Feed-In Tariff (FIT)

Key takeaways

• A feed-in tariff (FIT) guarantees long-term, cost-based payments to producers of renewable electricity, typically above market rates.
• FITs reduce investment risk by offering long-term contracts (commonly 15–25 years) and guaranteed grid access.
• Widely used internationally (notably Germany, Japan, China), FITs helped scale early solar and wind deployment, though some jurisdictions are shifting to more market-driven support mechanisms.

What is a feed-in tariff?

A feed-in tariff (FIT) is a policy tool designed to accelerate deployment of renewable energy by guaranteeing producers a fixed, cost-reflective price for electricity they deliver to the grid. By locking in long-term purchase agreements and assuring grid access, FITs make renewable projects—especially small or early-stage installations—more financially viable.

How FITs work

FIT programs typically include three core provisions:
* Guarantee of grid access — producers are assured they can connect and sell generation to the grid.
* Long-term contracts — contracts usually last 15 to 25 years, providing revenue certainty.
* Cost-based purchase prices — payments are set to reflect the cost of producing the energy (often above prevailing market rates) to encourage investment.

Because payments are predictable and tied to production, FITs lower financing costs and encourage a broad range of participants such as homeowners, farmers, small businesses, and private investors—not only large utilities.

History and global use

FITs originated as a policy response to energy supply concerns and the need to promote alternatives to fossil fuels. The United States introduced one of the earliest federal FIT measures in the late 1970s. Since then, many countries have adopted FIT-style programs; Germany, Japan, and China are notable examples that used FITs to rapidly expand solar and wind capacity. Estimates suggest a large share of global solar deployment—particularly in earlier growth phases—was supported by FITs.

Recent trends

After successfully jump-starting renewable markets, some countries have begun transitioning away from traditional FITs toward auction systems, contracts-for-difference, or other market-based mechanisms that aim to control costs and better match supply with demand. Nevertheless, FITs continue to play an important role where policy priorities include broad-based participation and rapid capacity growth.

FITs at the state level (U.S.)

Some U.S. states maintain FIT-style programs or targeted tariffs. States known to have active feed-in tariff programs include California, New York, and Indiana. Many other states use alternative incentives—tax credits, rebates, net metering, or renewable energy credits—to encourage small-scale renewable generation.

Interaction with tax credits

Federal and state tax incentives often complement FITs. For example, the federal Residential Clean Energy Credit provides a percentage-based tax credit for eligible residential clean energy installations (solar panels, solar water heaters, certain fuel cells and small wind turbines). Homeowners typically claim this credit when filing taxes (federal form references apply). Tax credit rates and eligibility rules vary over time, so check current government guidance when planning a project.

Pros and cons

Pros
* Rapid deployment of renewables by reducing investment risk
* Broad participation, including small and distributed producers
* Stable, predictable revenue streams that lower financing costs

Cons
* Potentially higher short-term costs to utilities or ratepayers because tariffs can exceed market prices
* Risk of over-subsidizing technologies as costs fall unless tariffs are periodically adjusted
* Administrative complexity in setting differentiated tariffs by technology and project size

Bottom line

Feed-in tariffs are a proven policy instrument for jump-starting renewable energy markets by providing guaranteed, long-term payments and assured grid access. They are particularly effective at encouraging small-scale and distributed generation. As renewable technologies mature, many jurisdictions refine or replace FITs with market-based approaches, but FITs remain a valuable tool where the goal is rapid, inclusive expansion of clean energy capacity.