A Feed-in Tariff scheme (FIT) is a form of economic policy used to promote the deployment of renewable energy. It gained significant popularity during the early stages of renewable energy deployment. The Solar Market Outlook (2022-2026) by SolarPower Europe shows it remains a popular policy option. Nevertheless, governments around the world have begun to implement new policy forms, including net metering and net billing.
In this blog, you will find an overview of how a feed-in tariff works in relation to solar photovoltaic, and how it differs from net metering in both functioning and effectiveness.
How does feed-in tariff work?
A FIT scheme is usually defined by the national government or an independent regulatory body responsible for overseeing energy markets. Nevertheless, the role can also be taken up by provincial governments or utility providers.
In brief, a feed-in tariff scheme involves residential and commercial PV system owners selling to the grid the electricity generated by their solar panels for a predetermined fixed rate above the retail market price.
Let’s break it down.
Step 1 – Setting a fixed price per kWh
The governmental body sets a fixed price for every unit of electricity that a renewable energy source generates. The fixed rate is guaranteed for a predetermined period of time that usually ranges from 15 to 25 years. The rate is typically higher than the retail electricity market price. This creates an incentive for homeowners, businesses, farmers and private investors to adopt renewables to power their activities.
Fixed rates can vary based on:
- The type of renewable energy source – In our case, the focus is solar photovoltaic.
- The installation type – It could be a rooftop or ground-mounted system. Furthermore, nowadays we assist to innovative ways of deploying photovoltaics, such as agri-PV and floating panels.
- The size of the system – The size or capacity is measured in kWp. Based on the size, ownership and use of the system, it is possible to classify solar PV eligible to FIT schemes into residential and commercial.
- The specific geographical location – Different regions within a country might apply different fixed rates.
- Market demand – The local demand for renewable energy influences feed-in tariffs, with higher rates offered when demand is greater. On the contrary, the more supply increases, the more the fixed rates decline eventually.
- Duration of the scheme – FIT schemes can have different rates depending on how long they run. For example, some programs might offer higher rates in the initial years to encourage the uptake of renewable energy. Then, rates would gradually decrease over time.
- Time of the day – Some FIT schemes are characterized by time-of-day tariffs, which offer different rates depending on when the energy is generated. This can encourage renewable energy generation during peak demand periods, when electricity is more expensive.
Step 2 – Utilities buy electricity from renewables at the fixed rate
As the PV systems generate electricity and feed it into the grid, utility providers buy it at the fixed rate. Homeowners and businesses are now selling energy generated by their solar panels for a price per kWh higher than the retail rate. Thus, they are able to receive a monetary return for the electricity they supply to the grid.
How does net metering work?
A solar photovoltaic (PV) system can generate more electricity than a house or business consumes in a given point of the day. This is normal. It occurs during hours and periods of peak solar irradiation, like midday and summer months. Therefore, it results in a surplus of electricity.
Net metering is made possible through the use of a net meter. Solar developers install it alongside the solar photovoltaic system. When the panels produce more electricity than what is required by the property, the excess energy is fed back into the grid, causing the net meter to run backwards. This credits the owner for the surplus electricity that has been generated.
In periods when the solar panels cannot fully meet the electricity demand of the property (e.g., at night, on cloudy days, in winter), the owner draws electricity from the grid. This causes the net meter to run forward.
When it is time to pay the electricity bill, the consumer is only billed for the net amount of electricity used. This is equal to the difference between what the PV system has supplied to the grid and what has drawn from it. As a result, the consumer doesn’t waste the surplus energy generated by the panels and uses it to offset future electricity bills.
Depending on the location, the credits earned can roll over from month-to-month and even from year-to-year. In this way, the owner of the PV system can offset the electricity pulled from the grid at night with the excess the panels generated during the day. Furthermore, the electricity produced in excess during summer months can reduce the winter billing cycles, when solar panels are under-performing due to environmental conditions.
For more information, especially regarding the pros and cons of net metering, see Net Metering: a Comprehensive Guide.
The core difference
Both programs promote the deployment of solar PV by compensating consumers with PV systems for supplying electricity to the grid. However, they differ in the way compensation is done.
On one hand, FIT schemes provide consumers with a direct monetary compensation for the amount of electricity they supply to the grid at the fixed rate. Homeowners and businesses must have two meters. One measures the electricity drawn from the grid at the retail rate. The other accounts for the electricity injected into the grid at the FIT rate.
Owners of PV systems still pay for the electricity they use from the grid at the retail price. But they offset this cost indirectly by earning revenue from selling the electricity produced by their PV systems at the fixed FIT rate. The outcome, whether positive or negative, depends on the amount of electricity they consume and produce.
On the other hand, net metering provides a kWh-to-kWh swap based on the current retail price. There is no monetary exchange, but a two-way-flow of electricity automatically recorded by one meter. This results in a more direct reduction of the electricity bills.
Furthermore, while net metering requires self-consumption, FIT schemes don’t. Under a net metering program, prosumers need to first generate electricity to satisfy their consumption. When they consume less than what their panels produce, then the electricity is fed into the grid and the surplus amount is credited. Instead, under a FIT scheme, the owner of the PV system has the option to sell the whole electricity without consuming any of it.
Therefore, which policy is better? As you will read in the next section, net metering allows for greater flexibility and cost-effectiveness. But this highly depends on the contingencies, including especially the size of the system.
FIT schemes or Net Metering?
It is clear that FIT schemes offer to owners of PV systems a long-term and relatively stable source of income for feeding electricity into the grid. Furthermore, they do not require self-consumption. However, they come with drawbacks that net metering can fix.
Firstly, FIT schemes bring about costs for governments and regulatory agencies. Indeed, they usually subsidize the difference between the fixed and retail rate. And thus they have to pay a guaranteed price over a long period of time. On the contrary, net metering is more cost-effective, because it allows prosumers to directly offset their electricity consumption, reducing their electricity bills.
Secondly, FIT schemes can distort the market by offering a fixed price for renewable energy, which might not reflect the true market value of the energy produced. Whereas net metering is a fairer mechanism. It pushes consumers to invest in solar photovoltaic systems based on their own energy needs and financial considerations.
Thirdly, FIT schemes require more regulatory oversight and bureaucratic effort, such as setting prices, administering contracts and managing payments. This increases administrative costs. On the other hand, net metering allows for more simplicity. It only requires the individual paperwork necessary when installing the PV system, which is usually taken care of by solar developers themselves. The rest is automatic and performed by the net meter, which keeps track every time electricity is supplied to and drawn from the grid. This reduces administrative costs for governmental bodies and utilities while simplifying the process for both utilities and prosumers.
Does this mean that net metering is in general a better alternative to FIT schemes? Not really.
It depends on the size of the PV system
Feed-in tariff schemes and net metering programs are more suitable for different types of PV system sizes and related prosumers due to their respective features.
Residential & Small Commercial
Net metering is more suitable for smaller PV systems, such as those installed on residential or small commercial buildings. The program can actually become problematic for the public grid or non-net metering consumers if applied to larger systems. For this reason, in many countries net metering is usually capped to a certain PV capacity.
Large Commercial / Industrial
Feed-in tariff schemes are generally more suitable for larger PV systems, such as those installed in commercial or industrial buildings. This is because FIT schemes offer a fixed, long-term price for every kWh of solar energy fed into the grid. This provides a relatively stable and predictable revenue stream that can help offset the high upfront costs of larger installations.
However, for industrial, community and utility-scale photovoltaic installations, there are other appealing alternatives. These include net billing and Power Purchase Agreements (PPAs).