Feed-in Tariffs: A Policy Mechanism for Renewable Energy Growth

Christopher Barry
December 13, 2016

Submitted as coursework for PH240, Stanford University, Fall 2016


Fig. 1: Growth of electricity generated by renewable sources after introduction of feed-in tariffs in Germany. [5] (Source: Wikimedia Commons).

Many countries are in a race to become energy independent and minimize their carbon footprint. As a result, they have been rigorously testing the best ways to increase the production of renewable energy in their home states. Feed-in Tariffs (FITs) are widely considered to be the most effective method tried so far; studies give FITs more credit for renewable energy development than any other existing investment mechanism. [1]

The structure of a feed-in tariff is relatively simple. In order to increase investment in technologies that have not advanced enough to become cost-efficient, in a FIT system, governments pay private firms a premium over market price for electricity generated renewably. The tariff generally has three provisions: the energy producer is guaranteed continued access to the grid, the purchase agreement exists over a long period of time (10-25 years) at stable prices, and the payment levels cover both the costs of generating the renewable electricity and a small premium to ensure profitability. [2] Because investors are almost guaranteed to make a profit under this system, FITs have historically caused an explosion in renewable investment that has lead to more advanced, efficient energy technology in the long term. Ideally, investments achieve "grid parity" at some point, meaning they become cost-competitive compared to other methods of electricity generation, and will be able to function with no additional government spending into the future. [1]


Although the success of feed-in tariffs has varied slightly based on location, geography, resources, and the sophistication of various grids, FIT implementation has been largely successful. Feed-in tariff policies are now in place in 87 different jurisdictions, and Germany became the first country to achieve grid parity by using FITs when its PV technology became cost competitive with other sources of electricity in 2014. [1]

In 2000, Germany described its strategy in a release by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety as one in which its tariffs made renewable energy ventures profitable if they used cutting-edge technology and operated their ventures cost-effectively. [3] They also took geography into account; companies that operated in locations that were rich in renewable resources received less of a premium than those who dealt with less bountiful areas. [3] The purpose of this policy was to create as many competitors as possible, and it was successful: Germany had nearly twice the amount of wind-power operations as the United Kingdom did by 2005, despite starting out with very similar numbers and having a resource disadvantage. [4] Furthermore, as displayed in Fig. 1, the explosion in PV and wind-generated electricity that has taken place since FITs were first implemented in Germany is a large part of why about 30% of the country's electricity comes from renewable sources. [5] This success functions as strong supporting evidence for what a European Commission sponsored by the EU declared in 2010, that FITs are "the most efficient and effective support schemes for promoting renewable electricity." [6]

France and China have followed in Germany's footsteps to become leaders in the FIT space. They have each set aggressive goals for their renewable energy programs: by 2020, France aims to have 5400MW of solar energy produced, and China wants 15% of its total energy consumption to come from renewable sources. Each of those objectives is within reach if current progress continues. [1]

This is not to say that feed-in tariffs have been perfect by every metric. In South Korea, for example, the mechanism has come under scrutiny because it may be awarding excess profits to electricity suppliers, which would indicate wasteful government spending. [7] Generally, it is difficult for governments to find a balance between providing an incentive to spur enough investment to drive down costs in the industry and knowing when their premiums become wasteful of taxpayer funds. [1] Current debates, as a result, focus less on whether or not FITs should exist and more on what premiums and pricing mechanisms they should put in place. [1,6]


Governments usually attempt to spur investment in alternative methods of electricity generation in two ways: price regulation in the form of feed-in tariffs and auctions, or quantity regulation in the form of portfolio standards. [7] Generally, price regulation has yielded both an artificial increase in "rents," or excess profits for electricity suppliers (considered to be wasteful from a government perspective) and an increase in electricity generation and efficiency. [4,7]

While price regulation can include FITs, it can also include auction systems, as the United Kingdom tried in the 1990s. Renewable energy companies submitted a price at which they would feel comfortable producing various sources of renewable energy, and the firms that submitted the most competitive prices received a contract from the UK to connect that electricity to the grid. [4] This was not a very successful system because firms could only win a contract if they existed in an area with bountiful renewable resources. Because there were not many of those locations, competition was restricted, few firms entered the market, and not many technological improvements were made over time. [4]

The other common mechanism for incentivizing renewable energy investment is driven by the desire to regulate the quantity of electricity in the market rather than the price paid for it. Quantity regulation has been praised because, since governments do not pay for renewable electricity under this model, it reduces government wastefulness. In South Korea, "portfolio standards" in which electricity suppliers were required to make a certain threshold of their total electricity come from renewable sources, created fewer artificial rents from every renewable source except solar power. [7] Unfortunately, less government waste does not necessarily mean that quantity regulation is more efficient. In side-by-side comparisons of Germany and the United Kingdom, which began using portfolio standards in 2002, the FITs utilized by Germany cost substantially less after adjusting for the availability of natural resources in each area. [4] Although Germany may have used more excess government funds, it created enough competition and incentivized enough technological advancement that it was a far better system in the long run. [4]

Moving Forward

All indicators so far point toward FITs as the most cost-effective way to increase renewable energy production. As a result, the most important question for policymakers to answer now becomes how to maximize efficiency of feed-in tariffs, by minimizing their costs to taxpayers while maintaining their success in spurring investment in clean electricity.

FITs can be broken down into two different models: those with fixed tariffs and those with electricity price-based premiums. In the fixed model, all of a producer's electricity is bought by the government at a predetermined price, independent of inflation, the economy, or the existing electricity market. [6] The price-based model, on the other hand, is also known as a market-based model because the government simply pays a premium over the existing price of electricity once a renewable energy producer sells it. Because firms are not guaranteed to be able to sell their electricity, and the price at which they sell it is not entirely in their control, this method generally garners less investment than a fixed model would. [2,6] That being said, it may work better in decentralized, less regulated grids because producers could choose to supply electricity at times of higher demand, creating more natural market conditions. [6] As a result, even if a fixed model is more reliable in general for spurring investment, the true success of the FIT will have to be determined on a case-by-case basis depending on the jurisdiction.

Fixed and market-based models are one of the multitude of debates going on between economists concerning feed-in tariffs. Should there be a ceiling or a floor, as there is in Spain, to make market-based systems less risky for private investors? [2] Should fixed returns on investment be designed to diminish as the FIT progresses, to encourage investors to put money down as quickly as possible? [1] Will Chinese and Indian efforts to integrate auctions into their FITs increase efficiency or decrease competition after contracts are awarded? [2] Many of these questions can only be answered through trial and error, which will gradually refine the feed-in tariff method until it becomes as efficient as possible. No matter what the verdicts of these experiments are, however, it is certain that FITs are a valuable tool in pursuing a greener electricity economy.

© Christopher Barry. The author grants permission to copy, distribute and display this work in unaltered form, with attribution to the author, for noncommercial purposes only. All other rights, including commercial rights, are reserved to the author.


[1] S. Alizamir, F. de Vericourt, and P. Sun, "Efficient Feed-In Tariff Policies for Renewable Energy Technologies," Oper. Res. 64 52 (2016).

[2] "A Policymaker's Guide to Feed-in Tariff Policy Design," National Renewable Energy Laboratory, NREL/TP-6A2-44849, July 2010.

[3] "Act on Granting Priority to Renewable Energy Sources," German Federal Ministry for the Environment, Nature Conservation and Nuclear Safety, March 2000.

[4] L. Butler and K. Neuhoff, "Comparison of Feed-in Tariff, Quota and Auction Mechanisms to Support Wind Power Development," Renew. Energy 33, 1854 (2008).

[5] C. Morris and P. Martin, "Energy Transition: The German Energiewende," Heinrich Böll Foundation, (2012).

[6] T. Couture and Y. Gagnon, "An Analysis of Feed-in Tariff Remuneration Models: Implications for Renewable Energy Investment," Energy Policy 38, 955 (2010).

[7] T. Kwon, "Rent and Rent-Seeking in Renewable Energy Support Policies: Feed-in Tariff vs. Renewable Portfolio Standard," Renew. Sustain. Energy Rev. 44, 676 (2015).