What Is a Feed-In Tariff (FIT)?
A feed-in tariff is a policy tool designed to promote investment in renewable energy sources. This usually means promising small-scale producers of the energy—such as solar or wind energy—an above-market price for what they deliver to the grid.
Key Takeaways
- A feed-in tariff (FIT) is a policy designed to support the development of renewable energy sources by providing a guaranteed, above-market price for producers.
- FITs usually involve long-term contracts, from 15 to 20 years.
- FITs are common in the U.S. and around the world, used most notably in Germany and Japan.
Understanding Feed-In Tariffs (FITs)
Feed-in tariffs are seen as necessary to promote renewable energy sources in the early stages of their development, when production is often not economically feasible. Feed-in tariffs usually involve long-term agreements and prices tied to the cost of production of the energy in question. The long-term contracts and guaranteed prices shelter producers from some of the risks inherent in renewable energy production, encouraging investment and development that otherwise might not take place.
Feed-In Tariffs and Small Energy Producers
Anyone who produces renewable energy is eligible for a feed-in tariff, but those who take advantage of it are often not commercial energy producers. They can include homeowners, business owners, farmers, and private investors. Generally, FITs have three provisions.
- They guarantee grid access, meaning energy producers will have access to the grid.
- They offer long-term contracts, typically in the range of 15 to 25 years.
- 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.