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07/14/10

Frequently Asked Questions about Feed-in Tariffs, Advanced Renewable Tariffs, Renewable Tariffs, and Renewable Energy Payments

By Paul Gipe


Funding for this document was provided by An Environmental Trust and David Blittersdorf in cooperation with the Institute for Local Self-Reliance. The views expressed are those of Paul Gipe and are not necessarily those of the sponsors.


What are feed-in tariffs?

Feed-in tariffs are simply payments for generation. They are payments, or tariffs, for renewably-generated electricity and heat. They are paid to the producers for every kilowatt-hour of electricity they generate.

Why are they important?

Feed-in tariffs are a powerful policy mechanism that has produced rapid growth of renewable energy in Europe--especially in Germany, France, and Spain and a host of other countries--at less cost than other policies. Equally as important, feed-in tariffs are more egalitarian than other policy mechanisms and have allowed people from all walks of life to participate in the renewable energy revolution-for profit.

Why should we use feed-in tariffs?

Systems of feed-in tariffs have been highly successful at developing large amounts of geographically dispersed renewable sources of generation quickly, at low cost, and with minimal administration. And because feed-in tariffs are not dependent upon the tax status of the owner, they are available to everyone who wants to use them-rich and poor alike.

What are Advanced Renewable Tariffs?

Advanced Renewable Tariffs are a comprehensive system of feed-in tariffs that are differentiated by technology, project size, application, and by resource intensity. Advanced Renewable Tariffs are the modern version of the simpler feed-in tariffs that were used previously in California during the early 1980s, and in Denmark and Germany during the 1990s.

Where have feed-in tariffs been used successfully?

Feed-in tariffs are widely used in Europe. Advanced Renewable Tariffs are prominently used in Germany, France, Spain, Portugal, Switzerland, and now Great Britain. Germany and Spain have become worldwide leaders in renewable energy because of their sophisticated systems of Advanced Renewable Tariffs.

Where are feed-in tariffs being used now in North America?

Ontario and Vermont have both implemented systems of feed-in tariffs. Ontario's program of Advanced Renewable Tariffs is the most comprehensive renewable energy policy in North America in three decades.

Why are there so many different names for feed-in tariffs?

Feed-in tariffs have been most successfully used in continental Europe and there is no single best English translation of the terms used in Germany, France, or Spain. The term "feed-in tariff" is a literal translation from Germany's 1991 Stromeinspeisungsgesetz (StrEG), the law on feeding electricity into the grid.

North Americans have attempted several adaptations using "payments" instead of using the term "tariffs" as tariffs sometimes have a negative connotation in North American English. These coinages have resulted in Renewable Energy Payments, Renewable Energy Producer Payments, and CLEAN Payments.

Eicke Weber, head of Germany's Fraunhofer Institute in Freiburg, prefers the translation of the German term as "feed-in rate" as "rate" is a synonym for tariff in utility regulation in North America. However, feed-in tariff is the most commonly accepted term in widespread use.

The term "feed-in tariff" itself doesn't capture the sophistication of the system of feed-in tariffs now used in Europe. For this reason, renewable energy advocates in Ontario coined the expression Advanced Renewable Tariffs to convey the modern system of feed-in tariffs that are differentiated by technology, size, application, and resource intensity.

Sometimes feed-in tariffs and Advanced Renewable Tariffs are shortened to simply "renewable tariffs."

Occasionally feed-in tariffs are incorrectly referred to as Standard Offer Contracts. This is especially true in North America. Systems of Advanced Renewable Tariffs rely on "Standard Contracts" but specifically do not use "Standard Offers." In systems of Advanced Renewable Tariffs, the "offers" differ by technology, size, application, and resource intensity, and are thus are not "standard."

Ontario implemented a simple system of feed-in tariffs in 2006 that was officially called the Standard Offer Contract Program.

The Minister of Energy in 2004 had directed staff to produce a program of standard contracts, not standard offers. However, the staff misinterpreted the minister's directive and created a program they dubbed "Standard Offer Contracts".

Ontario's ruling political party had previously endorsed the expression "Advanced Renewable Tariffs" to describe the program.

In 2008, Ontario's then Minister of Energy referred to his proposed program as "feed-in tariffs" and when Ontario's new program was launched in the fall of 2009 it was called, simply enough, the Feed-in Tariff Program.

Are feed-in tariffs the same as tax credits?

No. Feed-in tariffs are simply payments for generation. They have nothing to do with taxes or subsidies. Thus, feed-in tariffs are more egalitarian because they allow everyone to be paid for generating electricity regardless of their tax status or the amount they owe in taxes.

Are feed-in tariffs just another subsidy?

Feed-in tariffs are not subsidies. They do not subsidize the cost of the equipment used to produce renewably-generated electricity--like solar panels or wind turbines--nor do the payments come from taxpayers. Instead, feed-in tariffs are simply payment for the generation of electricity. The payments are no different than the payments for other forms of generation, such as that from a coal-fired power plant.

Society decides whether it wants a certain form of renewable energy, then it decides what it costs to pay for it. That's all there is to it. Some technologies, such as solar PV, cost more than other technologies and, thus, must be paid more for their electricity than, say, the electricity produced by wind turbines.

This is the same process used to pay for the electricity generated by a nuclear power plant. Nuclear power may be more expensive than fossil-fired generation at any particular time. Nevertheless, some jurisdictions, such as Ontario, Canada, or California have authorized the construction of nuclear power plants. The cost of the nuclear power plants is then recovered in rates--or tariffs-over the life of the plant.

Are tariffs taxes?

No. Tariffs are the rate paid for commodities like electricity. An electricity tariff is the price paid per kilowatt-hour of electricity consumed, or in this case, generated. The term is commonly used in North America's electric utility industry. The term is also commonly used in Europe. Tariffs are not taxes nor, in this context, are they customs duties on goods crossing international borders.

Who pays for feed-in tariffs?

Consumers of electricity pay for feed-in tariffs through charges on their electric bills, just as they do now for electricity coming from conventional power plants. This is more equitable than paying through taxes. In a system of feed-in tariffs paid from electricity rates, consumers who use a lot of electricity will pay more for renewable generation than those who use less.

Do feed-in tariffs hurt the poor?

No. There are existing programs in most states and provinces that protect low-income consumers from paying high prices for their electricity, especially during the winter months. Feed-in tariff policies do not alter these programs.

The relatively fixed prices in feed-in tariffs are, in effect, a hedge against fossil-fuel price volatility. As we saw in the run up of fossil-fuel prices from 2000 to 2008, the volatility and increasing cost of electricity generated from fossil fuels hit the poor hardest. Volatility and rising prices will only get worse in the years ahead. Feed-in tariffs that lead to the rapid development of renewable energy at a known cost are the best insurance we have of protecting all ratepayers--both rich and poor--from surging electricity prices.

How much do feed-in tariffs cost consumers?

Very little at first, because it takes several years for renewable sources of generation to become a significant part of electricity supply. Even in places such as Germany and Spain, the additional cost of renewable energy is modest because the costs are spread fairly across all consumers. In Germany in 2007, the average household paid less than $50 per year for the world's largest concentration of wind turbines, solar panels, and biomass plants. The German government estimates that the actual cost is near zero, because the benefits of reducing carbon emissions and other air pollutants, as well as reducing the cost of expensive fossil-fired generation offsets the cost of the renewable energy. Germany estimates that the savings from offsetting expensive fossil-fired generation, the so-called "merit-order-effect", alone offsets the cost to consumers.

Has the rapid development of renewable energy in Europe required huge amounts of public funds?

No. The success of continental Europeans in developing massive amounts of renewable energy has been due to private investment. Successful feed-in tariff programs don't use "public money" that comes from state budgets. Successful feed-in tariff policies place renewable energy in the electricity system's "rate base" as are all existing conventional power plants. Thus, consumers of electricity, not taxpayers, pay for the renewable energy developed by private companies, farmers, homeowners, and community groups.

Countries all across Europe are cutting their public expenditures, but their feed-in tariff programs roll on because they are not part of the public budget.

Feed-in tariff policies for renewable energy development are not part of public infrastructure paid out of public budgets; they are a "framework" for private investments in new sources of generating electricity.

Do feed-in tariffs allow you to sell back to the grid?

No. Feed-in tariffs allow you to "sell" to the grid, not "sell back" to the grid. This is an important difference. Selling "back" to the grid implies that you are already buying from the grid; that is, that you are a customer and already have a kilowatt-hour meter. In such cases as net-metering, the potential of the program is limited by the amount "consumed" by the utility customer. Feed-in tariffs allow you to generate electricity and sell it to the grid even if you are not presently a customer. Feed-in tariffs allow the development of green-field sites, such as the installation of wind turbines that are owned by groups of neighborhood investors, cooperatives, or traditional business.

How do we know that feed-in tariffs will work?

Like any policy mechanism, feed-in tariffs can be misapplied. The most common problem is setting the prices--the tariffs--too low and not attracting the desired amount of development. Another common problem is setting a limit on project size, or setting it far too low, or setting a limit on program size that is too low to allow ample industrial capacity to develop. These problems have been encountered in programs that were timidly implemented because proponents were not serious about dramatically increasing the supply of renewable generation. However, where there has been a serious political commitment for the programs to succeed, they have done so. This is seen especially in Germany, France, Spain, and Portugal.

How do feed-in tariffs differ from net-metering?

Net-metering is a policy that allows you to produce some of your own electricity when you can, store excess on the grid when you produce more than you need--effectively running your kilowatt-hour meter backwards--and take the electricity you "stored" on the grid when you need it. With net-metering, you can never be fully compensated if you produce more electricity than you consume.

In contrast, feed-in tariffs pay for the delivery of electricity to the grid. To use feed-in tariffs, you need a kilowatt-hour meter that measures the delivery of electricity for sale to the grid. The electricity is not "stored" on the grid, rather it is "sold" to the grid for a profit. Thus, you are not selling "back" to the grid, you are "selling to" the grid.

In Australia, some forms of net metering are incorrectly called feed-in tariffs. Thus, in Australia, true feed-in tariffs are called "gross" feed-in tariffs because all the electricity is sold to the grid.

The British have implemented a novel system of feed-in tariffs for microgenerators. Some of the tariffs pay for on-site consumption as well as for electricity sold to the grid. The program was only launched in early 2010 and it is too early to tell if this form of feed-in tariff program will be successful, but it is off to a good start.

Will feed-in tariffs allow "double dipping" into state rebate or subsidy programs?

Feed-in tariffs are designed to provide sufficient financial incentive to develop renewable energy without capital grants, rebates, or other capital subsidies. Thus, in most states or provinces where they have been proposed, those who opt for feed-in tariffs cannot also use capital grants or rebates.

However, the federal Investment Tax Credit (ITC) for solar systems and small wind turbines in the United States has been extended for eight years. As a consequence, most feed-in tariff programs proposed in the USA will include provisions for using the federal ITC alongside the feed-in tariff for those taxpayers who have sufficient tax liability.

Can feed-in tariffs work in parallel with existing programs?

Yes, the feed-in tariff programs proposed in North America have all been designed to work alongside and in parallel with existing policies, such as net metering, renewable energy standards, and capital grants (subsidies).

How do feed-in tariffs enable distributed generation?

The tariffs, or prices, in systems of Advanced Renewable Tariffs are designed to encourage development of renewable projects of all sizes, from residential rooftop solar systems to farms of large wind turbines, and in all locations, from sunny and windy sites to those sites less well endowed with wind and solar resources. When well designed, these differentiated tariffs result in the geographical distribution of renewable development and in the distribution of technologies in numerous different applications. While feed-in tariffs are also used to develop centralized renewable sources of generation, they are best known for increasing the role of distributed renewable resources.

What renewable energy sources are included in feed-in tariffs?

In systems of Advanced Renewable Tariffs, where the tariffs are differentiated by technology, programs can be designed to include all renewable sources of generation or only those that society wants in a particular jurisdiction. Some jurisdictions may want to use feed-in tariffs only for solar, or only for wind. Others, such as Germany, France, and Spain have tariffs for a host of different technologies, including onshore and offshore wind energy, rooftop and ground-mounted solar systems, hydro, various forms of biomass and biogas, geothermal electricity generation, and concentrating solar power.

Successful programs provide tariffs for a comprehensive suite of resources. This reduces program costs by balancing more expensive sources, such as solar photovoltaics, with less expensive generation from wind and hydro.

How are the tariffs calculated?

The tariffs are determined through a transparent political process based on input from industry, independent consultants, and users, among others. In systems of Advanced Renewable Tariffs, prices are based on the cost of generating electricity with a specific renewable technology under specific conditions, plus a reasonable profit. In successful programs, for example, the tariffs are not determined by the cost of the conventional generation offset by the renewable sources of generation. The tariffs must be high enough to spur development, but not so high that they create excessive profits.

Is it hard to set the tariffs?

No. Most jurisdictions in North America have existing institutions that regularly determine the rates paid for everything from electricity and natural gas to taxies and public transport. These regulatory commissions or review boards set rates of public commodities every day, day in, day out. Legislatures can also create single-purpose, rate-setting commissions solely to establish feed-in tariffs. In Germany, parliament itself sets the tariffs every four years after full consultation and public debate.

Do feed-in tariffs eliminate environmental review?

No. Projects using feed-in tariffs must comply with the same laws and environment requirements as any other projects. Feed-in tariffs typically only apply to the mechanism for getting access to the grid, for selling electricity to the grid, and for setting the price that is paid for the electricity.

What are the key elements of Advanced Renewable Tariffs?

Successful programs of Advanced Renewable Tariffs must

  • Be simple, comprehensible, and transparent,
  • Provide simplified interconnection to the grid,
  • Provide a sufficient price per kilowatt-hour to drive development,
  • Provide contract length sufficient to reward investment, and
  • Provide tariffs differentiated by technology, size, application, and resource intensity.

Does PURPA prohibit feed-in tariffs in the US?

No, not specifically. PURPA, the Public Utility Regulatory Policies Act (1978), regulates how the tariffs are calculated, and the Federal Power Act (FPA) determines who has jurisdiction in the US. Under federal law, utilities can voluntarily set feed-in tariffs at whatever rates they choose.

Federal Energy Regulatory Commission (FERC) decisions have made it clear how feed-in tariff programs must be designed to comply with federal law.

For an extensive discussion of this question, see NREL: Feed-in Tariffs Legal in USA When Certain Conditions Met.

What are degression rates?

In some systems of Advanced Renewable Tariffs, the tariff offered for new projects declines annually from one year to the next at a fixed or variable rate. Degression differs from the regular, scheduled review of tariffs that occurs in all programs. Degression rates, in percent, are based on the expectation that the cost of generation will decrease as the technology advances "down the learning curve." As such, degression assumes that the cost of the technology declines from one year to the next or degression is intended to force development along this path. Unfortunately, the cost of generation from a particular technology doesn't always decline. Sometimes, as in the case of wind energy during the period from 2006 to 2008, the cost of generation actually increased from one year to the next. For more on this topic, see Degression of Renewable Tariffs.

Degression is not a fundamental aspect of good feed-in tariff policy. It is one of the tools used in designing programs, but it is not an essential element of feed-in tariff policy.

Are feed-in tariffs adjusted for inflation?

Yes. In many programs there are adjustments in the tariff or payment with respect to an index of inflation. This varies from program to program. There is no inflation protection within a contract in the German program, but there is in the French and Spanish programs. Inflation is always used in calculating German tariffs but it is not included inside a contract, where the price is fixed. In the French and now in the Ontario program, the tariff inside the contract varies with a portion of inflation. For more on this topic, see Inflation Adjustment of Renewable Tariffs.

Is legislation required to implement feed-in tariffs?

In some states, provinces, and municipalities, feed-in tariffs can be implemented administratively. Most municipalities with their own municipal utilities have the authority to implement feed-in tariffs directly. In other jurisdictions, legislation may be required.

Is there a rule of thumb to set the tariffs above the retail rate?

No. Modern programs set the tariffs independent of the retail rate. In Germany's early program (StrEG), tariffs were set as a percentage of the retail rate. These tariffs were all less than the retail rate by definition. Spain's early program used a similar approach but included tariffs for solar PV that was 4-5 times greater than the retail rate.

In the mid-1990s the Germans concluded, as have all others since who have examined the question, that the tariffs should not be connected to the retail rate, the wholesale rate, or the "avoided cost". The tariffs should be based on the "cost of generation plus a reasonable profit" of the specific technology in the specific application intended. Further, because the cost of new conventional resources and existing conventional resources, and the taxes on them vary so widely from one jurisdiction to another, there's no simple way to say that tariff "x" should be some percentage above the retail rate.

Does the Chabot profitability index method forecast NPV profits per technology?

The Chabot Method is used, as is the Discounted Cash Flow method, to set the tariffs for each technology. Because the costs of the technology in question change over time, the initial tariff for new contracts will also change. Thus, in 2011 all tariffs for new contracts in the Ontario program will change to reflect changes in the costs of the technologies. Existing contracts will reflect the tariffs when the contracts were signed.

How did Ontario determine that 20% of projects should be community owned?

Ontario did not stipulate that a portion of the feed-in tariff program be set aside for community-owned renewables. Creating an opportunity for community ownership was, however, one of the program's goals.

During the first year of Ontario's feed-in tariff program, about 20% of contracted capacity was awarded to community-owned projects.

The 20% of contracts for "community-owned" or "aboriginal-owned" projects reflects specific feed-in tariff program design. These design details were administratively-set, not legislated. Community and farmer-owned projects receive $0.01/kWh more for wind projects and a similar proportion for other technologies. Aboriginal projects receive $0.015/kWh for wind projects and a proportional amount for other technologies. These bonus payments were determined by the Ontario Power Authority as part of the public process for determining the full suite of tariffs used in the Ontario program.

Who pays for connection costs, project developers or utilities?

This is a question of "shallow versus deep" connection costs and is very complex. Shallow connection costs are those incurred from the generator to the distribution system and are typically paid by the project developer. Deep connection costs are the costs incurred from the distribution system to the transmission system and are often paid by the utility or transmission system operator. The costs to the utility or the transmission system operator are then recovered from ratepayers.

Who pays what is a question of public policy. If utility companies are required to pay for both shallow and deep connection costs they must be fully compensated. Similarly, if project owners pay for all connections costs (deep and shallow) they too must be compensated within the tariff that they are paid. Ontario has chosen a mix, and their tariffs reflect this. Germany, France, and Spain have each chosen a different mix and their tariffs reflect the respective policy in each country. Thus, there's no one size fits all policy for connection costs.

Why do Ontario's tariffs seem so high?

Ontario's solar PV tariffs may seem high relative to payments for solar PV in the US or in Europe. However, all other tariffs in Ontario are in line with those worldwide.

The focus on solar PV alone is unwise. PV is only one form of renewable electricity.

Ontario's tariffs differ from one technology to another because each technology and each application has its own cost structure. Successful feed-in tariff programs base the tariffs on the "cost of generation plus a reasonable profit". Thus, each technology and each application (onshore wind and offshore wind for example) will have different tariffs.

Unlike the US, Canada does not have federal subsidies for renewable energy, and unlike California, Ontario does not have provincial subsidies for solar PV. Thus any of the various tariffs Ontario sets will be proportionally higher than those in the US.

Solar PV is much more expensive in the USA and Canada than in Europe for a variety of reasons. Many analysts blame the hodgepodge of subsidies and tax credits as well as cumbersome state bureaucracies in the US for keeping solar PV prices higher than they would be otherwise. Effectively the price of solar PV in North America is higher by the amount of US subsidies relative to the price of unsubsidized solar PV in Europe.

The highest price paid in Ontario's program is that for the MicroFIT. This tariff was limited to solar PV systems less than 10 kW in size and was intended for residential users.

Larger rooftop solar PV systems gain economies of scale relative to small residential systems, especially for warehouse and "big box" rooftops. Thus the tariffs decrease rapidly with size. Ontario's tariffs for large rooftop solar PV systems are comparable to those in Europe as is Ontario's tariff for large groundmounted systems.

Ontario has revised its MicroFIT tariff once since launching the program in the fall of 2009. The Ontario Power Authority (OPA) has split the MicroFIT tariff into two tranches: rooftop less than 10 kW, and groundmounted less than 10 kW. OPA set the groundmounted MicroFIT tariff some 20% less than the rooftop tariff.

Another unique factor that distinguishes Ontario's program from those in Europe is Ontario's requirement that a portion of wind and solar projects contain "domestic content" to receive the tariff. And "domestic content" refers to value added in Ontario specifically, not simply in Canada.

Ontario's program, like that in Germany, Spain, and Portugal, is not only directed at electricity policy but also at industrial policy.

Unlike most European programs, Ontario reviews its tariffs every two years. The first full review will occur in 2011. Germany reviews its program every four years. Thus, Ontario can change its tariffs more frequently than in European programs and this will enable Ontario to keep its solar PV tariffs in line with falling costs.

To conclude, the tariffs for PV are high in Ontario relative to those needed in the US because Ontario specifically and Canada generally doesn't have subsidies. The tariffs for wind, on and offshore, biogas, and hydro are all in line with those used elsewhere.

For more on Ontario, see Ontario and the Campaign for Advanced Renewable Tariffs.

What can I do to put feed-in tariffs on the policy agenda in North America?

The grassroots movement for feed-in tariffs in North America has blossomed from a few committed individuals to groups active across Canada and the United States. If you would like to help, contact the Alliance for Renewable Energy and ask if there is a group active in your area. If there isn't, create one.

Contact your local, regional, and federal elected representatives and ask them to support introduction of legislation implementing systems of Advanced Renewable Tariffs.

Where can I find more information on feed-in tariffs?

There are several web sites that feature news and articles about feed-in tariffs. The most comprehensive site can be found at www.wind-works.org. On this page there are links to more detailed information on the following subjects.

Books on feed-in tariffs

There several books with detailed information on feed-in tariffs and renewable tariff policy. You can find information about these books at the links below.

  • Powering the Green Economy: The Feed-in Tariff Handbook by Miguel Mendonça, David Jacobs, and Benjamin Sovacool--This book, from authors who have spent years working on feed-in tariff design and advocacy, provides a broad and detailed resource on feed-in tariffs and other renewable energy support mechanisms. It shares many lessons on good and bad design and implementation, as well as discussing the challenges faced by policy, and renewable energy in general. . .
  • Feed-in Tariffs by Miguel Mendonca--a Review--Miguel Mendonça's Feed-in Tariffs takes his place alongside Craig Morris' Energy Switch in explaining the success of Feed-In Tariffs to English speakers. . .
  • Energy Switch: Proven Solutions for a Renewable Future--Finally someone who can explain Germany's phenomenal success with renewable energy to North American readers. . .
  • Switching to Renewable Power by Volkmar Lauber--Volkmar Lauber is one of the world's pre-eminent academics specializing in renewable energy policy. . . Lauber edits this collection of essays on renewable energy policy and fortunately several of his pieces on German policy and electricity feed laws are included. . .

Web sites on feed-in tariffs

There are several web sites that feature articles on feed-in tariffs, renewable tariff design, and news updates on the movement for feed-in tariffs in North America.

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