Feed-in-tariffs have been one of the most successful ways of encouraging investment in renewable power projects.
Like power purchase agreements (PPAs), they provide long-term contracts with a purchaser of the electricity generated, rather than exposing the project to unknown or potentially widely fluctuating future electricity prices. Unlike PPAs, which must be negotiated between a power project and each purchaser, FiTs provide standard contracts defined by the government of the country (or state) in which the project is built.
They have typically provided fixed prices (often above market rates), along with other key risk-reducing provisions such as guaranteed sale of every unit of electricity generated and guaranteed access to the grid. So for project investors, FiTs have removed some of the biggest risks on future revenue forecasting; a critical factor when planning projects where most of the costs are present and fixed (e.g. solar PV).
Where FiT prices have been above market rates, this is obviously a subsidy to the project (they are earning more revenue than if left to the market). In most schemes, the costs imposed by FiT payments are spread across the entire electricity consumer base, for the duration of the contract.
Over time, some FiT programmes have become more complex and segmented, for example with different rates for different project types, sizes or locations; with different contract lengths; and/or with market-price premiums rather than fixed prices. Also, whereas past FiT programmes relied on governments to set the tariff amounts, almost all programmes now use bid-based processes. In the latter, it is up to project developers to compete for access to a limited project pipeline by proposing the tariff that they would accept (with the lowest bids winning). The idea of this approach is use competition to drive down prices (and costs) and to limit long-term subsidy liabilities.