A feed-in tariff is a policy process to accelerate investment in renewable energy technologies (FIT, FiT, Standard Offer Contract, ERT or payment of renewable energy). It does so by providing renewable energy producers with long-term agreements, generally depending on each technology’s costs of production. Rather than pay an equal amount for energy, however generated, technologies such as wind power and solar PV, for instance, are awarded a lower per-kWh price, while technologies such as tidal power are offered a higher price, reflecting costs that are higher at the moment and allowing a government to encourage development of one technology over another.
Furthermore, feed-in tariffs often include the’ tariff degression,’ a mechanism whereby price (or tariff) decelerates over time. This is performed to monitor and promote the decrease in technological costs. The aim of feed in renewable energy tariffs is to give renewable energy producers cost-based compensation and provide cost assurance and long-term agreements which fund investment in renewable energy.
FITs typically include three key provisions:
- guaranteed grid access
- long-term contracts
- cost-based purchase prices
Under a feed-in tariff, eligible renewable electricity generators, including homeowners, business owners, farmers and private investors, are paid a cost-based price for the renewable electricity they supply to the grid. This allows for the development of different technologies (wind, solar, biogas, etc.) and offers decent returns to investors. In German Renewable Energy Sources Act 2000 this principle was clarified.
A marginal feed-in tariff can be differentiated. The concept for price differentiation (Finon) is based on this theoretical alternative. In accordance with this policy, the tariff prices are slightly higher than the spot price at which the state determines the maximum manufacturing level. Companies with reduced marginal costs receive lower-end spectrum rates that boost income but not so much as under the standardized feed-in tariff. The greater the tariff price the more marginal manufacturers face. There are two goals in this version of the strategy. Firstly, the profitability of certain manufacturing locations will be reduced.
Many renewables depend heavily on their place. For instance, windmills in windy areas are most lucrative and solar energy in sunny areas is best served. This implies that generators tend to focus on the most beneficial locations. The differentiated tariff aims at improving the profitability of less naturally productive plants and thus spreading generators that many believe are unwanted in the region (Finon). Imagine cutting down forests to construct wind farms; for the environment this would not be nice.
This leads, however, to renewable electricity production being less cost-effectively used at the most effective sites. The other objective of marginalized tariffs is to cut program costs (Finon). All producers are paid a price which is sometimes considerably higher than the price needed to motivate them to produce under the uniform tariff. The extra income is a profit. The differentiated tariff therefore tries to provide every producer with the required manufacturing in order to achieve the optimum market production amount for renewable electricity (Finon). In the face of the emerging globalization, feed-in tariffs generally appear as increasing commercial issues, since its application in one nation can have a easy effect on other countries ‘ sectors and policies, requiring ideally worldwide coordination of handling and imposition, within the World Trade Organization, of the policy tool.