Feed-In Tariff (FIT): Explanation, History and Uses

What Is a Feed-In Tariff (FIT)?

A feed-in tariff is a policy tool designed to promote investment in renewable energy sources. This usually means promising small-scale producers of the energy—such as solar or wind energy—an above-market price for what they deliver to the grid.

Understanding Feed-In Tariffs (FITs)

Feed-in tariffs are seen as necessary to promote renewable energy sources in the early stages of their development, when production is often not economically feasible. Feed-in tariffs usually involve long-term agreements and prices tied to the cost of production of the energy in question. The long-term contracts and guaranteed prices shelter producers from some of the risks inherent in renewable energy production, encouraging investment and development that otherwise might not take place.

Feed-In Tariffs and Small Energy Producers

Anyone who produces renewable energy is eligible for a feed-in tariff, but those who take advantage of it are often not commercial energy producers. They can include homeowners, business owners, farmers, and private investors. Generally, FITs have three provisions.

1. They guarantee grid access, meaning energy producers will have access to the grid.
2. They offer long-term contracts, typically in the range of 15 to 25 years.
3. They offer guaranteed, cost-based purchase prices, meaning that energy producers are paid in proportion to the resources and capital expended in order to produce the energy.

History of Feed-In Tariffs (FITs)

The U.S. was a pioneer in feed-in tariffs. Its first was implemented by the Carter administration in 1978 in response to the energy crisis of the 1970s, which famously created long lines at gas pumps. Known as the National Energy Act, the FIT was meant to promote energy conservation along with the development of renewable energy such as solar and wind power.

The Growth in Use of FITs

Since then FITs have become widely used internationally. Japan, Germany, and China have all used them successfully over the past decade or so, and in total dozens of countries have used them to one degree or another to drive the development of renewable energy. It is estimated that about three-fourths of global solar energy is linked to feed-in tariffs.

A Shift Away From Feed-In Tariffs

Despite the successful role feed-in tariffs have played in promoting the development of renewable energy, some countries are turning away from relying on them, instead seeking more market-driven sources of support as well as more control over the supply of renewable energy that is produced. That includes Germany and China, two of the more prominent FIT success stories. Nonetheless, FITs still play a vital role in the development of renewable energy resources around the globe.