Long-term contracts for renewable energy producers are part of a feed-in tariff (FIT), a regulatory tool meant to spur investment in renewable energy technology. One of its key objectives is to provide long-term contracts and price stability to assist finance renewable energy projects (Alizada, 2018). FITs often offer varying rates to various renewable energy sources to stimulate the development of one renewable energy technology over another. Wind and solar power, for example, are paid more per kilowatt-hour than tidal power. Fits frequently incorporate “degression”—a progressive decline in tariffs and prices—to stimulate and support technical cost savings.
It is customary for FITs to have features such as assured grid access and long-term contracts. Feed-in tariffs allow you to be paid depending on the actual cost of generating renewable energy. This comprises residential, commercial, and agricultural properties, as well as private investors (Baur & Uriona, 2018). Wind, solar, and biogas are just a few examples of potentially lucrative energy sources. The Renewable Energy Sources Act of 2000 in Germany explains this idea. Scientists used scientific research to establish the compensation rates, predicated on the assumption that an installation may be run at an affordable cost when adequately managed, using cutting-edge technology and utilizing locally accessible renewable energy sources.
Numerous variables come into play here, including the technology, location (such as a rooftop or ground-mounted solar PV plant), size (such as a home or commercial building), and geographic region. Because of the rapid pace at which technology advances, tariffs are often set to decrease over time. A long-term (15–25 year) guaranteed purchase agreement is the norm for FITs. Producers are rewarded for increasing their project’s productivity and efficiency through performance-based pricing. Over 50 nations have put in place feed-in tariff programs by 2019. The marginal cost of a feed-in tariff may be used to discriminate between taxes. Using the notion of pricing differential, this is an alternate hypothesis. Depending on the program, the tariff price might range from little over the market rate to the price required to reach a government-specified maximum output level (Alizada, 2018). Feed-in tariffs for firms with low marginal costs result in higher revenues but not as much as the uniform tariffs for all firms: the more significant the tax, the more marginal the producer. There are two goals in this iteration of the policy. We may start by reducing a few of our manufacturing facilities’ profits.
The geographic location of many renewable energy sources is critical. When it comes to renewable energy sources, wind turbines and solar panels do best in windy environments. As a consequence, generators prefer to cluster in the most lucrative regions. Tariff differences are aimed at promoting the distribution of generators, which many consider an unwanted product in the region (Baur & Uriona, 2018). This would be not good for the environment if we cleared all the trees to create wind farms. As a result, renewable energy generation becomes less cost-effective as efficient locations are underutilized. Tariffs varied based on marginal cost might also serve the secondary goal of reducing the overall program budget. As a result of a uniform tax, all producers get the same payment, which at times exceeds the price that would stimulate them to produce (Zhao et al., 2021). As a consequence of the increased revenue, profits are made. For this reason, each producer will get a varied rate in order to ensure that the market has enough renewable energy production.
When it comes to trade, feed-in tariffs are a growing problem because they can directly impact other countries’ economies and policy-making. The World Trade Organization (WTO) may be able to assist in coordinating the handling and enforcement of this policy instrument. This brings in the topic of the theory of harm (Leiren & Reimer, 2018). To explain why an agreement or practice between two or more businesses may undermine competition and hurt customers. Market structure is considered, but motivations and capabilities of the enterprises engaged are also considered.
Safe renewable energy markets are built via subsidies and RPS. Renewable portfolio standards (RPS) mandate that electric utilities get a certain amount of their power from renewable sources. Utilities in the United States, the European Union, and Australia may get Renewable Energy Certificates, Renewable Energy Certificate Systems, and Renewable Energy Certificate Registries, respectively, to fulfill this requirement (Alizada, 2018). Emission Reduction Credits Renewable energy suppliers get these certificates based on the amount of energy they produce. Another income stream for the renewable energy generator is the sale of certificates. The cost of renewable energy certificates varies with the general demand for energy and the level of competition among providers.
As with carbon trading in Europe, certificate prices may plummet if the needed quantity of renewable energy is generated. The economic viability of renewable producers may be harmed due to this. Due to quota systems, big, vertically integrated generators and multinational electric utilities have an advantage over smaller, independent producers (Baur & Uriona, 2018). Because they are harder to develop and install than FIT, they are also more expensive. A more cost-effective approach to promoting renewable energy development may be to mandate dynamic pricing for user-initiated meter upgrades (especially for distributed energy uptake).
Alizada, K. (2018). Rethinking the diffusion of renewable energy policies: a global assessment of feed-in tariffs and renewable portfolio standards. Energy research & social science, 44, 346-361.
Baur, L., & Uriona, M. (2018). Diffusion of photovoltaic technology in Germany: A sustainable success or an illusion driven by guaranteed feed-in tariffs?. Energy, 150, 289-298.
Leiren, M. D., & Reimer, I. (2018). Historical institutionalist perspective on the shift from feed-in tariffs towards auctioning in German renewable energy policy. Energy Research & Social Science, 43, 33-40.
Zhao, G., Zhou, P., & Wen, W. (2021). Feed-in tariffs, knowledge stocks and renewable energy technology innovation: The role of local government intervention. Energy Policy, 156, 112453.