Feed-in tariffs (FITs) represent one of the most successful policy mechanisms for accelerating renewable energy adoption worldwide. Understanding their structure, implementation, and impact is crucial for anyone interested in the future of sustainable energy development.
The Fundamental Mechanism of Feed-in Tariffs
At their core, feed-in tariffs operate as a guaranteed pricing system for renewable energy producers. When a government implements a FiT program, it essentially makes a long-term commitment to purchase renewable energy at specific rates, normally based on the levelized cost of electricity (LCOE). In simple words, the government offers to buy your product at a established price during a period of time. Your investment risk is effectively lower because you have a guaranteed price and buyer.
Historical Development and Global Implementation
Feed-in tariffs began in the United States during the 1970s, and emerged as a response to the energy crisis that defined that era. It was the Carter administration who recognized the need for energy independence that implemented the first comprehensive Feed-in Tariffs (FiT) program through the National Energy Act of 1978. This set the base for future developments and growing FiT schemas all across the world.
Japan, Germany, and China have implemented large-scale FiT which have driven large scale solar PV investment. These have brought unique challenges as opposed to what most people say. For example, China’s FiT system between 2011 and 2016 led to the massive growth of PV waste, under utilized capacity and unbalanced spatial distribution. Solar curtailment, or the shutting down of facilities due to lack of ability for the transmission lines to take up more power, is increasingly common and is known as PV waste.
FiT have been remarkably successful at driving global scale energy production, to a point where approximately three-quarters of global solar energy production can be traced back to FIT initiatives.
To give you an example, I will briefly share with you what Spain implemented during early 2000s. In 2002, Spain set a Royal Decree 841, which introduced a the first FiT rate of €0.12 per kilowatt hour for solar thermal power plants. These solar thermal plants are also known as Concentrating Solar Power (CSP). As market conditions evolved, in 2004 the Spanish government kept enacting different laws that raised the FiT rate to €0.18 per kWh, complemented by additional premiums that effectively raised the total rate to €0.21 per kWh for early adopters. This led to a large increase in investment especially in CSP area and more investors entered the business of CSP energy production. Spanish climate in Andalusia and other southern areas proved to be ideal for this type of energy production as there is abundant space and sun.
Every feed-in tariff is unique and different, depending on the country, legal system and financial considerations but they share some common features and characteristics that are easily identifiable.
To start with, these are long-term contracts. Most FiT programs offer contracts ranging from 15 to 25 years, providing the stability necessary for substantial capital investments.
CSP investors (or other type of power generation plants that enjoy FiT programs) need to have guaranteed grid access, which means that they will be able to sell (hence make their production marketable) electricity to the grid. This is especially important for small scale producers such as households. Regulations in some countries are becoming stricter on being able to “sell back” your excess electricity production to the grid due to large grid congestions.
For large-scale producers, there needs to be a clear mechanism to earn a return on the investment. Feed-in tariffs should reflect market prices and should be yearly adjusted to inflation and electricity market prices to be competitive. There have been cases where investors suffered high price increases from their raw materials to build and operate their plants while contract prices did not really reflect those new costs. In those cases, negotiations tend to go wrong and investment can be delayed or even cancelled.
I will provide two examples of feed-in tariff payment mechanisms. The first one is a fixed price. This can be set based on average retail electricity prices over a period of time, adjusted on a rolling basis. Another type of FiT pricing can be what is also known as Feed-in Premium (FiP). These FiP are payments with a premium payment on top of the wholesale electricity prices. These mechanisms reward renewable energy investors when prices are high and erode profitability when electricity prices are low. There will be an entire section focused on the economic aspects later on. You can refer to this paper for more information.
Feed-in tariffs have also severe downsides. For example, they can incentive large-scale production which leads to overcapacity (which is what happened in China). These costs are paid by tax payers and do not reflect the market developments but instead become a market distorsion, which plummet supply chain prices (for example on solar panels) and lead to eroding profitability margins for downstream producers. FiT can be also seen as subsidies and while these can be good for policy purposes, they could have also been invested into more productive industries where there is real demand. Lastly, long-term FiT mechanisms, if they do not have the right mechanisms, can deter innovation as there is a guaranteed price on the market.
Modern programs often incorporate sophisticated features such as degression rates, which gradually reduce tariff levels as technology costs decrease. This dynamic approach helps maintain market efficiency while continuing to incentivize technological advancement.
While some nations are transitioning away from traditional feed-in tariff structures toward more market-oriented mechanisms, the fundamental principles of FITs continue to influence renewable energy policy worldwide. In the United States, states like California, New York, and Indiana maintain active FIT programs, while many others offer various incentives derived from FIT principles.
Net Metering System
Net metering is a financial mechanism that allows households with solar photovoltaic (PV) systems to receive credit for excess electricity fed back into the grid. Under this system, the electricity consumed from the grid is offset on a one-to-one basis by solar power generated and exported by the household. Implemented across Europe in the early 2000s, including Belgium (2004), Italy (2006), and Denmark (2010), the system requires electricity suppliers to deduct household grid exports from their consumption. For example, if a household consumes 1,200 kWh annually while exporting 900 kWh to the grid, they only pay for the 300 kWh difference. This two-way exchange is facilitated by bidirectional meters, with settlement periods typically calculated annually, though specific arrangements vary by country.
The Netherlands presents an interesting case study of net metering’s impact. As of early 2024, approximately one-third of Dutch households had solar panels installed, incentivized by the system’s financial benefits. However, this success has created challenges. The Dutch government faces reduced tax revenues of approximately 3 billion euros since consumers only pay tax on their net consumption. Additionally, the system has contributed to grid congestion and eroded electricity suppliers’ profitability. The simultaneous export of solar energy on sunny days by thousands of households, coupled with increased demand during cloudy periods and nighttime, creates significant grid balancing challenges for operators who must maintain constant supply-demand equilibrium without widespread energy storage capabilities.
In fact, the Dutch government stated on their website that the netting scheme (known as salderingsregeling) is ending on 1 January 2027:
“As a small-volume user, you are now allowed to offset the electricity you feed back into the grid with the electricity you use each year. This is called netting (salderen in Dutch). Do you feed back more electricity than you use? Your energy supplier pays you a compensation for the difference. Once the netting scheme ends, you can no longer offset electricity in this way. The current netting scheme will be replaced with a new arrangement. You will receive a reasonable compensation from your energy supplier for the solar energy you feed back to the grid. With this measure, the government aims to stimulate users to use as much as possible of the solar energy they have generated themselves. This will reduce the stress on the electricity grid.”