What Is a Feed-in Tariff?

A feed-in tariff, sometimes called an advanced renewable tariff or abbreviated FIT, is a government policy instrument that obliges electric utilities to buy the output of qualifying renewable generators at a set price under a long-term contract. Three provisions define the instrument: guaranteed grid access for the qualifying plant, a purchase obligation on the offtaker, and a payment rate fixed in advance for a contract term that typically runs 15 to 25 years. Because the rate is known before construction, the developer's revenue risk collapses to a question of how much electricity the plant will produce, which is what makes the policy effective at attracting debt finance for small and mid-sized projects.

Feed-in tariffs belong to the family of quantity-neutral, price-setting policies, in contrast to renewable portfolio standards and auctions, which fix a quantity and let the market discover the price. The design traces to the German Stromeinspeisungsgesetz of 1990 and its successor, the Renewable Energy Sources Act of 2000, which paid technology-specific rates derived from generation cost rather than from the wholesale market price. The IEA policies database records schemes of this kind at national and subnational level across Europe, Asia, Africa, and the Americas, and by the mid-2010s more than 70 countries had adopted a feed-in tariff or premium in some form.

Rate Setting and Degression

Tariff rates are normally calculated from the levelized cost of electricity for a reference plant, plus a target return on equity, and are differentiated by technology, plant size, and sometimes resource quality or siting. Rooftop photovoltaic systems receive a higher rate per kilowatt-hour than utility-scale wind because their unit costs are higher. The central design problem is that equipment costs fall while an administered price does not, so a rate that was fair at approval becomes an overpayment within a few years. Programs address this with degression, a scheduled annual reduction in the rate offered to new entrants, and with capacity caps or corridors that tighten degression automatically when deployment runs ahead of target. Spain, Italy, and the Czech Republic each experienced deployment booms in the late 2000s when degression lagged falling module prices, and each subsequently revised or curtailed its scheme.

Feed-in Premiums and Contract Variants

Fixed tariffs insulate generators from wholesale prices entirely, which removes any incentive to produce when power is most valuable. The feed-in premium variant answers this by paying a bonus on top of the market price the generator earns by selling into the exchange, so the plant still responds to price signals. Premiums are either fixed, in which case the total revenue varies with the market, or sliding, in which the premium shrinks as market prices rise and the generator receives an effective floor. Denmark's Promotion of Renewable Energy Act and Germany's post-2012 reforms both moved incumbent fixed tariffs toward premium and direct-marketing models, a transition many jurisdictions repeated as renewable shares grew large enough to affect wholesale price formation.

Cost Recovery and Legal Constraints

The cost of above-market purchases is recovered through a surcharge on retail electricity bills or, less often, from general taxation, which makes the distributional effect of the policy a persistent point of political contention. In the United States, jurisdiction complicates matters: wholesale rates are federal, so a state cannot simply order a utility to pay a chosen price. State programs are instead built inside the Public Utility Regulatory Policies Act framework, where rates for qualifying facilities must not exceed the utility's avoided cost, a constraint examined in analysis from Columbia's Sabin Center on the California program.

Applications

Feed-in tariffs have been applied across a range of technologies and settings, including:

• Rooftop and community-scale solar photovoltaics
• Onshore and offshore wind development
• Small hydropower and geothermal plants
• Biomass, biogas, and landfill gas generation
• Rural electrification and mini-grid programs in developing economies