What Is a Feed-In Tariff?

A feed-in tariff is a system by which an electricity company pays home owners for electricity generated by a renewable source in their home. The most common set-up is that the homeowner does not pay for electricity, instead getting it from the renewable source, with any excess generated power going back into the system. The feed-in tariff is usually intended as a financial incentive for people to use renewable sources.

There are a wide range of power generation methods that may be covered by a feed-in tariff. The most common is solar electricity, particularly via roof-mounted solar panels. Another option is wind power from a mini-turbine. Less common domestic solutions include hydroelectricity, which uses water to generate power, and anaerobic digestion, which takes its power from a gas created as vegetable material degrades. The electricity that can be generated, and thus the financial viability of a feed-in tariff, can vary widely between methods.

Although it is usually the electricity supplier that pays for the power generated in this way, governments usually have some involvement. This could mean passing legislation that requires power companies to offer a feed-in tariff. It could also mean compensating the power companies for some of the payments they make. Another option is for government to subsidize the installation of equipment.

The precise financial set-up for homeowners can vary from country to country and between electricity companies. In many cases the user will receive a small payment based solely on the energy his system creates, even if he uses some or all of it himself. The electricity company will then make another payment, usually at a higher rate, for any power the system generates that the homeowner does not use. It is of course possible that the system won't generate enough power to meet the homeowner's needs, in which case he will have to pay the electricity supplier for the remaining power at its usual rates.

The feed-in tariff is primarily designed to persuade people to invest in renewable home energy systems so that they can make savings in the long run. This is often assisted by a legal guarantee that the electricity company will make the payments for a set time, usually many years. A market has also developed for companies such as solar panel manufacturers to install the panels free of charge. In return they collect all the payments received by the homeowner for the power generated by the panels, but the homeowner benefits by not having to pay for any of this power that they use.