What Is a Feed-In Tariff (FIT)?

A feed-in tariff is an economic policy created to promote active investment in—and production of—renewable energy sources.

Key Takeaways

  • A feed-in tariff (FIT) is designed to support the discovery and exploitation of renewable energy sources.
  • FITs have long-term contracts, usually 15 to 20 years.
  • FITs use guaranteed, cost-based purchase prices, with energy producers being compensated in proportion to the costs they incur.

Understanding Feed-In Tariffs (FITs)

Feed-in tariffs typically use long-term agreements and pricing tied to costs of production for renewable energy producers. By offering long-term contracts and guaranteed pricing, producers are sheltered from some of the inherent risks in renewable energy production, thus allowing for more diversity in energy technologies.

Feed-in tariffs are meant for almost anyone who produces renewable energy—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.

The U.S. instituted the first feed-in tariff in 1978, but they are now more widely used internationally.

History of Feed-In Tariffs (FITs)

The first feed-in tariff (FIT) was implemented in the U.S. by the Carter administration in 1978 in response to the energy crisis of the 1970s that famously created long lines at gas pumps. Known as the National Energy Act, it was meant to promote energy conservation along with the development of new, renewable sources of energy, such as solar and wind power. Since then FITS have been more widely used internationally, most notably in Germany, Spain, and other parts of Europe.