability of the FIT is linked to the budget reliability.
  • There is less control over the installed quantity.

(Passey, et al., 2014)  (Laumanns, et al., 2015)

 

Links to other articles about FET

 

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