Solar feed-in tariffs (FIT) have served as one of the primary policy tools for increasing the deployment of solar energy in several countries. Yet a recent ruling by the Federal Energy Regulatory Commission (FERC) makes the future of solar FITs in the U.S. uncertain.

A feed in tariff is basically a subscription program where the owner of a solar system can sell their electricity at a fixed rate to utilities. The utilities are required to purchase the solar electricity at this determined rate, which is higher than the normal wholesale electricity price. Feed-in tariffs, highlighted in places such as Canada and Germany, have the potential to be great for solar deployment because they guarantee a certain cash flow, thus minimizing the risk for those financing solar.

However, there also drawbacks to FITs. In the U.S., the success or failure of such a policy would depend on the ability of the state legislature to determine the correct fixed rate for solar electricity that incentivizes solar without oversubsidizing it. This fixed rate contract for purchasing electricity is more dependent on government funding and consistent political will than market forces.

Regardless of whether you agree more strongly with the advantages or the disadvantages of a solar FIT, it is important to note the FERC ruling on FITs this past year and its likely consequences. On July 15th of last year, the interstate electricity regulators at FERC affirmed the fact that they had exclusive authority over wholesale electricity sales.

The ruling was necessary because the California Legislature in 2007 established a feed-in tariff program for small combined heat and power systems in the state. Some utilities protested this program under the language of the Federal Power Act. FERC’s ruling was originally confusing, although seemed to support the belief that state legislatures are severely limited in their ability to mandate premium, fixed-price requirements.

This ruling was controversial and eventually led to a clarification by FERC in October 2010 that states do have the authority for certain feed-in tariffs when they set their rates through the Public Utilities Regulatory Act (PURPA). A spokesperson explained that since utilities may be mandated to buy power from different sources of electricity, a multi-tiered approach is admissible where states can calculate the utilities’ avoided cost for each separate electricity source.

Moving forward, it is unclear whether these FERC rulings will encourage or discourage more state FITs. Renewable policy experts have noted that the FIT structure allowed under these FERC rulings does not really resemble European FITs and has limited ability to dramatically increase renewable energy generation.

One of the options for FITs that FERC explicitly allows is for a state to establish a targeted range (for example for PV systems between 10 kW and 50 kW only), and let the market set the price. This is significant because it highlights FERC’s preference towards market solutions because they have the potential to be self-correcting and continually incentivize solar cost reductions.

A market solution for solar deployment that already exists is a solar “carve out “in a state’s RPS, which creates Solar Renewable Energy Credits or SRECs. Trading SRECs allows the market to dictate an appropriate price based on a state’s alternative compliance penalty and supply and demand factors.

Many U.S. states already have solar carve outs and healthy SREC markets. In fact, a FERC spokesperson indicated that Renewable Energy Credits (RECs) may be needed in addition a FIT to get to sufficient levels of renewable energy deployment. States previously considering FITs can look towards SRECs as a favored policy tool for enabling solar deployment and adopt legislation accordingly.