28 renewable energy focus July/August 2010

Feature article

Fabulous feed-in tariffsTHE FEEDIN TARIFF IS OFTEN HELD UP AS A ‘MUST’ FOR RENEWABLE

ENERGY TO SUCCEED. DAVID JACOBS EXPLORES FEEDIN TARIFFS IN ALL

SHAPES AND FORMS, AND WHAT SHOULD BE TAKEN INTO CONSIDERATION

WHEN DESIGNING THESE.

First, a clarification of what a feed-in tariff is –

and what it is not. This policy instrument has

become so successful and popular that policy

makers sometimes claim to have established a

feed-in tariff even though this is not the case.

Other than classical tax and investment incen-

tives, the most frequently used support mecha-

nisms for renewable electricity are feed-in tariffs,

net metering, preferential tariffs, quota based

mechanisms (based on certificate trading) and

tender systems. These mechanisms can be

grouped into price-based and quantity-based

support. Tender mechanisms and quota obliga-

tions – also called Renewable Portfolio Standards

or Tradable Green Certificate schemes – are quan-

tity-based mechanisms because the legislator

fixes a certain quantity that has to be provided

by certain market actors.

Feed-in tariffs, net metering and so-called

preferential tariffs are all price-based support

instruments. In order to qualify for being

labelled a feed-in tariff, the support instrument

in place should consist of at least the following

design options: a purchase obligation, and a

stable tariff payment which is guaranteed over

a long period of time. First, the purchase obli-

gation obliges the nearest grid operator to buy

all renewable electricity – independent of elec-

tricity demand. Second, the renewable power

producer is guaranteed a certain amount of

money per unit of electricity that is produced.

Third, this payment is guaranteed over a long

period of time (usually 15 to 20 years), which

increases investment security and allows for

cost amortisation.

Feed-in tariffs should not be confused with

net-metering mechanisms, another price-

based support instrument. Net metering is

a concept mostly applied for the promotion

renewable energy focus July/August 2010 29

Energy/incentive schemes

of decentralised solar electricity in many

regions of the USA and other parts of the

world. Under this support scheme, inde-

pendent power producers have the right to

get connected to the grid and the local utility

is obliged to purchase all excess electricity –

that means all electricity that is not needed for

local consumption. The name of the support

instrument refers to the meter measuring

the electricity consumption. In the case of

most net metering schemes, the meter starts

turning ’backwards‘ once excess electricity is

fed into the grid. In other words, for each unit

of electricity delivered to the grid the renew-

able power producer ’receives’ the equivalent

of the retail electricity price. However, this

electricity price for fi nal consumers is not

fi xed and not guaranteed over a long period

of time. Therefore, a net metering mechanism

lacks two important components of a feed-in

tariff and therefore off ers a lower degree of

investment security.

Feed-in tariff s should also not be mistaken with

so-called preferential tariff s, as they are paid in

some Indian provinces and other parts of the

world. In the case of a preferential tariff , the

remuneration level is fi xed by the legislator.

However, in contrast to a feed-in tariff mecha-

nism, the tariff level is not guaranteed for a

long period of time. Instead, the legislator can

change the remuneration level on an annual

basis. Therefore, one of the essential compo-

nents of a feed-in tariff is missing.

Feed-in tariff s world-wide

Today, feed-in tariff s – as defi ned above – are

applied in a large number of countries, regions,

or provinces, including Africa, the Americas,

Asia, Australasia and Europe.

Additional design options

Besides the aforementioned mandatory

component, a feed-in tariff mechanism usually

includes a large number of additional design

options. This includes basic feed-in tariff design

options, design options for improved market

and system integration, and for emerging

economies and developing countries.

One of the most urgent questions legislators

usually have is how to get the tariff right.

Well functioning feed-in tariff mechanisms are

calculating the tariff s based on the technology

specifi c generation costs. In order to do so,

the legislator needs to analyse the costs for

renewable power generation based on a large

number of costs components, including invest-

ment costs (together with material and capital

costs), grid-related and administrative costs

(grid connection cost, costs for the licensing

procedure, and so on), operation and main-

tenance costs, and fuel costs (in the case of

biomass and biogas). This way, the legislator

can calculate the tariff level a renewable elec-

tricity producer needs to reach a certain profi t-

ability threshold.

More design options need to be considered in

countries which have already reached a certain

share of green power through political support.

In addition to tariff diff erentiation according

to technology, more mature feed-in tariff

mechanisms also off er diff erentiated tariff s

depending on the size of the power plant or

even the location in order to avoid windfall

profi ts. Moreover, the automatic, annual reduc-

tion of feed-in tariff s has become international

best practise, at least in the case of technolo-

gies such as solar photovoltaics (PV). Through

this so-called tariff degression the legislator

aims to anticipate technical progress, econo-

mies of scales, rationalisation and the overall

learning potential of a given technology.

Some countries have also indexed their tariff s

to national infl ation in order to further increase

investment security.

Improved system and market integration

Design options for improved market and

system integration have become increas-

ingly important in order facilitate the integra-

tion of renewable electricity into the existing

power system and market. These design

options usually improve the ’quality’ of elec-

tricity supply, meaning that electricity supply

better match electricity demand and that

grid stability will be improved. Design options

for improved system and market integration

include alternative sales options (e.g. spot-

market sales and premium feed-in tariff ), tariff

payment for improved system integration (e.g.

tariff payment for auxiliary grid services and

demand-oriented tariff payment) and regula-

tions for controlling power output (e.g. fore-

cast obligations and remote-controlled power

output). These design options have primarily

been implemented in countries with a large

share of renewable electricity, including Spain,

Germany and Denmark.

Emerging economies and developing countries

As feed-in tariff s are becoming increasingly

popular in developing countries and emerging

economies, the design should also refl ect the

typical features of the electricity system in those

countries. The beauty of feed-in tariff s is that they

Table 1: National feed-in tariff mechanisms worldwide as of February (2010):

Africa Asia Europe

Algeria China Austria

Kenya India** Bulgaria

Mauritius Israel Croatia

South Africa Mongolia Cyprus

Uganda Pakistan Czech Re-public

Philippines Denmark

South Korea Estonia

Sri Lanka France

Taiwan Finland

Thailand Germany

Turkey Greece

Ukraine Hungary

Ireland

Americas Australasia Italy

Argentina Australia* Latvia

Canada* Lithuania

Costa Rica Luxembourg

Ecuador Macedonia

Nicaragua Malta

United States* Netherlands

Portugal

Serbia

Slovak Republic

Slovenia

Spain

Switzerland

UnitedKingdom

Compiled by Miguel Mendonça, David Jacobs and

Paul Gipe.

* Countries with regional FiT(s) only

** Countries with regional and national FiTs

Click through

Interested in further information on this

topic? Go to http://tinyurl.com/yjynwpu.

Or click on the following links from the

digital issue of the magazine:

■ Comment: France ups feed-in tariff for solar, geothermal and biomass –

http://tinyurl.com/323928p

■ UK renewables industry wel-comes feed-in tariff – http://tinyurl.

com/38kf2jh

■ Comment: Feed-in tariff reductions in Europe to change solar PV market

– http://tinyurl.com/3xkj75u

30 renewable energy focus July/August 2010

Energy/incentive schemes

work both in liberalised and non-liberalised

power markets – the latter is the standard in

most emerging economies and developing

countries. In addition to the aforementioned

general design options, developing countries

might need to modify the financing mechanism

and decide whether revenues from international

carbon trading are taken into consideration

when calculating the tariffs. Furthermore, the

number of eligible projects might need to be

capped in order to better control the costs of

renewable electricity promotion. Feed-in tariffs

can also serve as a promotion tool for renewable

electricity development within mini-grids.

Political objectives

Legislators around the world are promoting

renewable energy sources for a multitude of

reasons. Some of them are related to classical

energy policy objectives, such as increasing

energy security through the use of local renew-

able energy sources, environmental protection

through the reduction of green house gases,

and the stabilisation of energy costs in the

longer term. Certain secondary objectives

have sometimes been overlooked by analysts,

namely the political objective to increase the

number of market actors and to establish a

strong national industry in an ever expanding

international market.

Increasing the number of actors has been a

political objective for all countries that have

established a liberalised power market, as

competition is expected to reduce costs. In

the EU policy makers initially hoped that liber-

alisation alone would increase the number

of actors and thus create competition. These

hopes, however, have faded and liberalisation

eventually leads to a concentration process on

the European power market. Nowadays, a few,

large-scale utilities are dominating the Euro-

pean market.

Surprisingly, it has not been liberalisation poli-

cies but renewable energy policies that have

managed to increase the number of actors

in European power markets. Because of the

high degree of investment security, feed-in

tariff mechanisms create favourable invest-

ment conditions for a heterogeneous group of

players, including utilities, small and medium

sized companies and even private persons.

In Germany the national utilities are losing a

market share of roughly 1% every year to new,

small-scale and independent power producers.

The province of Ontario in Canada is also

trying to bring new actors into the power

business. The regional feed-in tariff mechanism

even offers a slightly higher rate for commu-

nity based projects and projects financed by

the aboriginal population.

First mover benefits

Legislators have frequently implemented

feed-in tariffs to establish a strong national

industry and harness the related macro-

economic benefits, such as job creation. First

mover countries, i.e. countries that have started

to promote renewable electricity generation at

an early stage, were generally able to achieve

these objectives. Denmark started to promote

wind energy with preferential tariff in the 1980s

and today the largest wind power company

world-wide is Vestas from Denmark. Germany

implemented the first feed-in tariff mechanism

in 1990 and today the renewable electricity

industry comprises of 300,000 employees with

a turnover of more than €33billion – mostly

export activities.

It is often argued that so-called ’laggard coun-

tries‘, i.e. countries where political decision

makers have only recently focused on green

electricity promotion, often cannot generate

the same macro-economic benefits because

technologies will be primarily implemented

from other countries with a first mover advan-

tage. However, feed-in tariff design can also

contribute to establishing a strong national

industry, even today. Ontario is trying to do this

via national content requirements, meaning

that power plants need to include a certain

share of locally produced components to be

eligible for tariff payment under the feed-in

tariff mechanism. Legislators who wish to follow

this approach of course have to respect interna-

tional trading regimes, such as the World Trade

Organisation (WTO) agreements.

Today, a number of Asian countries, including

Malaysia and Taiwan, are also trying to establish

a national green power market via feed-in tariffs.

Those countries traditionally have a strong export

industry for renewable electricity systems, espe-

cially of solar PV. However, governments have

realised that it was risky to exclusively rely on

exporting markets, especially as support instru-

ments in European countries have frequently

been amended or cut, and therefore entire

export markets have disappeared over night. The

establishment of a national market can serve as a

cushion for the national (export) industry.

Conclusion

So why are feed-in tariffs so fabulous? First, they

have proven to be the most successful support

instrument for renewable electricity. Second,

feed-in tariffs can be designed flexibly according

to the framework conditions of the national

electricity markets and according to the specific

national energy policy objectives. They can be

designed in order to include an increasing share

of renewable electricity and according to the

needs of developing countries and emerging

economies. Third, feed-in tariffs have helped to

create national markets for the manufacturing

industry, thus leading to a number of secondary

macro-economic benefits such as job creation.

Finally, they have also helped to ‘democratise’

energy markets by allowing a large number

of actors to participate in the power genera-

tion business, including small and medium size

companies, farmers and private persons.

About the author:

David Jacobs is researcher at the Environmental Policy Research

Centre (FFU) of the Freie Universität Berlin. Besides, he is

co-author of the book Powering the Green Economy – The feed-in

Tariff Handbook (Earthscan, November 2009).

Table 2: Regional Feed-in tariff mechanisms (as of February 2010):

Africa Americas Asia Australasia Europe

Canada: India: Australia:

New Brunswick Gujarat Australian – Capital Territory

Ontario Harayana Karnataka New South -Wales

Orissa Northern -Territory

USA: Punjab Rajasthan Queensland

California Gainesville, (Florida) Tamil Nadu South Australia

Hawaii West Bengal Tasmania

Michigan Victoria

Tennessee Valley Authority Western –

Vermont Australia

Washington

Wisconsin

Compiled by Miguel Mendonça, David Jacobs and Paul Gipe for the 2010 Renewables Global Status