A feed-in tariff is a policy mechanism designed to is a policy mechanism designed to accelerate investment in renewable energy technologies by offering long-term contracts to renewable energy producers. The basic idea is that you can earn money, not only to pay for the installation, but also earn profit for making the investment in a clean and renewable energy source which supports the energy grid, stabilizes peak energy demands, offsets CO2 and other pollutants, and continues producing energy for the price you paid for the installation for the next 25-30+ years.
Under a feed-in tariff, eligible renewable electricity generators (which can include homeowners, business owners, farmers, as well as private investors) are paid a cost-based price for the renewable electricity they produce. This enables a diversity of technologies (wind, solar, biogas, etc.) to be developed, providing investors a reasonable return on their investments. FITs typically offer a guaranteed purchase agreement for electricity generated from renewable energy sources. These agreements are generally framed within long-term (15–25 year) contracts.
There are three methods of compensation.
- Feed-in tariff – compensation is above current retail price, and as the percentage of adopters increases, the FIT is reduced to the retail rate.
- Net metering – compensation is always at the current retail price, and allows producers to use electricity at a different time than when it was generated. There is no limit to the number of customers using net metering. Best practices call for perpetual roll over of kilowatt hour credits rather than converting to a monetary compensation.
- Power Purchase Agreement – pays for the generation of electricity and is normally below the current retail price. This is mostly targeted to considerably medium and large scale commercial producers.