Feed-in tariffs: What you need to know

Property owners have a number of financial incentives to go solar. From rebates to tax incentives and net metering policies, these policies all bring down the cost of installing solar panels on your house. One such policy is the feed-in tariff, which, when designed properly, can provide substantial financial benefits to solar customers.

A feed-in tariff is a solar incentive that pays owners of distributed energy systems (like solar) a certain amount per unit of electricity sent to the grid. They are often fixed-price incentives locked in over a contract period of 10 to 20 years, providing property owners with distributed generation, a long-term, stable incentive.

Feed-in tariffs are relatively rare as a solar policy mechanism in the U.S. Only seven states have offered solar feed-in tariffs, according to the Database of State Incentives for Renewables & Efficiency. As such, if you're a property owner who is considering or has already invested in solar, it is unlikely that a feed-in tariff mechanism impacts the economics of your system. However, feed-in tariffs remain a useful policy tool that can augment the economics of going solar by adding to other solar incentives.

To meet renewable energy goals, federal, state, and local governments have all provided financial incentives to boost the economic case to invest in renewable energy. These incentive policies allow a government (or electric utility) to focus on a specific public policy goal, such as installing a greater solar energy capacity or developing and deploying a local green-collar workforce. One such policy mechanism is the feed-in tariff, which has long been a popular policy device worldwide.

Feed-in tariffs are designed to provide a fixed-price incentive to guarantee a certain benefit for each unit of electricity your solar panels produce over a long-term contract, typically 10 to 20 years. Though not as popular of a policy mechanism in the United States, feed-in tariffs have long played a role in driving renewable energy growth throughout the rest of the world, specifically in Europe, where countries like Germany have effectively deployed feed-in tariffs to expand the renewable energy sector substantially. The stability afforded by a long-term, fixed-price contract sends a clear signal to developers that installing a certain type of generating resources is a priority.

Typically, the financial incentives in a feed-in tariff are structured in a few key ways. First and foremost, feed-in tariffs are designed to guarantee payment above the cost of purchasing electricity from the grid. To do so, a feed-in tariff will likely compensate a renewable energy system either at a predetermined level representative of the value it provides to society or at the all-in cost of the system, levelized over the length of the contract and with a revenue margin built in, according to a seminal report on the policy mechanism by the National Renewable Energy Laboratory.

In Europe, feed-in tariffs have been used as a primary or exclusive policy mechanism for renewable energy deployment. In contrast, feed-in tariffs in the United States are more often used with other solar incentives, designed as an added price benefit beyond the additional financial incentives for property owners investing in solar.

Perhaps the best-known solar incentive is the federal solar investment tax credit (ITC), which allows solar customers to reduce their annual income tax by 26% of the cost of their solar system during the tax year it's installed. First introduced in 2006 and renewed most recently in 2020, the congressionally-passed ITC has played a commendable role in the growth of the solar industry as it has coincided with 50 percent annual growth in solar over the past decade, according to the Solar Energy Industries Association (SEIA).

The ITC is hardly alone in terms of solar incentives. One of the most popular mechanisms to financially incentivize solar is a policy called "net metering." At its core, net metering is a performance incentive that results in your electric consumption being measured as the net of your overall monthly consumption and the monthly output from your solar panels. In some cases, net metering policies pay a higher rate for the electricity produced from your solar panel system than you pay to purchase electricity from the grid. In other cases, net metering policies allow you to avoid the supply charge (i.e., the portion of your bill tied to generating electricity) and the transmission and distribution charge (i.e., the portion of your bill tied to getting that electricity to your appliances).

These policies are designed to help meet public policy goals or targets, such as a state-specific renewable portfolio standard (RPS), which mandates that a state must generate or procure a certain amount of its electricity usage from renewable energy by a certain year.

The difference between feed-in tariffs and other solar incentives, such as the ITC, is that feed-in tariffs are a production-based incentive. In other words, where a policy mechanism such as the ITC is based upon the amount of money you invest in your solar energy system, a feed-in tariff compensates you based on how much electricity that system generates.

This is an essential distinction for solar. As the cost of solar panels continues to decline, an investment-based incentive may pay less of a benefit, as it now costs less to build a 6-kilowatt system than a year ago. Some of the most successful state policies to deploy renewable energy have already employed production-based incentives. Combining a production-based incentive with an investment-based incentive can lead to exceedingly quick payback periods for investing in solar.

To take advantage of the solar incentives in your area, register for the EnergySage Marketplace to receive up to seven free quotes from local, pre-screened solar installers. The quotes take into consideration performance-based incentives, tax credits, and rebates. With all those incentives included, the average payback period for a solar panel system is under eight years nationally.