Get FIT: Shape up Your State’s Renewable Energy Generation

The new policy option on the block for spurring renewable energy (RE) expansion is the feed-in tariff – or FIT.  Feed-in tariffs offer a price per kilowatt-hour to producers of certain electricity sources, most notably solar and wind.  Feed-in tariffs have been successful in Europe for quite some time, but are only beginning to break into the United States, where the dominant policy tool for advancing renewable energy generation has been the renewable portfolio standard (RPS).

One of the many benefits of feed-in tariffs is that they can complement a state’s renewable portfolio standard and can help to ensure standards are met by providing financial incentives to develop renewable energy generation.  In general, FITs operate by covering the cost of generation, generally through rate-payer funded surcharges, plus ensuring a reasonable rate of return, thereby encouraging development.  FITs are also typically guaranteed for a span of 15-20 years, enough time for large scale deployment to take place. 

According to the National Renewable Energy Lab (NREL) in its comprehensive 2010 A Policymakers’ Guide to Feed-in Tariff Policy Design, policymakers should consider 4 main points when designing a FIT:

1. Payment Options, e.g. whether there is a fixed-price incentive (one that is independent of the market price) or a premium-price incentive, which adds a payment to the spot-market price of electricity, but which can result in either windfall profits or insufficient returns if not structured just right; and

2. Payment Differentiation, which is intended to ensure goals related to deployment are met.  These goals can be based on the quality of the resource, the technology desired to be advanced, and policymakers’ preferred development location; and

3. Implementation Options, which includes who can participate (citizens, government entities, etc.), the role of the utility (such as a requirement that all eligible projects be connected to the grid), the length of the contract (again, longer contracts, 15-20 years, result in lower financing costs, and increased confidence on the part of the investor), caps on overall or individual project size or overall program costs to limit bankrupting the program, and forecast obligations from the RE generator to help utilities adjust to the intermittency of renewable energy; and finally,

4. Funding Options, i.e. what rate-payers pay and how costs are spread out among utilities.

By carefully designing a FIT program, policymakers can achieve the rapid and continued expansion of renewable energy to the benefit of their state’s energy security, climate, and economy. 

For those that are interested, I will be producing a brief in the forthcoming weeks on FIT best practices.  In the meantime, you can read the lengthy but excellent NREL report here: http://www.nrel.gov/docs/fy10osti/44849.pdf.