Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
Updated May 26, 2024A feed-in tariff is a policy tool that provides renewable energy producers with an above-market price for what they deliver to the grid. These policies are usually designed to promote investment in renewable energy sources.
Feed-in tariffs are used to promote renewable energy sources in the early stages of their development, when production is often not economically feasible. Feed-in tariffs usually involve long-term agreements and prices tied to the cost of production of the energy in question. The long-term contracts and guaranteed prices shelter producers from some of the risks inherent in renewable energy production, encouraging investment and development that otherwise might not take place.
Anyone who produces renewable energy is eligible for a feed-in tariff, but those who take advantage of it are often not commercial energy producers. They can include homeowners, business owners, farmers, and private investors. Generally, FITs have three provisions.
One of the first feed-in tariffs was implemented in the U.S. by the Carter administration in 1978, but they are now used around the world.
The U.S. was a pioneer in feed-in tariffs. Its first was implemented by the Carter administration in 1978 in response to the energy crisis of the 1970s, which famously created long lines at gas pumps. Known as the National Energy Act, the FIT was meant to promote energy conservation along with the development of renewable energy such as solar and wind power.
Since then FITs have become widely used internationally. Japan, Germany, and China have all used them successfully over the past decade or so, and in total dozens of countries have used them to one degree or another to drive the development of renewable energy. It is estimated that about three-fourths of global solar energy is linked to feed-in tariffs.
Despite the successful role feed-in tariffs have played in promoting the development of renewable energy, some countries are turning away from relying on them, instead seeking more market-driven sources of support as well as more control over the supply of renewable energy that is produced. That includes Germany and China, two of the more prominent FIT success stories. Nonetheless, FITs still play a vital role in the development of renewable energy resources around the globe.
As of 2024, three states have a feed-in tariff, according to the Database of State Incentives for Renewables and Efficiency. Those states are California, New York, and Indiana. In addition, many other states have tax credits or other incentives to encourage small-scale renewable energy production.
A feed-in tariff provides a guaranteed, long-term price for renewable energy that is at or above current market rates. This guaranteed price reduces the risk and uncertainty associated with new renewable energy installations, thereby encouraging new producers to make initial investments.
The IRS offers a 30% credit on new clean energy facilities installed on residential homes between 2022 and 2032. After 2032, the credit falls to 26%. This can apply to solar panels, solar water heaters, wind turbines, fuel cells, and certain other clean energy technologies, and they must be installed in a residence where you live, rather than an investment property. To claim the credit, file Form 5695 with your annual taxes. You may also qualify for state renewable energy credits.
A feed-in tariff is a policy measure intended to incentivize installation and adoption of solar or other clean energy sources. It does this by guaranteeing a high price for renewable energy on the grid, thereby allowing producers to reduce the risk of new installations.