What Are Feed-In Tariffs and How They Affect Your Utility Bills
As the need to shift to renewable energy to prevent even worse damages that cause climate change becomes more apparent and widely accepted, many policy mechanisms continue to be discussed, debated and enacted towards that goal. Where investment tax credits have helped to reduce the installation costs of wind and solar to make their nascent technologies more competitive and carbon taxes and cap and trade systems continue to be debated across the world, one renewable energy policy mechanism that’s been successfully implemented for decades is the use of feed-in tariffs.
Many customers may have no idea that feed-in tariffs are being used in their region and affecting the mix of energies that power their devices as soon as they plug them into the wall, while plenty simply have never heard of feed-in tariffs in the first place. What exactly is this renewable energy integration strategy, how successful has it been and what effect does it continue to have on the average customer’s power bills?
Defining Feed-In Tariffs
Simply put, a feed-in tariff, or FIT, creates a market for renewable energy sources guaranteeing that eligible generation projects will receive a set price for the power they produce. The feed-in tariffs offer a long-term contract with a fixed price on renewable generation, though the exact price typically varies based on the technology and how expensive the technology is at a given moment.
In some areas, the high capital cost of building new renewable energy generation projects is tenuous because investors and customers don’t know if the payoff of their project will be worthwhile based on uncertainty in the electricity markets. However, when those same regions are subject to a feed-in tariff, then renewable energy investors are assured that they’ll receive a base level of financial recuperation.
While that’s no guarantee that a given renewable energy project will be profitable in the long run, a system that embraces feed-in tariffs creates a more favorable environment for these higher risk ventures and fosters growth in a nascent renewable energy sector is a huge win for the entire clean energy sector.
Feed-in tariffs can be collected by anyone who installs renewable energy generation, such as rooftop solar power, including homeowners, business owners or institutions like hospitals or schools. The feed-in tariff is applied to power generated by these renewable energy installations, whether that power ends up being sold back to the utility through the grid or simply used onsite by the customer generating it in the first place.
Feed-In Tariff Success Stories
Feed-in tariffs have been utilized as a successful means to encourage renewable energy development across the world.
Germany instituted its Law on Feeding Electricity into the Grid, an early form of feed-in tariffs, as early as 1990, which required utilities to buy renewably-generated electricity from producers at a discount to fully priced electricity. The program evolved into the Act on Granting Priority to Renewable Energy Sources in 2000, which looks more like the common version of feed-in tariffs.
In the United Kingdom, feed-in tariffs have been used by the government to aid the push towards receiving 15% of total energy from renewable sources by 2020.
While no national feed-in tariffs have taken hold in the United States, a few states (namely California and Hawaii) have utilized a feed-in tariff program to mandate public utilities to enter into long-term contracts at designated rates for renewable generation projects up to a certain size.
Impact of Feed-In Tariffs to Utility Bills
The most important question to many will be how does this affect me? The truth is that the specific terms and design of a feed-in tariff is a critical factor in answering that question. Utility rates have increased in some instances after a feed-in tariff was introduced, namely when the funding required for a feed-in tariff comes directly from increases to the charges to all ratepayers. Notably, the German feed-in tariff program is funded by utility customers and currently accounts for about 6.9 cents per kilowatt/hour on electricity rates.
On the other hand, though, the increase of renewable energy sources on the grid has the ability to decrease the overall market prices of electricity across the grid. Namely, the increased ubiquity of renewable energy meeting existing energy demands means that the least efficient (and thus most costly) fossil fuel plants can be shut down most of the time, only powering up when there’s a particularly high demand or the renewable energy sources are unable to meet the demand (such as a loss of solar due to cloud cover).
Since the renewable energy sources that benefit directly from feed-in tariffs can power the grid at a moment’s notice, they’re well-suited for responding quickly to spikes in demand and can out-compete other fuel sources that don’t rely on free and renewable sources. This flexibility allows hour-by-hour or even minute-by-minute pricing on the electricity wholesale market. Using algorithms and market principles together allows overall average utility prices to decrease - savings that can be passed on the customers on their bills. Notably, this trend has actually happened in Germany and counteracted the previously mentioned surcharge that funds the feed-in tariff program!