Feed-in Tariff

A feed-in tariff (FiT) is a policy under which an eligible renewable electricity producer receives a predetermined payment for each unit supplied to the grid. The tariff is usually offered through a long-term purchase arrangement, giving the producer revenue certainty independent of short-term wholesale electricity prices.

How it works

A regulator or government specifies the eligible technologies, tariff rate and payment period. A distribution utility or another designated buyer then purchases the electricity exported by qualifying generators.

• The payment is generally expressed per unit of electricity, such as per kilowatt-hour, and may differ by technology, plant size or location.
• Tariffs may be based on generation costs plus a reasonable return, rather than being discovered continuously in the electricity market.
• A tariff may apply only to new projects and may decline for later projects through tariff degression as technology costs fall.

Purpose and limitations

The central purpose is to reduce price risk and make renewable projects easier to finance, particularly when a technology is new or when small producers cannot participate effectively in auctions.

• Predictable revenue can promote investment, technology diversification and decentralized renewable generation.
• An excessively high tariff can impose avoidable costs on utilities and consumers, while an excessively low tariff may fail to attract investment.
• Effective design therefore requires periodic tariff revision, transparent cost assumptions and appropriate capacity or eligibility controls.

Distinction and Indian framework

A fixed FiT guarantees the total purchase price, whereas a feed-in premium adds a specified premium to the market price. Net metering primarily adjusts a consumer's electricity bill against eligible generation, while an FiT separately remunerates electricity supplied under the applicable purchase terms.

• Under the Electricity Act, 2003, electricity regulatory commissions determine tariffs under Section 62, while Section 86(1)(e) directs State Commissions to promote renewable electricity and specify its share in consumption.
• Competitive bidding under Section 63 is an alternative approach in which the tariff is discovered through bids rather than fixed administratively.