A Feed in Tariff or FiT, is a policy mechanism requiring utilities to purchase electricity generated from a certain source at a fixed rate (which is typically higher than average market electricity rates). FiTs are implemented as a means to encourage the development of renewable energy by balancing the cost between electricity generated from renewable and traditional energy sources. Although FiTs have been implemented in countries such as Germany and Spain around the world, the United States federal government has not enacted FiT legislation. Thus far, each state has taken different approaches to encourage the development of solar. Many U.S. states have opted for Renewable Energy Credit (REC) trading schemes while other states, such as Vermont and California have implemented FiTs. However, a recent ruling by the Federal Energy Regulatory Commission (FERC), threatens the future potential for states to implement FITs.

In March 2010, the California Legislature passed Assembly Bill 1613, which granted the California Public Utilities Commission (CPUC) the power to set and regulate the purchasing price of electricity produced from Combined Heat and Power sources (CHPs). The CPUC would have required utilities to purchase electricity at fixed rates for 10 years from all CHPs that meet environmental and efficiency guidelines and are under 20 MW. Utilities affected by the legislation pushed back, claiming that the CPUC could not set wholesale electricity prices, a right, they argued, reserved only for the FERC.

In mid-July, FERC responded to the controversy by issuing a ruling stating “setting rates for wholesale sales in interstate commerce by public utilities… [is] preempted by the FPA.” The ruling confirms that FERC has the sole authorization to set and regulate the wholesale sale of electricity and deals a blow to pending FiT legislation in other states across the U.S. While states are allowed to enforce fixed rates upon utilities purchasing electricity from renewable sources, these rates cannot exceed avoided costs. Avoided costs are typically lower than proposed FiT rates, which effectively defeats the intent of a FiT which is to promote renewable energy development through guaranteed premium rates.

A likely result of the ruling is that states interested in establishing and achieving targets for renewable energy electricity generation will continue to turn to REC trading schemes. REC trading schemes have proven to be effective at both providing substantial incentives for renewable energy as well placing safeguards against unreasonably high compliance costs for utilities. For more information on REC schemes versus Feed-in Tariffs, please read Sol System’s recent posting on the issue.