The Producer Tariff: Its Goals, Dynamics And Dilemmas

Last October 2024, the ACM announced the preparation of a feed-in tariff for the electricity grid (also known as the producer tariff). A feed-in tariff would result in a fairer distribution of costs. That sounds like a noble goal, but a feed-in tariff will also have the potential for major negative financial consequences for already existing renewable energy projects. While the ACM is aware of this issue, there does not appear to be a simple solution to this that fully compensates producers.

This first blog of a series of three discusses the goals, dynamics and dilemmas of a feed-in tariff based on CE Delft's research report. It concludes that the effectiveness of a feed-in tariff is not a given and implementation will be complex.

A fairer distribution of rising grid costs?

Currently, feeders of electricity into the grid pay no transport tariff for feed-in; grid costs are borne entirely by electricity consumers of electricity. These grid costs will rise significantly in the coming years, primarily due to the high construction costs of the offshore grid and onshore grid expansions. In order to distribute these costs more fairly among all grid users in the future, the ACM announced on 2 October 2024 that it had started preparing a feed-in tariff for large producers of electricity. However, whether a feed-in tariff will lead to a fairer distribution of grid costs is debatable. Indeed, producers will factor higher costs – to the extent possible – into their bidding strategy and the business cases of new projects. Consumers' savings on their transport costs could then lead to an increase in electricity prices. According to the calculations of CE Delft (whom the ACM asked to study different variants of a feed-in tariff), a feed-in tariff would lead to higher total energy costs (consisting of both transport and power supply costs) in all the scenarios considered, resulting in the consumers being worse off with a feed-in tariff. The ACM also published this research on 2 October 2024.

Given these impacts of a feed-in tariff on total energy bill, a fairer distribution of grid costs does not seem to be the primary motive. More important seems to be the underlying desire to build in a tariff incentive to use the electricity grid more efficiently. Currently, a developer has no tariff incentive to develop a wind or solar farm in close proximity to consumers or to feed less electricity into the grid when there is a surplus and/or threat of congestion. To investigate these broader effects of different tariff structures, the ACM asked CE Delft to study 6 variants of a feed-in tariff. The ACM also published this research report on 2 October 2024.

Six variants of a feed-in tariff

The six variants of a feed-in tariff studied by CE Delft differ in terms of rate carrier (kWmax(weighted), kW contracted, kWh, and a one-off connection tariff related to deep grid connection costs), location (in particular whether a grid area is offtake or feed-in-dominated) and time (in line with the rush hour premium as already applicable to customers on the transmission grids). Specifically, CE Delft examined:

1. a uniform capacity tariff, with kWmax and kWcontracted as rate carriers;
2. a location-dependent capacity tariff with kWmax and kWcontracted as rate carriers;
3. a time-dependent capacity tariff with kWmax-weighted and kW-contracted as rate carriers;
4. a location and time-dependent capacity tariff with kWmax-weighted and kW-contracted as rate carriers;
5. a time and location-dependent volume tariff with kWh as rate carriers; and
6. an (increased) one-off connection fee due to necessary deep grid investments.

Although the variables used allow for many more differentiations, the 6 scenarios investigated by CE Delft give a good picture of the effects of the choices to be made. The main difference between the rate carriers is that capacity-based tariffs (kWmax, kWmax-weighted, kWcontracted) in principle do not lead to increased marginal costs of electricity production. They can therefore not simply be passed on to customers. A volume (kWh) tariff will, however, lead to marginal costs and in principle can be directly included in the bidding strategy. A location-dependent tariff could provide an incentive to realise projects on offtake-dominated grid areas. However, at offtake-dominated grid areas, physical space is usually scarce and land is expensive, which raises the question whether a location-dependent feed-in tariff could be the deciding factor in a development decision.

A time-dependent (variable) tariff should lead to curtailment during peak hours, thus possibly resulting in lower peaks. According to CE Delft's results however, a time-dependent tariff will not lead to any to curtailment (except for battery projects), and thus will not yet have the desired effect in the investigated variant. The last variant studied by CE Delft involved a one-time connection fee, payable upon realisation of the connection (in addition to the regular construction costs for the realisation of the connection). This connection fee would be based on the deep grid investments that the grid operator needs to make to provide transport capacity.

This variant is preferred by developers because such a connection fee does not affect existing projects, and the costs are easy to include in the business cases of new projects. On the other hand, such a connection fee does not provide an incentive to change behaviour for existing projects, so existing projects will not contribute to congestion relief either. A second disadvantage would be that the plug would be pulled of a large proportion of all pipeline solar projects, estimated to be up to 40%, due to such an (additional) connection fee.

The assessment criteria

In the report, CE Delft examined the six different feed-in tariff structures and assessed them on ten criteria. These criteria are:

1. objectivity;
2. transparency;
3. non-discrimination;
4. cost reflectivity;
5. grid impact;
6. effect on total energy bill;
7. competitiveness of Dutch power producers compared to neighbouring countries;
8. security of supply;
9. workload of grid operators; and
10. coherence with other rules (such as alternative transmission rights and subsidies).

CE Delft made the final assessment based on its quantitative calculations of the financial impact of the various feed-in tariffs on the one hand, and qualitative interviews with producers and developers on their behavioural changes on the other. The final assessment was made relative to the current reference situation, in which no feed-in tariff exist.

Remarkably, none of the feed-in tariff structures examined really came out well. All feed-in tariff variants would lead to:

1. a higher total energy bill,
2. a worsening of the international competitiveness, and
3. – except for the one-time connection fee – limited to no more efficient use of the existing grid.

For the ACM, unfortunately, not the strong start of the justification for a feed-in tariff. Of course, that is not to say that a feed-in tariff could still score better on specific criteria. Indeed, CE Delft has calculated with specific assumptions that are not necessarily legally prescribed, or may prove to be incorrect. For example, CE Delft has calculated with an allocation of only 9.5% of total grid and transport costs to feed-in (more on this below), the cascading (allocation) of costs across voltage levels can be performed differently with respect to power feed-in, tariff differences in terms of location and time may be increased to reinforce economic incentives, market conditions may change (including interest costs, CAPEX, increase in demand for and price of electricity), and the State may remove regulatory barriers and broaden subsidy instruments (allowing the supply of renewable energy to increase).

European maximum tariffs

What further complicates the introduction of a feed-in tariff is the existence of the maximum limit of EUR 0.50 per transported MWh as set at the European level, which importers on average are allowed to pay at most for feed-in to the transmission grid. This limit does not include the costs of supporting system services, such as balance maintenance and grid loss compensation costs. If those costs are included, the average maximum feed-in tariff would be EUR 2.50 per MWh. If an average tariff of EUR 2.50 per MWh is taken into account, only 9.5% of the annual total grid costs in 2030 would be charged to producers that feed power into the Dutch grid. Not only would this negate much of the grid cost burden reduction for consumers as desired by the ACM, but the feed-in tariff (in whatever form) is so low that in many cases it will not lead to an economically driven behavioural grid usage change. Nevertheless, there are possibilities to partially circumvent this European limit. For example, the limit does not apply to feed-in to distribution grids, the 110 kV and 150 kV grids can – theoretically – also be designated as distribution grids in this context (as in Germany), more system supporting services costs can be allocated to feed-in, and negative tariffs can also be charged for congestion-relieving feed-in (keeping average tariffs lower).

Diversity of importers

Another relevant distinction can be made in the impact of a feed-in tariff on different types of importers. Indeed, the same feed-in tariff may still have a differentiated impact on different types of projects. CE Delft distinguished:

1. offshore wind;
2. onshore wind;
3. onshore solar;
4. onshore solar combined with behind-the-meter consumption;
5. large power plants; and
6. batteries.

For example, offshore wind (apart from Borssele I and II and possible future offshore wind farms) and fossil power plants receive no SDE(+(+)) subsidy, and offshore wind has no freedom over a connection location in the grid. Wind and solar are also at the mercy of the weather in terms of their feed-in, so they would only curtail if their marginal feed-in tariffs are higher than the electricity price (to the extent that they are not contractually obligated to supply everything). It is interesting that with respect to solar combined with consumption behind the meter, the calculations show that with sufficiently high feed-in tariffs (with kWmax and kWcontracted as rate carriers) there does exist an economic incentive for behavioural change. This is because solar in combination with consumption behind the meter needs to curtail far smaller volumes to still save on transportation costs. In principle, batteries seem least affected by a feed-in tariff, since they already pay high off-take tariffs and factored this into their business cases. Nevertheless, battery operators will also have to carefully consider the impact of a feed-in tariff. If a battery is currently saving on transportation costs through alternative transportation rights (e.g. non-firm capacity) and/or sharing a connection with production installations, the introduction of a feed-in tariff may still impact a battery's business case.

Timeline of implementation

All in all, there are many variables in terms of tariff structures, criteria and types of importers. For the ACM, there is plenty of information to process, options to explore further, and (Gordian) knots to cut. In its recent publication "Focus on Energy", the ACM reiterated its intention to publish a draft decision for public consultation in 2025. It also follows from the same publication that the ACM plans to issue a separate decision for offshore grid tariffs, with which the ACM appears to have decided to differentiate between feed-in tariffs for offshore wind and onshore producers. In light of the complexity and necessary follow-up investigations, this timeline seems optimistic. Assuming that the ACM does fulfill its commitment, a final decision would likely not come until 2026 and a feed-in tariff could become a reality starting in 2027.

This blog was the first of series of three. Next week's second blog will discuss the impact of a feed-in tariff on existing projects, the possibility of compensation for damages, and points of attention that producers and developers should already consider.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.