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Feed-in Tariffs (FIT)

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Overview

Feed-in tariffs (FIT) are fixed electricity prices that are paid to renewable energy (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). Another possibility is to calculate a fixed maximum amount of full-load hours of RE electricity production for which the FIT will be paid. FIT are usually paid by electricity grid, system or market operators, often in the context of Power purchasing agreements (PPA).

Currently, in most RE support schemes, the level of FIT is determined on the basis of a calculation of the levelized cost of electricity (LCOE) produced from RE. This allows the RE investor to recover the different costs (capital, O&M, fuel, financing) while realizing a return on his investment that depends on the assumed financing costs. In some cases, FIT have been calculated on the basis of avoided costs for the electricity system or the society, including e.g. environmental externalities. Thirdly, it is also possible to determine the FIT level by means of a tendering mechanism.


Design Options

FIT are usually differentiated by technology to reflect the differences in generation costs between the various RE technologies. A second differentiation is also often done for the size of the RE project in terms of installed capacity, reflecting the higher generation costs of small and medium scale RE projects. Thirdly, FIT can be differentiated according to the RE resource quality (e.g. average wind speed) at different project locations. In this case, FIT for sites with lower RE potential are higher than those for sites with a better RE potential. In general, these options for FIT differentiation can lead to a more heterogeneous mix of different RE projects (in terms of technologies, size and location) but carry the risk of increasing the overall costs of the support scheme (NREL 2010).

In many FIT schemes, RE investors are also eligible for the payment of additional bonuses (i.e. an increase of the basic FIT) for the use of certain biomass fuels (e.g. liquid manure), combined heat and power generation (CHP), repowering of older RE installations, provision of ancillary services to the electricity system or specific innovative applications (e.g. enhanced geothermal systems). On the one hand, these bonuses can be useful to achieve certain policy objectives (e.g. technological innovation), on the other hand they also increase the costs of the support scheme.

FIT are usually stable during the whole guaranteed payment period after the commissioning of a RE project. In some cases, a higher FIT is paid in the first years of operation and a lower FIT for the remaining years. This “front-loaded” FIT can facilitate the financing of capital-intensive RE projects. In other cases, FIT are increased on an annual basis to compensate for the inflation of operation and maintenance costs.

The levels of FIT are usually determined by means of RE legislation (e.g. RE laws, decrees, ministerial decisions…) or by national regulatory authorities. This means that a revision of the FIT would normally require an additional administrative act. Therefore, many RE support schemes have included an automatic degression mechanism that is applied to the FIT in regular intervals. This degression can be pre-determined (e.g. a fixed annual percentage reduction of the FIT) or it can be responsive, taking into consideration the market development for a specific RE technology.

For the calculation of the degression of the RES remuneration rates, data from international studies with projections about the technological progress, market development and the evolution of the technology costs (“learning curves”) are being used. The determination of the right degression rate can be challenging due to uncertainties concerning the technology development and other important factors such as financing costs.


Advantages of feed-in tariffs

Feed-in tariffs are a relatively simple RES policy instrument that provides however the possibility to be combined with specific design elements (in particular tariff differentiation) that allow a fine-tuning of the support and the achievement of different policy objectives (e.g. innovation, climate protection, regional development, etc.). For RES investors and financing institutions, the existence of FIT combined with long-term contracts guaranteed by the government provides transparency, predictability and security and therefore contributes to lowering investment risks and financing costs. The existence of FIT generally also contributes to a more continuous and stable RES market development. FIT provide an incentive to maximize the production of RES electricity because they are output-based. In many countries, they have proven their ability to stimulate rapid and large-scale RES market development as well as the development of less mature RES technologies and the participation of small and medium scale RES electricity producers.

Disadvantages of feed-in tariffs

The main challenge with FIT has been the definition of remuneration levels which are neither too low to be attractive for investments, neither too high in order to avoid overcompensation (“windfall profits”) and a market development that leads to the escalation of costs of the RE support scheme or to technical problems with the electricity system. Therefore, a good knowledge and monitoring of the actual costs of RE projects is required. In many cases, FIT have not been set at the right levels due to the problem of information asymmetry between the public and private sector as well as political influence during the FIT determination.

FIT schemes without degression have proven to have a rather slow reaction time to rapid changes in RE costs (e.g. the cost reductions of photovoltaic systems during the past few years). Even if there is a degression mechanism, the degression might be set at a level that does not reflect the actual development of RE costs. FIT also do not provide any incentive for RE operators to respond to price signals of the electricity market. Therefore, FIT schemes do not allow for an effective market integration of RE.


Experiences

Feed-in tariffs have proven to be very effective in stimulating rapid and large-scale development of RES e.g. in countries such as Germany, Denmark and Spain. Feed-in tariffs (FIT) and feed-in premiums (FIP) remain the most widely adopted renewable power generation policy employed at the national and state/provincial levels. As of early 2014, 73 countries and 28 states/provinces had adopted some form of FIT/FIP policy (REN 21 Renewables 2014 Global Status Report). This has been mainly attributed to the high investment security that long-term guaranteed FIT are providing. On the other hand, recent experiences in countries such as Spain, Czech Republic or Greece have shown that FIT can result in overcompensation and low efficiency if they are not adapted to cost decreases of RE technologies.


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 in 5-7 years.
  3. The regulator is repsonsible for tariff adjustments.


Brazil Energy Situation


Chile

Sixty percent of electricity generation in Chile is based on imported fossil fuels (mostly natural gas that was imported from Argentina until they started to close the gas tap in 2004) and 40 percent on domestic hydropower.

Besides its capacity to greatly expand the use of hydro power, Chile also has non-conventional renewable energy (RE) resources with considerable potential that the Chilenian government plans to use also as a means of security for energy supply. Until the start of the joint project the private sector had invested in this area only in a few isolated instances, especially since unresolved technical and legal issues have made supplying power to the electric grid difficult. In the liberalised electricity market, renewable energies must also compete economically with conventional energy sources.
The GTZ project started in 2004 and supports non-conventional renewables to gain a more significant role in maintaining a sustainable electricity supply in Chile. Political acceptance and the investment climate for supplying the grid with electricity generated from renewable sources have been improved and the number of projects to be implemented is rising rapidly.
The project provides the Comisión Nacional de Energia (CNE), (the body responsible for regulating, preparing and implementing energy policy) with advisory services on creating favourable conditions for electricity generation from non-conventional renewable energy sources. This includes regulation of grid access, integration into the electricity market, and development of expansion strategies and promotional instruments for renewable energies. This resulted in a law that obliges power distributers to offer a growing part of their electricity from renewable energies (starting with 5% in 2010, aim for 2014: 10%) and fines them if they don´t provide the adequate amount.
A second priority area is the removal of structural market constraints hindering the rapid expansion of renewables in Chile. These include, besides lack of knowledge about energy resources and their geographical distribution, lack of experience with planning and approval procedures and with grid connection.
The project supports investigation of the technical and economic energy potential in the wind energy, biomass and biogas sectors. To facilitate planning and approval procedures, guidelines for project planning and environmental impact studies are being prepared for the respective renewable energy technologies.
Results: The new regulations improve the economic and legal conditions for RE projects and facilitate entry into the market for new actors and investors. At present, more than 45 projects with a total capacity of about 1280 MW have the status of legal approbation, are in planning or already in construction (mini hydropower plants, wind energy plants, biomass/biogas plants, geothermic projects). The CO2 emissions reduction sum up to 2.5 Mio. t/year.

Chile Energy Situation


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 2000 the first version of the now called Renewable Energy Sources Act (EEG) entered into force and was designed to provide specific tariffs for different RE technologies depending on 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 August 2014. In 2012, an optional FIP scheme was introduced under which RES operators had the choice between a fixed FIT and a sliding FIP, the latter being complemented by a market premium. With the revision of the Renewable Energy Law in 2014, all new RES plants will be part of the FIP scheme and FIT will only be granted to RES plants with a capacity below 500 kW (this threshold will be reduced to 100 kW by 2016). In 2009, Germany has introduced an automated degression mechanism for the FIT of new PV projects that is related to the development of the market in terms of installed capacity (“breathing or flexible cap”). This mechanism has been extended to wind energy and biogas from August 2014.

The EEG obligates grid operators to grant guaranteed grid access to all RE generators and to compensate their electricity production at a fixed price based on a feed-in tariff the time span of 20 20 calendar years plus the months from the commissioning of the system until the end of the calendar year in which the project was commissioned. The exact amount of the feed-in tariff depends on the starting date of electricity generation and decreases by a fixed percentage each year. This degression encourages technological improvements and cost decreases. The prices furthermore vary with the capacity installed, amount of energy generated by the producer, 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) and the type of site where the power is generated (e.g. wind onshore or offshore; solar PV roof or ground-mounted).

The additional costs that arise are distributed equally among all four transmission system operators in Germany (equalisation scheme) through a central RE account. The revenues of this account are coming on the one hand from the sale of RE electricity on the electricity spot market (for FIP, the electricity is directly sold by the RE generator) and on the other hand from the RE levy that is charged by electricity suppliers for each kilowatthour they provide to electricity consumers.

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 and photovoltaic energy systems.

Germany Energy Situation


Malaysia

The Renewable Energy Act was passed in April 2011


Malaysia Energy Situation


Philipines

On the debate to whether decide on FIT or auctioning for the limited allotments of 760 MW on the Philipines.


Philippines Energy Situation


Uganda

"Feed-in Tariffs Hit Uganda
Monday, January 24, 2011
Uganda has introduced its renewable energy feed-in tariff (Refit) joining Kenya and South Africa, but the East African country is offering a twist compared to its African neighbors.

Uganda has geared its Refit to a plethora of sectors, including varying tariffs for hydropower projects that range from 1 MW to 8 MW, geothermal, and bagasse. The tariff also proposes capacity caps per year, less than 20 MW, for each technology; however, projects with an installed capacity greater than 20 MW will be required to negotiate a tariff and PPA with the system operator on a case by case basis.

The Refit will be managed and implemented by Uganda’s Energy Regulatory Authority (ERA) as part of its mandate under the Electricity Act of 1999. The tariffs for each priority technology will be determined by using a $/kWh leveled cost approach based on the electricity generation costs from the RE source. The ERA said in its Refit document that this is aimed at providing an after tax internal rate of return to equity holders equal to an assumed cost of equity capital in order to provide sufficiently high tariffs and avoiding windfall profits. The ERA said, “The key inputs are based on general investment assumptions and specific assumptions for each of the priority technologies that influence the power generation costs.”


Uganda Energy Situation


Tonga

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Tonga Energy Situation

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 dbcca.com


Further Information


References