Feed-in tariffs (FITs) have been celebrated as one of the more effective policies to promote renewable energy deployment. This technical report, written by NREL and E3 Analytics, is a guide for policymakers to help implement FITs without breaking the bank. The report discusses the use of caps, payment level adjustment mechanisms, and auction-based mechanisms.
The report finds:
- Caps are commonly used in FIT policies and provide a predictable limit on program costs. However, program size caps can introduce access risk for developers, meaning that there is uncertainty regarding whether or not a developer will be able to access the FIT payments. Additionally, project size caps can limit the ability of a market to achieve economies of scale.
- Payment level adjustment mechanisms help deal with the particularly thorny issue of setting appropriate payment levels and can align FIT payment levels with market realities over time. If designed well, these mechanisms can also provide valuable information about future price levels. Though not sufficient to contain costs on their own, payment level adjustments can help prevent markets from getting overheated, a central aspect of cost containment policy.
- Auction-based pricing can be applied to a FIT policy framework or in place of a FIT. Auctions offer a flexible way of procuring new electrical supply and can be designed for particular types of generation capacity: regional, technology-specific, or based on load characteristics. However, there are material challenges associated with implementing auctions for new renewable energy projects with differing characteristics, different timing of commercial operation, and differing completion or performance risk. In order to be functionally competitive, the market must be sufficiently deep and liquid and the product being auctioned must be relatively homogenous both in definition and performance risk.