Background
In a feed-in premium (FIP) program, renewable energy producers sell their electricity at market rates and get extra money on top. FIPs can be fixed (a set amount) or sliding (changes with market prices). Fixed FIPs are simple but can lead to overpaying in high-priced markets and underpaying in low-priced ones. To avoid this, they often set minimum and maximum payment levels.
Sliding FIPs adjust continuously based on market prices compared to a reference price. If market prices are higher, no extra payment is made. Some use a minimum market price to make sure producers pay attention to market changes and to save money when prices are low.
FIPs can change depending on the type of renewable energy, project size, and location. They can also include bonuses for specific technologies and for handling the costs of selling electricity directly. There might be limits on how much can be paid to make sure the program stays sustainable over time.
Merits of FIP
FIPs encourage renewable energy operators to produce electricity when it’s most needed and when other energy sources aren’t producing much. They also motivate renewable energy investors to plan their projects based on when people use the most electricity (like picking the right location for wind turbines or solar panels). So, FIPs help renewable energy fit better into the electricity market, making it more efficient in matching electricity supply with demand. This is super important as we use more renewable energy.
For fixed FIPs or total payments (FIP + market price), having a minimum level (called “floor”) makes things less risky for renewable energy investors. It guarantees that they’ll make at least a certain amount of money. This also applies to sliding FIPs where a set reference price is guaranteed to renewable energy investors, kind of like a safety net. In some cases, FIPs can even bring in more money than traditional fixed payments when market prices are higher.
Demerits of FIP
Market-based support systems like FIP work well for renewable energy sources (RES) that can be controlled, like biomass and geothermal, or those that can be combined with energy storage, like hydropower and concentrated solar power (CSP). However, for variable RES such as wind and solar, which can’t easily adjust their output to market price changes, FIP schemes bring added expenses for balancing services.
Similar to Feed-in Tariffs (FIT), FIP schemes have the risk of either overcompensating or undercompensating RES producers. This happens because the government decides the FIP rate (for fixed FIP) or the reference tariff (for sliding FIP), and the same goes for setting minimum and maximum payment levels or degression mechanisms within the FIP scheme.
For investors in renewable energy, FIP schemes introduce extra uncertainty due to market price fluctuations and revenue changes, leading to higher financing costs. However, this risk can be reduced by setting price boundaries (for fixed FIP) or by adjusting the FIP according to market conditions (for sliding FIP). Selling electricity directly on the market adds complexity and expenses (for forecasting systems, balancing services, and electricity trading), which can make it challenging for small-scale renewable energy operators to participate in a FIP program.
FIP in Japan
FIT was introduced in Japan in 2011, and implemented in 2012. It was targeted to expand renewable energy, more specifically to smaller power plants. It included solar, wind, hydro, geothermal and biomass. The energy produced by IPP had to be purchased by grid operators and the final cost is passed to the consumer by adding additional tax in their monthly. It means, the whole nation is sharing the burden of introducing renewable energy.
By 2021, the amount of energy covered by FIT reached 115 TWh (https://www.renewable-ei.org/pdfdownload/activities/RE_Procurement_Guidebook_EN_2023.pdf). The Japanese government is gradually aiming to transition to FIP, so that the electricity price will be competitive and will be a function of market dynamics. From 2022, a new measure has been introduced. The price of energy is given in details in the government website at: https://www.meti.go.jp/english/press/2022/0325_004.html
It will be a good opportunity for the old plants whose FIT period will start expiring. Which means, the plants will be able to sell electricity with new terms, bringing a good opportunity for those plant owners. In other words, once the FIT expires, they can still sell electricity and earn revenue. This will provide an incentive to keep the plant running.
To calculate the expected revenue from FIP, one can use the following formula.
By definition of the FIP,
FIP income = Market price revenue + Premium
Premium = [Base price（Fixed) – Market reference price(stable over a period)] * energy in kWh
The market reference price is revised periodically based on the average market price index of the previous year and the average market price of that month compared to last month. It is calculated as follows:
Market reference price = Annual average market price of the previous year + (Monthly average market price of the current year- Monthly average market price of the previous year) + Revenue from sell of renewable energy certificates- Balancing costs(Fixed)
FIP in other countries
Spain
Spain has been a pioneer in the use of FIP in Europe with the introduction of a sliding FIP scheme in 1998. RES operators generally had the choice between a guaranteed fixed FIT and a guaranteed FIP paid on top of the wholesale electricity price, except for photovoltaic projects where only the FIT was applicable. For RES projects with a capacity above 50 MW, the FIP scheme was compulsory. Maximum and minimum levels (cap and floor) for the overall remuneration level for each RES technology have been introduced with the Royal Decree 661/2007. Between these levels, the RES producer receives the reference FIP. Above and below these levels, the FIP is decreased or increased so that overall remuneration is always within the maximum and minimum levels. The calculation of the overall remuneration is done either on an hourly or on a monthly basis. In February 2013, all FIP have been reduced to zero, thus effectively abolishing this mechanism.
Czech
In 2006, the Czech Republic introduced an optional Feed-in Premium (FIP) program. Under this scheme, operators of Renewable Energy Source (RES) plants had the choice to receive a “Green Bonus” annually or hourly, in addition to the revenue they earned from selling their electricity production to an electricity trader or any other customer. The program also allowed for bonuses on self-consumed RES electricity.
Feed-in Tariffs (FIT) were applicable only to RES plants with a capacity up to 100 kW (30 kW for photovoltaic and 10 MW for hydro power). The Energy Regulatory Office determined the green bonus levels for various RES technologies so that the bonus slightly exceeded the difference between the FIT and the expected average hourly electricity price for the upcoming year. This arrangement encouraged RES producers to participate in the FIP program. However, it’s worth noting that both FIT and FIP schemes have been closed for new RES projects installed after the end of 2013.
Germany
In Germany, they introduced an optional sliding Feed-in Premium (FIP) in 2012, known as the “market integration model.” This FIP is an extra payment received on top of the money earned from selling Renewable Energy Source (RES) electricity directly on the spot market (EPEX). It’s calculated as the gap between specific reference values for each RES technology (like solar and wind) and the average monthly reference market value for that technology.
For dispatchable RES, the market value is based on the monthly average of hourly contract values on the electricity spot market (EPEX). In 2014, with changes to the Renewable Energy Law, the FIP scheme became mandatory for all new RES plants, and the management premium was eliminated. Exceptions were granted only for small RES plants with capacities below 500 kW starting in August 2014 and 100 kW from 2016.
In cases where electricity prices go negative, meaning operators receive less money from wholesalers than the FIP, the difference is covered by an EEG surcharge, which is then passed on to German consumers. However, for larger renewable energy installations, they don’t receive the premium if prices remain negative for six consecutive hours.
UK
The United Kingdom is in the process of implementing a sliding Feed-in Premium (FIP) system through “Contracts for Difference” (CfD). This new scheme will replace the existing Renewable Energy Source (RES) quota system until 2017. It aims to financially incentivize low-carbon technologies, including RES, carbon capture and storage, and nuclear energy.
Here’s how it works: The government sets a “strike price,” which is agreed upon in long-term (15-year) contracts between RES operators and the government-owned company known as the “CfD Counterparty Company Ltd.” If electricity prices fall below this strike price, the RES operator receives the difference as a FIP payment. The reference electricity price is determined based on either short-term (daily) or long-term (annual) electricity prices, depending on the specific RES technology. However, if the electricity price surpasses the strike price, RES operators are required to repay the excess to the government.
The strike price levels for most RES technologies were established at the end of 2013 for the period of 2014-2019, sometimes with predetermined reductions. The first round of CfD applications began in October 2014, with the first CfD contracts expected to be finalized by the end of January 2015. There are plans to introduce competitive bidding for mature RES technologies through the CfD program. For small and medium-scale RES projects with capacities below 5 MW, the existing Feed-in Tariff (FIT) scheme will continue to be applicable.
