Feed in Tariff
The feed-in tariff system is designed as an incentive for energy producers to move away from conventional fossil fuels to renewable energy sources. Essentially, it is government legislation which guarantees a fixed, premium rate for renewable electricity fed into the national grid. The power companies are obliged by the government legislation to buy the renewable electricity, the additional costs of which are passed onto the customers.
<strong>The Tariff</strong>
The UK government is committed to reducing its carbon emissions through the adoption of renewable energy sources, particularly in regards to the generation of power in order to combat climate change. The Energy Act of November 2008 set out a series of provisions in order to help the government meet its targets. The need for a feed in tariff comes from the fact that it is far more expensive to produce energy from green sources than it is from fossil fuels. This of course renders the retail price of fossil fuel electricity cheaper than that from renewable producers. In order to attract renewable investors, it is therefore necessary to incentivise those wishing to invest in the installation of renewable plant.
Feed-in tariff legislation fixes an above market rate for utility companies to buy electricity from renewable energy producers. It could therefore mean for example that if the retail price of fossil fuel electricity were 15p per kWh, then the rate for renewable electricity could be up to 60p per kWh. In this case, the 45p difference per kWh would be spread across every customer of the relevant utility company. It is this fixed tariff paid by the utilities which makes renewable energy an attractive prospect for investors as it guarantees them a return over a long period and has been highly successful at attracting investment where it has been implemented across Europe. Germany for example now produces over 14 per cent of its energy from renewable sources, something which has been attributed to the generous and comprehensive feed-in tariff system implemented by the German government.
<strong>The Future</strong>
The Feed-in tariff system has already been in place in many states such as Germany, Israel, the US, Spain and Australia for some time now and has been instrumental in the success and growth of renewable energy operations there. The recent Energy Act (November 2008) includes specific provisions for the implementation of feed-in tariffs in the UK by 2010 although at the moment the precise details of the kWh threshold and tariff price has not been set.
Despite the current lack of clarity, it is believed that as we move towards 2010, the government will set a tariff which allows renewable energy to be a viable option to investors. The government has established the new department of Energy & Climate Change (DECC) headed by Ed Milliband, whose job it is to reduce carbon emissions and help the UK meet the targets set out in international agreements such as Kyoto. They will see it as absolutely fundamental that the provisions for the feed-in tariff allow the UK to have the legal infrastructure for investors to feel safe in the knowledge that any investment they make is protected in the long term as it is in other states with strong feed-in tariff systems.
In a December 2008 report titled The Renewable energy country attractiveness indices by consultants Ernst & Young, the UK ranks highly as a potential target for renewable investors. Indeed, citing the falling value of the Pound and the iminent introduction of feed-in tariffs, Ernst & Young now rate the UK as joint fifth in a list of countries in terms of their attractiveness to investors. Germany rates top of this report, a success which is attributed to their excellent feed-in tariff system (Erneuerbare-Energien-Gesetz EEG).
