Tuesday, June 26, 2012

The Evolution of FiTs in Germany

It's Evolution Baby!!!
In the Beginning - Gross FiT

The modern FiT*, at least as far as solar is concerned, was born in 2004 when Germany established a FiT rate of 57.4 cent/kWh for photoelectric systems. Among the rules of the program it was set forth that the FiT would be paid for gross production. This means each and every kWh produced would be paid the FiT - this is called a Gross FiT structure.

2004 FiT Stats and Market

Feed-in Tariff rate: 57.4 cent/kWh
Retail Electricity rate: 17.5 cent/kWh

In the Middle - Hybrid FiT 1.0

In 2009 Germany moved from a Gross FiT structure to a Hybrid FiT design. In the hybrid design, the production payments are broken into parts. The portion of production that is exported is paid the normal FiT rate but the portion of production that is self-consumed is paid a different self-consumption bonus (AKA: FiT kicker).

2009 FiT Stats and Market

Feed-in Tariff rate: 43.01 cent/kWh
Self-consumption rate: 25.1 cent/kWh
Retail electricity rate: 22.9 cent/kWh

Consumers didn't mind the change to a Hybrid FiT one iota. Rather than pay 22.9 cent/kWh to buy electricity from the utility Hans was getting paid 25.1 cents/kWh to self-consume his own production. Hans knew this meant he was effectively getting 22.9 + 25.1 = 48 cent/kWh for self-consumed electricity rather than the lower 43.01 cent/kWh for exported production. Five cents better... No brainer.

Still in the Middle - Hybrid FiT 2.0

In Q3 of 2010 the FiT architects, in an attempt to further encourage self-consumption, added a bonus tier to the self-consumption bonus. The bonus tier was formulated around the idea of rewarding people for self-consuming a high percentage (greater than 30%) of their production. This new wrinkle brought more light on the idea/concept/notion of self-consumption rates.

Example 1: Hans produces 10,000 kWh per year and he self-consumes 3,000 kWh of that production. Hans has a self-consumption rate of 3,000/10,000 = 30%

Example 2: Hans produces 10,000 kWh per year and he self-consumes 6,000 kWh of that production. This means he has a self-consumption rate of 6,000/10,000 = 60%

Q3 2010 FiT Stats and Market

Feed-in Tariff rate: 34.05 cent/kWh
Self-consumption rate Tier 1 (<30%): 17.67 cent/kWh
Self-consumption rate Tier 2 (>30%): 22.05 cent/kWh
Retail electricity rate: 23.9 cent/kWh

Example 1 part 2: Hans gets paid the Self-consumption rate of 17.67 cent/kWh for the 3,000 kWh of self-consumed electricity and the regular FiT rate of 34.05 cent/kWh for the other 7,000 kWh of annual production.

Example 2 part 2: Hans gets paid the self-consumption bonus rate of 17.67 cent/kWh for the first 3,000 kWh of self-consumption, 22.05 for the next 3,000 kWh of self-consumption and the regular FiT rate of 34.05 cent/kWh for the other 4,000 kWh of annual production.

In the Now - Net FiT

In April 2012 the FiT structure transistioned from a Hybrid to a Net FiT design. In a Net FiT design you get the FiT rate for exported production but there are no self-consumption bonuses of any sort.

April 2012 FiT Stats and Market

Feed-in Tariff rate: 19.5 cent/kWh
Retail electricity rate: 26.2 cent/kWh

The FiT architects were able to make a smooth switch over to Net FiTs because the FiT rate had fallen below the retail price of electricity. People currently considering installing solar don't care that they won't get paid for the self-consumed portion of production becasue they know they're saving 26.2 cent/kWh. Hans understands that 26.2 cent/kWh in savings is better 19.5 cents/kWh in earnings.

In the Future - Market FiT

The current degression rate of the FiT is 1% per month. This means every month the FiT rate is falling by 1%. In April 2012 the rate was 19.5 cent/kWh... in May 19.31, June 19.11 and so on. If this degression rate holds we'll see the FiT fall below 10 cent/kWh some time in 2016 or there abouts. I suspect the FiT architects are going to step in and accelerate the process. This intervention will likely be initiated in early 2013 after the newly released installation statistics reveal the uptake of photoelectrics has been significantly faster than planned. Conservatives will angrily call for cuts. The industry will sing a sad song. There will be a strange dance.

February 2013 FiT Stats and Market

Feed-in Tariff rate: Approximately 17 cent/kW
Retail electricity rate: Approximately 28 cent/kWh

Analysis will reveal that a FiT of around 10 cent/kWh will be sufficient to promote further adoption in the sub 10 kW system category. The FiT architects may choose to step the FiT down to this rate over several quarters or they may do it in one fell swoop. I'd fell swoop the FiT but there's really no hurry.** A year long comprehensive market study will be comissioned to determine the relative value of the excess photoelectric production. The results of this study will inform FiT revisions in the 2014 timeframe.


The general evolution of FiTs in Germany is instructive for other FiT markets - Japan, Belgium and Italy come to mind. A good plan is to start out with a generous Gross FiT. The second stage of a FiT program can be initiated once the FiT rate approaches the retail electricity rate. At that point you can use Hybrid FiTs to smooth the transistion between Gross and Net FiTs or you can jump straight to Net FiTs. Once reaching a Net FiT structure the goal is to continue driving costs down and improving self-consumption rates such that you can eventually transition to a market rate for excess feed.

Gross FiT --> Hybrid FiT --> Net FiT --> Market FiT

*Note: My use of the term "modern FiT" will cause consternation among some. If you want to get picky we had proto-FiTs popping up as early as 1989 but it wasn't until 2004 that I see an unmistakeably clear signal from the FiT architects that they meant business. This is what I mean by "modern FiT".

**Note in November: I still battle with the concept of pulling the bandaid off slowly vs. ripping it off. I'm currently of the position that if you have a healthy budget a steady gradual removal of the FiT is better than pulling the rug out. The problem with chopping the FiT in a large adjustment is that it introduces an information vacuum. People will find it hard to believe that half a FiT is still profitable. So you side with people/information over policy/money where you can.

I have recently been running into a lot of revisionist history (AKA: bullshit) putting forth the idea that the US created the FiT when they came up with avoided cost payments under PURPA. A fundamental element a Feed in Tariff is that it's specifically designed to deliver a specific profit to a specific generation technology based on that generation technology's specific costs of production. Avoided Cost payments are derived via reference to the market rather than a specific technology - this is totally different than a FiT.

1 comment:

  1. Bravo! A very clearly written, E-Z reading post. This is the best yet explanation of FITs and how, if prudently deployed, they can help spread Solar PV to "Joe Six Pack" in America.

    -- JamesChristopherDesmond.com