A policy mechanism designed to encourage the adoption of renewable energy sources and to help accelerate the move toward grid parity.
It typically includes three key provisions: 1) guaranteed grid access, 2) long-term contracts for the electricity produced, and 3) purchase prices that are methodologically based on the cost of renewable energy generation [3] and tend towards grid parity. Under a feed-in tariff, an obligation is imposed on regional or national electric grid utilities to buy renewable electricity (electricity generated from renewable sources, such as solar power, wind power, wave and tidal power, biomass, hydropower and geothermal power), from all eligible participants.[4].
The cost-based prices therefore enable a diversity of projects (wind, solar, etc.) to be developed, and for investors to obtain a reasonable return on renewable energy investments. This principle was first explained in Germany's 2000 RES Act:
“The compensation rates…have been determined by means of scientific studies, subject to the provision that the rates identified should make it possible for an installation – when managed efficiently – to be operated cost-effectively, based on the use of state-of-the-art technology and depending on the renewable energy sources naturally available in a given geographical environment.” (RES Act 2000, Explanatory Memorandum A)[5]
As a result, the rate may differ among various source of power generation, installation place (e.g. rooftop or ground-mounted), projects of different sizes and, sometime, by technology employed (solar, wind, geothermal, etc.). The rates are typically designed to ratchet downward over time to track technological change and overall cost reductions. This is consistent with keeping the payment levels in line with actual generation costs over time.
In addition, FITs typically offer a guaranteed purchase for electricity generated from renewable energy sources within long-term (15–25 year) contracts [6]. These contracts are typically offered in a non-discriminatory way to all interested producers of renewable electricity. Source: Wikipedia
