Getting FiT

Miguel Mendonça is the research manager at the World Future Council

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A feed-in tariff (FiT) is a renewable energy law that obliges energy suppliers to buy electricity produced from renewable resources at a fixed price, usually over a fixed period.

The feed-in tariff mechanism has been used in over 50 countries worldwide, driving the majority of renewable energy investment and deployment to date, and creating world-leading industries in several countries. It has pushed costs down and efficiencies up, and can be adapted for least developed countries and emerging economies. Well-designed and implemented FiTs can provide access to energy, while reducing fossil fuel dependency and creating low-carbon growth. The critical question, however, is how to fund them.

Village mini-grids can use the FiT mechanism to sell excess electricity to a local energy utility.

Some key proposals emerged around the UN Climate Change Conference, COP15, aimed at breaking the deadlock over financing technology transfer from the global north to the global south:

The World Wind Energy Association and the International Renewable Energy Alliance advocate a Global Renewable Energy Investment Programme, containing a global FiT fund, to be sourced from obligatory annual contributions from the Annex I (developed) countries. They also suggest ways of reforming the Clean Development Mechanism (CDM) to be more effective for the deployment of wind power and other technologies.

The World Future Council (WFC) has proposed ‘creating new money’ for climate-protecting measures, a model recently applied to the banking sector. Governments can authorize this in the form of the Special Drawing Rights of the International Monetary Fund. This should be interest-free and non-inflationary.

A specific FiT design for LDCs is being pursued by the WFC. A new book, Powering the Green Economy – The Feed-in Tariff Handbook suggests methodologies for both grid-connected and off-grid installations, including village mini-grids. It also proposes the creation of a dedicated FiT fund, sourced from national budgets and/or international donors.

Greenpeace and the European Renewable Energy Council have also explored the creation of a major fund, called the Feed-in Tariff Support Mechanism (FTSM). It would link FiTs with emission trading schemes and/or funding arrangements, and use existing international finance arrangements and institutions to deliver project finance at low risk. It seeks to create a reliable alternative to CDM which connects bottom-up planning with top-down financing. It would be funded by contributions from OECD countries.

Another emerging possibility is ‘overcharging’ commercial and industrial electricity customers in order to generate FiT funds.

A proposed model to adapt the FiT scheme to off-grid areas in developing countries is the so-called ‘Renewable Energy Premium Tariff’ (RPT). Like a normal FiT, it rewards performance rather than simply supplying the initial capital investment funds for the installation. The RPT has been analysed under different ownership, regulatory and institutional frameworks, and options for practical applications are being considered.

In 2009, the emerging economies of India, China, and South Africa, have all introduced national FiTs. South Africa, with both major power capacity constraints and significant carbon reduction targets, has embarked on the establishment of an ambitious FiT, but there remains a need to finalize the operational details to enable power purchase agreements to be signed. Kenya also established a FiT in 2009, and Uganda, Botswana and Mauritius are looking at FiT legislation. China has introduced a FiT for wind, which replaces the tendering system. The National Development and Reform Commission, the country’s economic planning agency, expects it to guide investment decisions more clearly. A FiT for solar power is anticipated. India has regional FiTs in around half a dozen states, but has now opted for a national scheme, covering all renewables, with attractive rates of return.

The main recommendations for FiTs in the developing world concern financing – guaranteeing international monies for 20-year FiT-funds – and creating a strong institutional and legal framework. Existing funds are often linked to management by international institutions such as UN bodies or the International Monetary Fund or World Bank. The International Renewable Energy Agency (IRENA) may be able to play a role in the creation of the required framework.

FiTs could be combined with the CDM, as the additionality criteria have been altered since November 2001, to allow coexistence with established national support schemes (additionality is where emissions reductions must be beyond or additional to what would have happened in the absence of the project). However, the area is complex, and with continuing uncertainty over international mechanisms such as the CDM, it is recommended for now that FiT schemes stand alone and apart from anything that raises investment risk.