The PACT project aims to provide the necessary elements for rapidly introducing policy to combat climate change - giving parliamentarians, civil servants, and advocates around the world access to the legal and technical expertise needed to envisage, to argue for and to enact laws and policies that effectively protect the climate. Find out more...

Financing the FIT law

There are immediate costs in introducing a FIT law, and it is important to consider ways of helping to finance these, such as through a cost sharing mechanism for all electricity consumers or a fund.

But it is also important at the same time to remember the overall financial benefits of a FIT law. For example, in 2006 the financial benefits of Germany's FIT law were estimated to be €9.3 billion (taking into account avoided fuel imports, avoided negative external effects and the "merit-order effect") compared with an increased cost to consumers of €3.3 billion. 

Cost sharing mechanism

Most FIT countries have implemented a cost sharing mechanism by equally distributing the additional cost onto the electricity bills of all end-users. Usually the local grid operator is obliged to purchase and transmit the generated "green" electricity and pay the producer the fixed tariff. The grid operator will then pass the related costs on to the next entity along the line until it "reaches" the final electricity consumer, as shown in the diagram.

The major political advantage of this financing method is that it is separate from the national budget. Moreover, conflicts with state-aid provisions in regional electricity market such as the EU can be avoided.

Fund option

An alternative to a cost sharing mechanism is to set up a fund. This is particularly important where additional costs to the end consumer are deemed politically or morally unacceptable.

The legislator should make sure that sufficient money is available and that the fund's income sources are reliable and sustainable. The fund's income can come, for example, from taxing conventional energies, a share that all electricity consumers have to pay as a proportion of their electricity bill (e.g. 2%), or other sources that might be specific for your region or country.

For example: the Green Energy Fund enacted in Maharashtra, India, in 2004; and the Energy Fund announced in Sri Lanka in 2007.

Maharashtra

Resolution No. Pawan 2004/P. No. 1274/Urja - 7, point 3 provides that: 

3. Green Energy Fund:
For the development of non-conventional energy projects, a Green Energy Fund in the State will be raised through imposing cess on commercial and industrial consumers. The money raised through this Fund will be utilized for infrastructure facilities required for the development of non-conventional energy sources. A separate directive will be issued for the management of Green Energy Fund.

Sri Lanka

National Energy Policies and Strategies of Sri Lanka 2006 provides that:

The NCRE strategy shall not cause any additional burden on the end use customer tariffs. If justified, the Government may subsidize the energy utilities for this purpose.
The Government recognises that certain NCRE technologies would require incentives to ensure their capacity build-up to contribute to the national NCRE target. These incentives shall be provided on a competitive basis, in which the NCRE developers shall bid for a share of the NCRE target, subject to a price ceiling. NCRE incentives shall be technology-specific and based on actual energy supplied to the grid.
To make available the incentives for NCRE technologies, the Government will create an 'Energy Fund', which will be managed by the ECF. This fund will be strengthened through an energy cess, grants received from donors and well wishers, as well as any funds received under CDM. This fund will be used to provide incentives for the promotion of NCRE technologies and strengthen the transmission network to absorb the NCRE technologies into the grid.
NCRE developments will not be charged any resource cost (royalty) for a period of 15 years from the commercial operation date. Resource costs charged from selected NCRE technologies after the 15th year of commercial operation shall be used to finance incentives for further NCRE development, through the Energy Fund.