(November 2009)Regulators are in the unenviable position of determining an allowance for ROE that’s fair to consumers and investors in a volatile economy. The cases that stand out this year...
FIT in the USA
Constitutional questions about state-mandated renewable tariffs.
European nations and the United States are distinct. What is permissible in one doesn’t always seamlessly translate legally to the other.
FITs are the most widely employed renewable energy policies in Europe and, increasingly, the rest of the world. As of 2006, 17 European Union countries, as well as Brazil, Indonesia, Israel, South Korea, Nicaragua, Norway, Sri Lanka, Switzerland and Turkey all used them to promote and support renewable energy. In March 2008, the Kenyan Ministry of Energy proposed the adoption of FITs for wind, biomass and small-hydro resources. 1
A FIT establishes a secure contract for wholesale electricity at a set price that results in a rate of return attractive to investors and developers. 2 Typically, FIT structures are either fixed payments based on an electricity generator’s cost to produce electricity, or a fixed premium paid above the spot market or wholesale market price of electricity. These fixed payments are long-term contracts for anywhere from five to 30 years in duration. 3
FITs increase the price for certain renewable technologies to an amount deemed administratively and politically necessary to encourage their development. FITs typically might exceed utility-avoided costs, and therefore are justified only by their objectives and results, and not typically by accepted ratemaking methodology, which aims to minimize prudent generating costs. Often fixed-payment feed-in rates and terms are differentiated by technology and are based on the cost of deploying a given renewable energy technology. 4 FITs for sale of renewable power typically decline over time as the high front-end capital costs of renewable energy are amortized and as the number of installed systems increases. FIT laws usually also guarantee interconnection for distributed generation and utility scale projects. FITs have been successful in encouraging significant renewable energy development in nearly all of the countries in which they have been deployed.
The high initial capital costs of permitting and construction can hinder the development of renewable technologies, while FIT price premiums can help to offset the risk associated with those high capital costs. FITs offer a fixed-price long-term contract for payment from utility or electricity suppliers to the wholesale renewable energy generator. The structure of a FIT can be either a long-term payment based on the cost of generation—including profit—or a premium added on to the wholesale or spot-market price of electricity. So long as a generator feeds power onto the grid, it’s guaranteed a long-term contract at the government mandated feed-in price for the renewable energy commodity. A FIT also can be structured to reproduce the benefits that renewable energy sources provide that aren’t reflected in traditional fossil-fuel resource-based pricing structures, including pollution costs, climate-change costs, security costs, and future fossil-fuel cost uncertainty. 5
Costs of a FIT are passed on to consumers by purchasing energy suppliers and reflect a public policy decision to increase the percentage of renewable electricity sources used. Germany, Denmark, and Spain, while only a small fraction of the size of the United States in square miles, were responsible for 53 percent of total installed global wind power capacity between 1990 and 2005. Germany receives