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Photovoltaic systems are generally categorized into three distinct market segments: residential rooftop, commercial rooftop, and ground-mount utility-scale systems. Their capacities range from a few kilowatts to hundreds of megawatts. A typical residential system is around 10 kilowatts and mounted on a sloped roof, while commercial systems may reach a megawatt-scale and are generally installed on low-slope or even flat roofs.
Source: Photovoltaic system, https://en.wikipedia.org/w/index.php?title=Photovoltaic_system&oldid=1013398488 (last visited Mar. 24, 2021).
Here in Business Ideas, we present the idea of creating a passive income over a long period of time by building a photovoltaic system.
This business idea is based on the requirement that your company’s domicile pays a preferential tariff for generating electricity by renewable energies.
To learn more about renewable energies, read the pages Solar Energy and Wind Energy.
A feed-in tariff (FIT, FiT, standard offer contract,advanced renewable tariff, or renewable energy payments) is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. Their goal is to offer cost-based compensation to renewable energy producers, providing price certainty and long-term contracts that help finance renewable energy investments. Typically, FITs award different prices to different sources of renewable energy in order to encourage development of one technology over another. For example, technologies such as wind power and solar PV, are awarded a higher price perkWh than tidal power. FITs often include a “degression”, a gradual decrease of the price or tariff, in order to follow:25 and encourage technological cost reductions.:100
- guaranteed grid access
- long-term contracts
- cost-based purchase prices
Under a feed-in tariff, eligible renewable electricity generators, including homeowners, business owners, farmers and private investors, are paid a cost-based price for the renewable electricity they supply to the grid. This enables diverse technologies (wind, solar, biogas, etc.) to be developed and provides investors a reasonable return. This principle was explained in Germany’s 2000 Renewable Energy Sources Act:
The compensation rates … have been determined by means of scientific studies, subject to the provision that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.— 2000 Renewable Energy Sources Act:16
As a result, the tariff (or rate) may differ by technology, location (e.g. rooftop or ground-mounted for solar PV projects), size (residential or commercial scale) and region. The tariffs are typically designed to decline over time to track and encourage technological change.
Performance-based rates give incentives to producers to maximize the output and efficiency of their project.
As of 2019, feed-in tariff policies had been enacted in over 50 countries, including Algeria, Australia, Austria, Belgium, Brazil, Canada, China, Cyprus, the Czech Republic, Denmark, Estonia, France, Germany, Greece, Hong Kong, Hungary, Iran, Republic of Ireland, Israel, Italy, Kenya, the Republic of Korea, Lithuania, Luxembourg, the Netherlands, Malta, Pakistan, Portugal, South Africa, Spain, Switzerland, Tanzania, Thailand, Turkey and the United Kingdom. In early 2012 in Spain, the Rajoy administration suspended the feed-in tariff for new projects.
In 2008, a detailed analysis by the European Commission concluded that “well-adapted feed-in tariff regimes are generally the most efficient and effective support schemes for promoting renewable electricity”. This conclusion was supported by other analyses, including by the International Energy Agency, the European Federation for Renewable Energy, as well as by Deutsche Bank.
A feed-in tariff can differentiate on the basis of marginal cost. This is a theoretical alternative which is based on the concept of price differentiation (Finon). Under such a policy the tariff price ranges from some level slightly above the spot rate to the price required to obtain the optimal level of production determined by the government. Firms with lower marginal costs receive prices on the lower end of the spectrum that increase their revenue but not by as much as under the uniform feed-in tariff. The more marginal producers face the higher tariff price. This version of the policy has two objectives. The first is to reduce the profitability of certain production sites.
Many renewable sources are highly dependent on their location. For example, wind turbines are most profitable in windy locations, and solar plants are best at sunny locations. This means that generators tend to be concentrated at these most profitable sites. The differentiated tariff seeks to make less naturally productive sites more profitable and so spread out the generators which many consider to be an undesirable good in the area (Finon). Imagine cutting down all the forests to build wind farms; this would not be good for the environment. This, however, leads to a less cost-effective production of renewable electricity as the most efficient sites are under-utilized. The other goal of tariffs differentiated by marginal cost is to reduce the cost of the program (Finon). Under the uniform tariff all producers receive the same price which is at times in gross excess of the price needed to incentivize them to produce. The additional revenue translates into profit. Thus, the differentiated tariff attempts to give each producer what it requires to maintain production so that the optimal market quantity of renewable energy production can be reached (Finon).
Overall, and in light of incipient globalization, feed-in tariffs are posing increasing problems from the point of view of trade, as their implementation in one country can easily affect industries and policies of others, thus requiring an ideally global coordination of treatment and imposition of such policy instrument, which could be reached at the World Trade Organization.
Understanding Feed-in Tariff and Power Purchase Agreement meter connections
There are three methods of compensation.
- Feed-in tariff – compensation is above retail, and as the percentage of adopters increases, the FIT is reduced to the retail rate.
- Net metering – allows producers to consume electricity from the grid, e.g., when the wind stops. Credits typically roll over to future periods. Payments (to the utility or the consumer) depend on net consumption.
- Power Purchase Agreement (PPA) – pays for the generation of electricity and is normally below the retail rate, although in the case of solar can in some countries be higher, because solar in many countries generates at times of peak demand.
The first form of feed-in tariff (under another name) was implemented in the US in 1978 under President Jimmy Carter, who signed the National Energy Act (NEA). This law included five separate Acts, one of which was the Public Utility Regulatory Policies Act (PURPA). The purpose of the National Energy Act was to encourage energy conservation and develop new energy resources, including renewables such as wind, solar and geothermal power.
Within PURPA was a provision that required utilities to purchase electricity generated from qualifying independent power producers at rates not to exceed their avoided cost. Avoided costs were designed to reflect the cost that a utility would incur to provide that same electrical generation. Different interpretations of PURPA prevailed in the 1980s: some utilities and state utility commissions interpreted avoided costs narrowly to mean avoided fuel costs, while others chose to define “avoided costs” as the “avoided long-run marginal cost” of generation. The long-run costs referred to the anticipated cost of electricity in the years ahead. This last approach was adopted by California in its Standard Offer Contract No. 4. Another provision included in the PURPA law was that utilities were prevented from owning more than 50% of projects, to encourage new entrants.
To comply with PURPA, some states began offering Standard Offer Contracts to producers. California’s Public Utility Commission established a number of Standard Offer Contracts, including Standard Offer No.4 (SO4), which made use of fixed prices, based on the expected long-run cost of generation. The long-run estimates of electricity costs were based on the belief (widely held at the time) that oil and gas prices would continue to increase. This led to an escalating schedule of fixed purchase prices, designed to reflect the long-run avoided costs of new electrical generation. By 1992, private power producers had installed approximately 1,700 MW of wind capacity in California, some of which is still in service today. The adoption of PURPA also led to significant renewable energy generation in states such as Florida, and Maine.
This notwithstanding, PURPA retains negative connotations in the U.S. electricity industry. When oil and gas prices plummeted in the late 1980s, the Standard Offer Contracts that were signed to encourage new renewable energy development seemed high by comparison. As a result, PURPA contracts came to be seen as an expensive burden on electricity ratepayers.
Another source of opposition to PURPA stemmed from the fact that it was designed to encourage non-utility generation. This was interpreted as a threat by many large utilities, particularly monopolistic suppliers. As a result of its encouragement of non-utility generation, PURPA has also been interpreted as an important step toward increasing competition.
In 1990, Germany adopted its “Stromeinspeisungsgesetz” (StrEG), or “Law on Feeding Electricity into the Grid”. The StrEG required utilities to purchase electricity generated from renewable energy suppliers at a percentage of the prevailing retail price of electricity. The percentage offered to solar and wind power was set at 90% of the residential electricity price, while other technologies such as hydro power and biomass sources were offered percentages ranging from 65% to 80%. A project cap of 5 MW was included.
While Germany’s StrEG was insufficient to encourage costlier technologies such as photovoltaics, it proved relatively effective at encouraging lower-cost technologies such as wind, leading to the deployment of 4,400 MW of new wind capacity between 1991 and 1999, representing approximately one third of the global capacity at the time.
An additional challenge that StrEG addressed was the right to interconnect to the grid. The StrEG guaranteed renewable electricity producers grid access. Similar percentage-based feed-in laws were adopted in Spain, as well as in Denmark in the 1990s.
Germany’s Renewable Energy Sources Act
Main article: German Renewable Energy Sources Act
Germany’s feed-in law underwent a major restructuring in 2000 to become the Renewable Energy Sources Act (2000) (German: Erneuerbare-Energien-Gesetz or EEG). The long title is an act on granting priority to renewable energy sources. In its new form, the act proved to be a highly effective policy framework for accelerating the deployment of renewables. Important changes included:
- purchase prices were based on generation cost – this led to different prices for different technologies and for projects of varying sizes
- utilities were allowed to participate
- rates were designed to decline annually based on expected cost reductions, known as ‘tariff degression’
Since it was very successful, the German policy (amended in 2004, 2009, and 2012) was often used as the benchmark against which other feed-in tariff policies were considered. Other countries followed the German approach. Long-term contracts are typically offered in a non-discriminatory manner to all renewable energy producers. Because purchase prices are based on costs, efficiently operated projects yield a reasonable rate of return. This principle was stated in the act:
“The compensation rates … have been determined by means of scientific studies, subject to the proviso that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.”— Renewable Energy Sources Act (2000):16
Feed-in tariff policies typically target a 5–10% return. The success of photovoltaics in Germany resulted in a drop in electricity prices of up to 40% during peak output times, with savings between €520 million and €840 million for consumers. Savings for consumers have meant conversely reductions in the profit margin of big electric power companies, who reacted by lobbying the German government, which reduced subsidies in 2012. The increase in the solar energy share in Germany also had the effect of closing gas and coal-fired generation plants.
Often all power produced is fed to the grid, which makes the system work rather like a PPA according to the disambiguation above, however, there is no need for a purchase agreement with a utility, but the feed-in tariff is state-administered, so the term “feed-in tariff” (German “Einspeisetarif”) is usually used. Since around 2012, other types of contracts became more usual, because PPAs were supported and for small-scale solar projects, direct use of power became more attractive when the feed-in tariff became lower than prices for power bought.
On 1 August 2014, a revised Renewable Energy Sources Act entered into force. Specific deployment corridors now stipulate the extent to which renewable energy is to be expanded in the future and the funding rates (feed-in tariffs) for new capacity will gradually no longer be set by the government, but will be determined by auction; starting with ground-mounted solar plant. This represented a major change in policy and will be further extended as of 2017 with tender processes for onshore and offshore wind.
Effects on electricity rates
FiTs have both increased and decreased electricity prices.
Increases in electricity rates occurred when the funding for the feed-in tariff scheme is provided by ratepayers via a surcharge in their electricity bills. In Germany, this approach to funding the feed-in tariff added 6.88 cEUR per kWh to the electricity rate for residential consumers in 2017. However, renewable energy can reduce spot market prices via the merit order effect, the practice of using higher-cost fossil fuel facilities only when demand exceeds the capacity of lower cost facilities. This has led to electricity price reductions in Spain, Denmark and Germany.
Grid parity occurs when the cost of an alternative technology for electricity production matches the existing average for the area. Parity can vary both in time (i.e. during the course of the day and over the course of years) and in space (i.e. geographically). The price of electricity from the grid varies widely from high-cost areas such as Hawaii and California, to lower-cost areas such as Wyoming and Idaho. In areas with time-of-day pricing, rates vary over the course of the day, rising during high-demand hours (e.g. 11 AM–8 PM) and declining during low-demand hours.
In some areas wind power, landfill gas and biomass generation are already lower-cost than grid electricity. Parity has already been achieved in areas that use feed-in tariffs. For example, generation cost from landfill gas systems in Germany are currently[when?] lower than the average electricity spot market price. In remote areas, electricity from solar photovoltaics can be cheaper than building new distribution lines to connect to the transmission grid.
Policy alternatives and complements
Renewable Portfolio Standards (RPS) and subsidies create protected markets for renewable energy. RPS require utilities to obtain a minimum percentage of their energy from renewable sources. In some states, utilities can purchase Renewable Energy Certificates (USA), Renewable Energy Certificate System (EU), Renewable Energy Certificates Registry (AUS) to meet this requirement. These certificates are issued to renewable energy producers based on the amount of energy they feed into the grid. Selling the certificates is another way for the renewable producer to supplement its revenues.
Certificate prices fluctuate based on overall energy demand and competition among renewable producers. If the amount of renewable energy produced exceeds the required amount, certificate prices may crash, as happened with carbon trading in Europe. This can damage the economic viability of the renewable producers.
Quota systems favor large, vertically integrated generators and multinational electric utilities, if only because certificates are generally denominated in units of one megawatt-hour. They are also more difficult to design and implement than an FIT.
Mandating dynamic tariffs for customer initiated meter upgrades (including for distributed energy uptake) may be a more cost-effective way to accelerate the development of renewable energy.
Further information: PV financial incentives
Feed-in tariff laws were in place in 46 jurisdictions globally by 2007. Information about solar tariffs may be found in a consolidated form, however not all of the countries are listed in this source.
Czech Republic introduced a tariff with law no. 180/2005 in 2005. The tariff is guaranteed for 15–30 years (depending on source). Supported sources are small hydropower (up to 10 MW), biomass, biogas, wind and photovoltaics. As of 2010 the highest tariff was 12.25 CZK/kWh for small photovoltaic. In 2010 over 1200 MW of photovoltaics were installed, but at the end of the year the FiT was eliminated for larger systems, and reduced by 50% for smaller systems. In 2011, no photovoltaic systems were installed.
The European Union does not operate or necessarily encourage feed-in tariff schemes, this being a matter for member countries.
However feed-in tariff schemes in Europe have been challenged under European law for constituting illegal state aid. PreussenElektra brought a case concerning the German Electricity Feed-in Act (Stromeinspeisungsgesetz). In 2001, the European Court of Justice (ECJ) ruled that the German arrangements did not constitute state aid. The court concluded that:
Statutory provisions of a Member State which, first, require private electricity supply undertakings to purchase electricity produced in their area of supply from renewable energy sources at minimum prices higher than the real economic value of that type of electricity, and, second, distribute the financial burden resulting from that obligation between those electricity supply undertakings and upstream private electricity network operators do not constitute State aid within the meaning of Article 92(1) of the EC Treaty.— European Court of Justice, Luxembourg, 13 March 2001:29–30
The proposed Transatlantic Trade and Investment Partnership (TTIP) trade agreement now threatens to overturn feed-in tariff schemes throughout the Europe Union. The draft energy chapter of the TTIP, leaked to The Guardian in July 2016, mandates that operators of energy networks grant access to gas and electricity “on commercial terms that are reasonable, transparent and non-discriminatory, including as between types of energy”. This would open feed-in tariff schemes to commercial challenge, including that used by Germany. The Green MEP Claude Turmes stated: “These [TTIP] proposals are completely unacceptable. They would sabotage EU legislators’ ability to privilege renewables and energy efficiency over unsustainable fossil fuels. This is an attempt to undermine democracy in Europe.”
The administrative procedure for ground-mounted PV systems was significantly modified in late 2009. The distinction between segments was essentially based on capacity, which determines the complexity of the administrative process. A call for tenders for PV projects above 250 kWp was launched on 15 September 2011. The projects were to be analysed on multiple criteria, including the tariff rate requested by the applicant.
|Type of integration bonus||Capacity (kWp)||Feed-in tariffs (€-¢/kWh)|
First introduced in 2000, the Renewable Energy Sources Act (German: Erneuerbare-Energien-Gesetz) is reviewed on a regular basis. Its predecessor was the 1991 Stromeinspeisegesetz. As of May 2008, the cost of the program added about €1.01 (US$1.69) to each monthly residential electric bill. In 2012 the costs rose to €0.03592/kWh. Nonetheless, for the first time in more than ten years, electricity prices for household customers fell at the beginning of 2015.
Tariff rates for PV electricity vary depending on system size and location. In 2009, tariffs were raised for electricity immediately consumed rather than supplied to the grid with increasing returns if more than 30% of overall production is consumed on-site. This is to incentivise demand-side management and help develop solutions to the intermittency of solar power. Tariff duration is usually 20 calendar years plus the year of installation. Systems receive the tariff in effect at the time of installation for the entire period.
The feed-in tariff, in force since 1 August 2004, was modified in 2008. In view of the unexpectedly high growth rates, the depreciation was accelerated and a new category (>1000 kWp) was created with a lower tariff. The facade premium was abolished. In July 2010, the Renewable Energy Sources Act was again amended to reduce the tariffs by a further 16% in addition to the normal annual depreciation, as the prices for PV panels had dropped sharply in 2009. The contract duration is 20 years.
The PV Feed-in tariffs for 2013 are:
|FIT Rate (€/MWh)|
Spanish feed-in legislation was set by Royal decree 1578/2008 (Real Decreto 1578/2008), for photovoltaic installations, and Royal decree 661/2007 for other renewable technologies injecting electricity to the public grid. Originally under the 661/2007, photovoltaic tariffs were developed under a separate law due to its rapid growth.
The decree 1578/2008 categorized installations in two main groups with differentiated tariffs:
- Building Integrated installations; with 34c€/kWh in systems up to 20 kW of nominal power, and for systems above 20 kW with a limit of nominal power of 2MW tariff of 31c€/kWh
- Non integrated installations; 32c€/kWh for systems up to 10 MW of nominal power.
For other technologies decree 661/2007 setd up:
|Energy Source||Feed-in Tariff|
|Cogeneration systems||maximum FiT of 13.29c€/kWh during lifetime of system.|
|Solar thermoelectric||26.94 c€/kWh for the first 25 years|
|Wind systems||up to 7.32 c€/kWh for the first 20 years|
|Geothermal, wave, tidal and sea-thermal||6.89 c€/kWh for the first 20 years|
|Hydroelectric||7.8 c€/kWh for the first 25 years|
|Biomass and biogas||up to 13.06 c€/kWh for the first 15 years|
|Waste combustion||up to 12.57 c€/kWh for the first 15 years|
On 27 January 2012 the Spanish government temporarily stopped accepting applications for projects beginning operation after January 2013. Construction and operation of existing projects was not affected. The country’s electrical system had a €24 billion deficit. FiT payments did not contribute significantly to that deficit. In 2008 the FiT was expected to result in 400 MW of solar being installed. However, it was so high that over 2600 MW was installed. Utilities in Spain reported that they had no way to pass on cost increases to consumers by increasing rates and instead accrued deficits, although this is under dispute.
Source: Feed-in tariff, https://en.wikipedia.org/w/index.php?title=Feed-in_tariff&oldid=1013190727 (last visited Mar. 21, 2021).
Overview on Renewable Energy Feed-In Tariffs
A complete overview on worldwide FiTs can be found here: