Renewable energy: are feed-in tariffs going out of style?

Feed-in tariffs have helped to initiate a surge of renewable energy growth in many markets, but there are signs that the stock of this important support mechanism is starting to fall. How and why are countries replacing feed-in tariffs, and is there still a place for them in the energy markets of the future?

A year on from the signing of the era-defining Paris Climate Agreement and a few weeks after the deal’s official ratification on 4 November, the momentum behind renewable energy is stronger than ever before. According to data from the REN21 Renewables 2016 Global Status Report, around 147GW of renewable electricity came online in 2015, the largest ever year-on-year increase, with the total new renewable energy installed equalling the entire electrical capacity of the African continent.

Clean energy technologies attracted investments worth $286bn, with more than twice as much invested in sustainable energy than fossil fuel-burning capacity, adding to the sense that renewables are starting to compete with coal and gas in the free market and that the days of fossil fuels – debates over baseload generation and renewable intermittency notwithstanding – are numbered.

“What is truly remarkable about these results is that they were achieved at a time when fossil fuel prices were at historic lows, and renewables remained at a significant disadvantage in terms of government subsidies,” said REN21 executive secretary Christine Lins after the report’s publication in June. “For every dollar spent boosting renewables, nearly four dollars were spent to maintain our dependence on fossil fuels.”

Feed-in tariffs: an important support mechanism

Of course, to reach this point of critical mass for renewables, policy support from national governments has been vital as an incentive to clean energy investment and development. Mechanisms such as competitive auctions for renewable energy capacity and renewable portfolio standards (RPS), which mandate a proportion of clean energy to be sourced by all major power suppliers, are common around the world.

Given the market penetration achieved by renewables like wind and solar photovoltaics in many regions, there are now debates over the appropriate level of subsidies that should still be afforded to such projects, especially considering the upward pressure these supportive policies can put on domestic electricity bills at a time of tightening household budgets.

However, given the Paris Agreement’s near-universal pledge to limit global warming to no more than 2°C above pre-industrial levels, there is a clear need to accelerate the decarbonisation of the global energy supply, which makes policy support for renewables as necessary today as it has ever been, and will likely ensure that subsidies in some form will continue to be a fixture of the energy landscape for decades to come.

"FITs played a major role in the promotion of renewables across Europe."

Feed-in tariffs (FITs), which guarantee adequate compensation for renewable energy producers through either a long-term fixed price or the electricity market price plus a special premium, represent another renewable incentive measure that has proven popular as a means of boosting renewable development and reducing uncertainty for potential investors. In Europe particularly, FITs played a major role in the promotion of renewables across the continent.

These tariffs, which until recently were a fixture of Germany’s Renewable Energy Act, were instrumental in the country’s ‘Energiewende’ transition movement and helped boost renewables’ share in the national electricity production mix from less than 4% in 1990 (when the act came into force) to more than 30% today. Spain, another country that implemented FITs, has steadily increased its renewable coverage of electricity demand from 18.4% in 2006 to 37.4% in 2015.

A shift away from FITs?

In recent years, countries in Europe and elsewhere have begun a shift away from FITs as they attempt to move towards more market-driven renewables promotion mechanisms. The transition to market-based renewables support in Europe is a goal of the European Commission; high consumer electricity prices, coupled with the potential misbalance of FIT-facilitated renewable energy supply and the actual needs of national and cross-border grids, have prompted an urge for states to have more control over the development of renewable capacity.

Germany, which, along with Denmark and Spain, has been the main torchbearer for FITs on the continent, is one of the countries now moving away from them. Reforms to the Renewable Energy Act, coming into effect in January next year, will effectively jettison the previous FIT system, under which any renewable energy project would be eligible for the scheme, in favour of a competitive auction process.

Germany’s reformed Energiewende will see the country’s renewable energy producers compete for ‘feed-in premiums’ in a market-responsive auctioning process. The German Government says these auctions, along with placing a cap on the amount of clean energy capacity eligible for subsidy payments, will give it more control over the integration of renewables in line with the expansion of the grid, as well as providing planning security for developers and helping to reduce renewable electricity costs for the public.

Renewables trade associations and campaigners in Germany have decried the move, arguing that the elimination of automation FITs threatens to stall the progress of the country’s transition. Nevertheless, the shift is in line with EU objectives as it moves towards Europe-wide harmonisation of energy markets, as abundant German renewable energy has previously flooded the grids of neighbouring countries, including the Netherlands and Poland, wreaking havoc with grid infrastructure.

“The reform clearly puts Germany in line with a general global trend that we see going from feed-in tariffs to auctioning systems," said Dolf Gielen of energy think tank Irena in a July interview with Deutsche Welle. “In that sense, Germany is more a follower than a leader now.”

Asia: a mixed bag for feed-in tariffs

A shift away from feed-in tariffs and towards other more market-friendly renewable support measures is reflected in countries such as Kenya, South Africa and others. But it’s clear that FITs are still playing an important supportive role in the development of renewables around the world. In Asia particularly, FITs have helped to facilitate massive growth in renewable energy capacity as the continent’s rapidly expanding economies continue to set a good example for the rest of the world. A GlobalData report published in May notes that with very few exceptions – Malaysia, South Korea and Singapore – all countries on the continent are using FITs for one or more renewable technologies, often to eye-catching effect.

“India, for example, had fewer than 50MW solar capacity in 2010, which increased to more than 1,000MW in 2011, partly because of the introduction of FITs,” said GlobalData senior analyst for power Harshavardhan Reddy Nagatham. “China has seen similarly impressive results through the use of FITs, achieving the largest installed capacity of renewable energy across the APAC [Asia-Pacific] region and adding 10,950MW of solar power in 2013, up from 3,500MW in 2012. In 2015, China added around 15,000MW of solar PV capacity.”

But in some of the most advanced Asian economies, FITs have started to fall out of favour. South Korea, a highly developed economy that is looking to expand its renewable energy sector to reduce reliance on fossil fuel plants and foreign oil imports, ditched FITs as a support mechanism back in 2011 in favour of an RPS scheme that requires the country’s top power companies to generate a proportion of their power from renewable sources, from 3% in 2015, rising incrementally up to a 10% obligation by 2024.

"In some of the most advanced Asian economies, FITs have started to fall out of favour."

Since bringing in the RPS and associated renewable energy certificates in 2012, the installation of new renewable energy capacity has increased three-fold compared to installations achieved between 2001 and 2011 under FITs. The RPS has prompted particular surges in biomass co-firing and fuel cell deployment. It hasn’t all been plain sailing however, with the original target of hitting the 10% renewables quota delayed from 2022 to 2024 after power companies argued the strategy was too aggressive.

Japan, another advanced Asian economy, is also considering making revisions to its FIT scheme, introduced in 2012 following the shutdown of the country’s nuclear reactors, along German lines. The proposed change would again see renewable generators bid for subsidies to reduce the burden of consumer energy prices, which have been pushed up by a solar energy industry that has surged because of the profits guaranteed by FITs.

There is clearly no catch-all answer when it comes to the comparative effectiveness of FITs, RPS, auctions and other renewable support initiatives. FITs have been shown to be effective in the past and today as a stimulant to renewable market growth, but they are rather blunt instruments in terms of policy, and the evidence suggests they may become a market-distorting burden as a country’s renewables sector matures, at which time market-based auctions and other measures can become more attractive options. But in the end, it’s a question of finding equilibrium between promoting renewables, maintaining a healthy grid and securing an energy market that is both affordable and increasingly green. Countries will continue to decide which particular mechanisms (or combinations of them) will strike the right balance and make good on their climate change commitments.