Feed in tariff

Figure 1. A wind and solar farm.[1]

The aim of a feed-in tariff (FIT) is to encourage the use of renewable technology for the generation of electricity. To encourage this behavior, governments guarantee electricity generation firms a long-term contract with a fixed price for each kilowatt hour.[2] Having a long term contract with a guaranteed price, that is higher than the average price per kWh, means that firm using renewable technologies can operate with less vulnerability to changes in the market. By guaranteeing a certain price, the policy promotes and accelerates investment in renewable technologies because it is profitable to do so under a FIT agreement. A stable price coupled with a digression scheme, by which the guaranteed price is reduced over time, both reduces the risk to investors and prevents the overpayment for electricity as renewable technology progresses and becomes more efficient.[3]

An FIT also has the goal of lowering the cost of renewable energy in the long run as more and more firms are encouraged to generate electricity using renewable methods. One way to do this is to focus on a number of different technologies such as wind, solar, hydroelectric and geothermal.[4] By diversifying the number of generation methods, the FIT can compensate for dispatchability issues. For example, the wind does not blow all the time so there is an intermittent flow of electricity from wind farms. Having other firms produce electricity through different methods and technologies such as hydroelectric or solar can make up for a shortage in electricity supplied from wind farms. The stability gained from varying the ways in which electricity is generated stabilizes market prices and protects consumers from both sharp price increases and shortfalls in the supply of electricity while reducing emissions produced from electricity generation.

References

  1. Pixabay [Online], Available: https://pixabay.com/en/solarpark-wind-park-renewable-energy-1288842/.
  2. H. Roby. (2013). A Supplementary Dictionary of Renewable Energy and Sustainability. [Online], Available: http://www.oxfordreference.com/view/10.1093/acref/9780199654581.001.0001/acref-9780199654581-e-98?rskey=UNXLhD&result=1 [May. 29, 2016].
  3. C. Mitchell. The Political Economy of Sustainable Energy. London: Palgrave MacMillian, 2008, pp.182.
  4. M. Mendonca, D. Jacobs and B. Sovacool. Powering the Green Economy: The Feed-in Tariff Handbook. London: Earthscan, 2010, pp. 16.

Authors and Editors

Lyndon G., Jordan Hanania, Jason Donev
Last updated: September 17, 2016
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