Feed-in tariffs (FITs) are policies guaranteeing renewable energy generators a fixed price for their electricity, usually integrating a cost premium intended to subsidize additional development so that emerging renewable energy technologies can reach scale. Generally, utilities are mandated to pay the fixed price, which includes the cost the utility would have paid for the same amount of electricity generated by non-renewable sources plus the additional premium. Often, these added costs are carried through to the consumer, raising electricity prices for certain ratepayers.
FITs have been effective tools for speeding the development of renewable energy markets and have contributed to the rapid reduction in the cost of renewable electricity as mass production and installation of components like photovoltaic panels and wind turbines have reduced prices. But FITs can impact voluntary renewable energy programs and instruments and may increase the risk that these programs and instruments double-count environmental attributes, if they are not carefully implemented with FITs in mind.
Avoiding Double-Counting
FITs typically convey (either explicitly or implicitly) the right to make claims based on the environmental attributes of the renewable generation purchased at the FIT-guaranteed, fixed price. The fixed price of the FIT is a premium the utility pays for the benefit of all ratepayers, including the same commercial and industrial customers that purchase renewable generation or the environmental attributes of renewable generation (in the form of Energy Attribute Certificates, or EACs) independently in the voluntary market.
Voluntary procurers typically want to ensure that their purchases make a difference and represent credible, exclusive claims to the renewable attributes they purchase. However, almost all FITs convey to the purchasing utility claims to environmental attributes associated with the purchased power. Therefore, it is important to ensure that EACs purchased in the voluntary market do not double-count attributes the utility already purchased on behalf of all ratepayers through the FIT. Since the cost of the FIT is borne by ratepayers, all ratepayers have an exclusive claim to the renewable energy purchased through the FIT on their behalf.
To avoid double-counting, voluntary buyers should not source EACs generated from FIT projects. For example, in Europe, where FITs have been a popular policy mechanism in many countries, EACs (known there as “guarantees of origin” or GOs) for projects that are supported by a FIT typically are not tradable in the European voluntary market.
Exceptions: When FITs Do Not Convey Claims
On rare occasions, however, FITs may not explicitly convey to the utility the environmental attributes of renewable energy purchased at the FIT-guaranteed, fixed price. In the U.S., for example, qualifying renewable generators are guaranteed a fixed price for their electricity under a type of FIT mandated by the Public Utility Regulatory Policies Act (PURPA). Under PURPA, the Federal Energy Regulatory Commission (FERC) allows electricity generators to maintain ownership of the EACs (known there as “renewable energy certificates,” or RECs) unless a state determines otherwise.
In these cases, the generator may sell the RECs in the compliance market, where a utility can purchase them to meet mandated renewable energy targets. The generator may also sell the RECs in the voluntary market to purchasers that want to go beyond renewable energy mandates and spur additional investment in renewable energy projects. It is important, therefore, to ensure that the utility purchasing the FIT-funded power does not characterize the purchased electricity as renewable but rather assigns to it the attributes of a residual mix, which is the mix of power from different fuel sources that remain after all specified power purchases are subtracted from a market.
In Hong Kong, the main electric utility has adopted a novel approach whereby the utility retains the EACs associated with renewable energy purchased through a FIT, but any proceeds from the sale of these EACs are refunded back to all ratepayers. In this case, the voluntary EAC buyer receives an exclusive claim to the environmental attributes associated with FIT-funded power, and ratepayers are paying for electricity stripped of its environmental attributes (which is characterized using a residual mix). It may appear complex, but under this system, everyone gets what they paid for and no attributes are double-counted.
Best Practices
Where FITs are adopted, EAC markets and/or regulations must be crafted carefully to protect voluntary purchasers and prevent potential double-counting. Within international EAC tracking systems, it can sometimes be challenging to understand whether a project is receiving the FIT. Look for a checkbox that indicates either “Supported” or “Feed-in Tariff.”
When EACs are issued for FIT-funded generation, voluntary purchasers should be informed that the EACs do not support exclusive claims to the environmental benefits of the energy and should be discouraged from purchasing these EACs.
The best way to avoid double-counting environmental attributes when issuing EACs in jurisdictions operating under a FIT is either to not issue EACs for FIT projects or to require that any EACs produced from generation purchased under the FIT be transferred and retired on behalf of the purchasing utility’s ratepayers. This ensures that EACs purchased in the voluntary market are distinct from those purchased under the FIT and protects the exclusive claim to the environmental attributes of the renewable energy.
Even corporations that generate renewable energy on-site and receive a FIT premium for their facility should follow these same best practices, since their generation is subsidized for the benefit of all ratepayers, and the corporation cannot make an exclusive claim to the environmental attributes even of this on-site generation.
Conclusion
FITs can be effective mechanisms to promote rapid growth in the production of renewable generation. EACs and voluntary renewable energy programs can coexist with FITs either by requiring that EACs corresponding to FIT-funded generation be retired on behalf of a purchasing utility’s ratepayers or by ensuring that the FIT does not convey—explicitly or by implication—claims to the environmental attributes of the renewable energy purchased under the FIT. Divorcing the FIT from the environmental benefits of renewable energy, however, may call into question the very purpose of adopting a FIT in the first place.
In almost all cases, credible voluntary EAC markets should not source from projects that participate in a FIT, and voluntary renewable energy buyers should be discouraged from sourcing EACs from FIT-supported projects.