Feed in tariffs is a process implemented to encourage renewable energy technology investments. Also known as renewable energy payments and advanced renewable tariffs, they offer long-term contracts for those who generate renewable energy based on the cost of production involved in each of the technologies such as wind, solar and tidal power.
Tariff rates for technologies such as wind power are offered at a lower per-kWh rate and those for tidal and solar power are offered at higher rates. They also include tariff digression, a system whereby, tariff schemes reduce over time to compensate for the increase in living costs and for the volume of renewable technologies becoming greater.
How do Feed-in-Tariffs Work?
Feed-in tariffs are given based on the electricity produced by the renewable energy system. An extra incentive is offered for exporting generated energy to the electrical grid.
Any renewable energy producer can sell electricity to the grid. The utility offers long-term contracts to producers, typically for a period of 15 to 20 years to ensure priority connection to the grid as well as paying for any necessary upgrades to the grid.
The state utility commission set the price for the renewable energy. This is to fix high tariff rates which will only benefit producers by gaining reasonable rates of return.
Tariff rates are structured to support local and small producers to encourage local ownership allowing small communities and individuals to set up their own renewable energy system.
The state utility, in addition, imposes a user charge on all electricity customers in the state to compensate the cost of grid upgrades and the premiums offered by the renewable contracts. It has been estimated that the average electricity bill has increased by 6% or less due to feed-in tariffs. However, feed-in tariffs are more cost-effective than most of the other policies that encourage renewable energy production.
Due to fluctuating costs of oil and coal, customers are set to make a significant saving over a longer period of time.
At the same time, to ensure that the utility commission are not charging excessive amounts, and that producers are not receiving inflated profits, tariff rates are adjusted and monitored at a frequent rate.
Key Elements of Feed-in-Tariff System
The following are some of the key components that must be considered when introducing a feed-in tariff law:
- Determining good tariff rate - The tariff rate for energy generated using renewable resources must be fixed such that it guarantees profitability and reflects the price associated with the production of electricity from that source. If the fixed tariff rate is too high, producers will benefit. There will be little or no investment if the rate is too low. Therefore, it is necessary to include a system for adjusting the tariff.
- Imposing a priority purchase obligation - Grid operators are responsible for connecting renewable energy producers to the grid and transmitting electricity produced by them. This should be a priority as the energy from renewable resources is purchased before energy from other sources.
- Guaranteed tariff rates for a specific time period - The cost per unit of electricity should be guaranteed for a specific time period once producers have connected to the grid. This ensures security of investment for producers, investors and suppliers.
- Determining the technologies to be covered under the law - It is very important for any feed-in tariff legislation to clearly state what renewable energy technologies are covered to ensure profitability for producers and investors.
- Reduce the tariff rate every year - Reducing the tariff rate per kWh annually for technologies connected to the grid, encourages rapid growth in the renewable energy sector.
Benefits of Feed-in-Tariff
The key benefits of feed-in tariff include the following:
- Increased drive for technological innovation – Good feed-in tariff rates for renewable energy encourages investment in photovoltaic solar energy, concentrating on solar power or wind energy.
- Secure domestic energy supply – Countries will become less dependent on imported fossil fuels when the domestic renewable energy supply market expands.
- Creation of jobs – The growth of the renewable energy market will increase the job opportunities.
- Reduction of CO2 emissions - and other air pollutants.
- Feed-in tariff system - enables renewable technologies to compete with conventional energy sources that are highly subsidized.
The feed-in tariff is one of the more effective policies in resolving the cost barriers involved in introducing renewable energy and making it economically feasible. The assurances provided by the feed-in tariff system include, the access to the electricity grid, a fixed price per kilowatt hour that includes the costs related to electricity production and a guaranteed sum which has changed a number of European countries into global leaders in producing renewable energy.
However, the greatest challenge for the renewable energy sector is to make the clean energy costs compete with that of conventional energy