Feed-in-tariff (FiT) refers to a premium payment to new and renewable energy technologies which are relatively expensive or thus not competitive with conventional technologies for electricity generation. The tariff is based on the cost of electricity produced, including a reasonable return on investment for the producer. It thus reduces the risk to potential investors for long-term investments in new and innovative technologies. This policy has been implemented in more than 75 jurisdictions around the world as of early 2010, including in Australia, EU countries, Brazil, Canada, China, Iran, Israel, the Republic of Korea, Singapore, South Africa, Switzerland, the Canadian Province of Ontario and some states in the United States (REN21, 2010). FIT has played a major role in boosting solar energy in countries like Germany and Italy, which are currently leading the world in solar energy market growth. Mendon? a and Jacobs (2009) argue that FIT promotes the fastest expansion of renewable electric power at the lowest cost by spreading the costs among all electric utility customers. A study evaluating renewable energy policies in EU countries found that the FIT is the most effective policy instrument to promote solar, wind and biogas technologies (CEC, 2008).
FiTs cover all types of solar energy technologies (e. g., small residential rooftop PV to large scale CSP plants). The tariffs, however, differ across countries or geographical locations, type and size of technology.
For example, German feed-in payments are technology – and scale – specific. It is subdivided by project size, with larger projects receiving a lower feed-in tariff rate in order to account for economies of scale, and by project type, with freestanding systems receiving a low FiT (Sosemann, 2007). The current FITs for solar PV in Germany are 0.43€/kWh for rooftop capacity less than 30 kW; 0.41€/kWh for rooftop capacity between 30 kW and 100 kW; 0.39€/kWh for rooftop capacity between 100 kW and 1MW;
0. 33€/kWh for rooftop capacity greater than 1 MW; and 0.32€/kWh for free-standing units (IEA, 2011). Each tariff is eligible for a 20-year fixed – price payment for every kilowatt-hour of electricity generated. Germany’s FIT assessment technique is currently based on a “corridor mechanism” (EPIA/Greenpeace, 2011).
This mechanism sets a PV capacity installation growth path which is dependent on the PV capacity installed the year before, and results in a decrease or an increase of the FIT rates according respectively to the percentage that the corridor path was exceeded or unmet. As PV capacity installations were superior than planned by government in 2010, the FIT rates were decreased by 13% on January 1st, 2011 to reflect the decrease in PV costs.
The FiT is regarded as the key driver for recent growth of grid connected solar power, both CSP and grid connected PV. However, some existing studies, such as Couture and Cory (2009), identify several concerns with the FiT. FITs put upward pressure on electricity rates, at least in the near to medium term in order to significantly scale up the deployment of such technologies. FiT policies guaranteeing grid interconnection, regardless of location on the grid, increase transmission costs if projects are sited far from load centers or existing transmission or distribution lines. Similarly, FiT policies designed to periodically adjust to account for changes in technology costs and market prices over time pose a challenge with respect to balancing the purpose of the tariff—increasing utilization of the beneficiary technologies—and fiscal cost, especially as the authorities can only guess at the appropriate tariff adjustments. Changing payment levels increase uncertainties to investors, and political pressures to hold down payments increase overall market risk. In Germany, for example, there was political pressure to cap the policy or speed its rate of decline (Frondel et al., 2008; Podewils, 2007).