Elsevier

Energy Policy

Volume 38, Issue 2, February 2010, Pages 955-965
Energy Policy

An analysis of feed-in tariff remuneration models: Implications for renewable energy investment

https://doi.org/10.1016/j.enpol.2009.10.047Get rights and content

Abstract

Recent experience from around the world suggests that feed-in tariffs (FITs) are the most effective policy to encourage the rapid and sustained deployment of renewable energy. There are several different ways to structure a FIT policy, each with its own strengths and weaknesses. This paper presents an overview of seven different ways to structure the remuneration of a FIT policy, divided into two broad categories: those in which remuneration is dependent on the electricity price, and those that remain independent from it. This paper examines the advantages and disadvantages of these different FIT models, and concludes with an analysis of these design options, with a focus on their implications both for investors and for society.

Introduction

Feed-in tariffs1 are increasingly considered the most effective policy at stimulating the rapid development of renewable energy sources (RES) and are currently implemented in 63 jurisdictions worldwide (Klein et al., 2008; Ernst and Young, 2008; Mendonça, 2007; IEA, 2008; European Commission, 2008; REN21, 2009). They have consistently delivered new renewable energy (RE) supply more effectively, and at lower cost, than alternative policy mechanisms (Menanteau et al., 2003; Ragwitz et al., 2007; Stern, 2006; Lipp, 2007; Butler and Neuhoff, 2008; de Jager and Rathmann, 2008; Fouquet and Johansson, 2008; IEA, 2008). Indeed, according to a recent European Commission update on renewable energy policies in the European Union (EU), “well-adapted feed in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity” (European Commission, 2008).

The central principle of feed-in tariff policies is to offer guaranteed prices for fixed periods of time for electricity produced from Renewable Energy Sources (RES). These prices are generally offered in a non-discriminatory manner for every kWh of electricity produced, and can be differentiated according to the type of technology, the size of the installation, the quality of the resource, the location of the project, as well as a number of other project-specific variables (Mendonça, 2007; Fouquet and Johansson, 2008; Langniss et al., 2009). This enables a greater number of investors to participate, including homeowners, landowners, farmers, municipalities, and small business owners, while helping to stimulate rapid renewable energy deployment in a wide variety of different technology classes (Klein et al., 2008; IEA, 2008; Lipp, 2007; REN21, 2009).

In the most successful2 jurisdictions, the FIT payment levels offered to particular projects are determined as closely as possible in relation to the specific generation costs (Mendonça, 2007; Klein et al., 2008). More specifically, they are designed to make it possible for efficiently operated RE installations to be cost-effectively developed (RES Act, 2000; Fell, 2009).

By basing the payment levels on the costs required to develop RE projects, and guaranteeing the payment levels for the lifetime of the technology, FITs can significantly reduce the risks of investing in renewable energy technologies and thus create conditions conducive to rapid market growth (Lipp, 2007; IEA, 2008). This structure provides a high degree of security over future cash flows, and enables investors to be remunerated according to the actual costs of RE project development. This security is particularly valuable for financing capital-intensive projects with high upfront costs, and a high ratio of fixed to variable costs (Guillet and Midden, 2009; see also Harper et al., 2007).

Ensuring that the FIT payments are adequate to recover project costs over the life of the project, while allowing for a reasonable return, remains one of the central challenges of a successful FIT policy (Klein et al., 2008; Mendonça, 2007).

Section snippets

FIT policy design: focus on remuneration models

Beyond ensuring the FIT payments are adequate to cover project costs, experience has shown that the specific design and stability of the remuneration scheme is essential to efficient and well-functioning FIT policies, and crucial to maintaining investor confidence (Ragwitz et al., 2007; Held et al., 2007; European Commission, 2008; Dinica, 2006). However, a survey of the different jurisdictions that currently employ FIT policies for renewable energy development reveals that there are many

Market-dependent vs. market-independent FIT models

A central difference between feed-in tariff policies is whether the remuneration they offer to renewable energy developers is dependent or independent from the actual electricity market price (Klein et al., 2008). Market-independent FIT policies are generally known as fixed-price policies, since they offer a fixed or minimum price for electricity from RES delivered to the grid (Mendonça, 2007; IEA, 2008). Market-dependent FIT policies are generally known as premium price policies, or feed-in

FIT policy design options

Seven different ways to structure market-independent and market-dependent remuneration schemes are examined here, discussing four in the former category and three in the latter category, on the basis of experience from a number of jurisdictions across Europe and North America. A brief analysis will accompany each model, focusing in particular on each model's impact on investment risk, analyzing the main strengths and weaknesses of these different ways of structuring FIT policies.

Analysis of market-independent and market-dependent FIT policies

Experience with different approaches to feed-in tariff policy design has helped provide a base of evidence from which certain general conclusions can be drawn. As explored above, there are different advantages and disadvantages to each of these different design options and some of them can have significant impacts on the market growth that occurs, as well as on the per-kWh costs of electricity generated from RES. This section provides an analysis of market-independent FIT models with a focus on

Conclusion

This paper provided an overview of various feed-in tariff remuneration models for electricity generated from renewable energy sources. An overview of the different models suggests that the different ways of structuring FIT payments have important impacts on investor risks, and overall rates of RE deployment. While fixed price policies that offer remuneration that is independent from prevailing electricity prices can help lower investment risks, premium price policies create incentives to

Acknowledgements

This work was supported by the New Brunswick Environmental Trust Fund, the New Brunswick Innovation Foundation, and the Université de Moncton. Thanks are also due to Léo Blanchard for his assistance with designing and preparing the accompanying feed-in tariff policy graphs.

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