Financial Incentives
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The political purpose of PV financial incentives is to grow the photovoltaics industry even where the cost of PV is significantly above grid parity, to allow it to achieve the economies of scale necessary to reach grid parity. The policies are implemented to promote national energy independence, high-tech job creation and reduction of CO2 emissions. When smart meters are used to manage demand and peak usage coincides with hot summer days, PV power can compete more closely with fossil fuels and the need for subsidy through feed-in laws is reduced.

Four incentive mechanisms are used (often in combination):

Investment subsidies: the authorities refund part of the cost of installation of the system.
Feed-in Tariffs/net metering: the electricity utility buys PV electricity from the producer under a multiyear contract at a guaranteed rate.
Renewable Energy Certificates ("RECs")
Smart meters allow the retail price to more closely reflect the "spot" wholesale price at periods of peak demand. When demand is high the retail price is high and vice versa. With Smart Meters, when peak demand coincides with hot sunny days, PV installations can be much more competitive with the consumer price of electricity from retailers.
With investment subsidies, the financial burden falls upon the taxpayer, while with feed-in tariffs the extra cost is distributed across the utilities' customer bases. While the investment subsidy may be simpler to administer, the main argument in favour of feed-in tariffs is the encouragement of quality. Investment subsidies are paid out as a function of the nameplate capacity of the installed system and are independent of its actual power yield over time, so reward overstatement of power, and tolerate poor durability and maintenance.

With feed-in tariffs, the initial financial burden falls upon the consumer. Feed-in tariffs reward the number of kilowatt-hours produced over a long period of time, but because the rate is set by the authorities may result in perceived overpayment of the owner of the PV installation. The price paid per kWh under a feed-in tariff exceeds the price of grid electricity. "Net metering" refers to the case where the price paid by the utility is the same as the price charged, often achieved by having the electricity meter spin backwards as electricity produced by the PV installation in excess of the amount being used by the owner of the installation is fed back into the grid.

Where price setting by supply and demand is preferred, RECs can be used. In this mechanism, a renewable energy production or consumption target is set, and the consumer or producer is obliged to purchase renewable energy from whoever provides it the most competitively. The producer is paid via an REC. In principle this system delivers the cheapest renewable energy, since the lowest bidder will win. However uncertainties about the future value of energy produced are a brake on investment in capacity, and the higher risk increases the cost of capital borrowed.

The Japanese government through its Ministry of International Trade and Industry ran a successful programme of subsidies from 1994 to 2003. By the end of 2004, Japan led the world in installed PV capacity with over 1.1 GW.

In 2004, the German government introduced the first large-scale feed-in tariff system, under a law known as the 'EEG' (see below) which resulted in explosive growth of PV installations in Germany. At the outset the FIT was over 3x the retail price or 8x the industrial price. The principle behind the German system is a 20 year flat rate contract. The value of new contracts is programmed to decrease each year, in order to encourage the industry to pass on lower costs to the end users.

In 2006 California approved the 'California Solar Initiative', offering a choice of investment subsidies or FIT for small and medium systems and a FIT for large systems. The small-system FIT of $0.39 per kWh (far less than EU countries) expires in just 5 years, and the residential investment incentive is overwhelmed by a newly required time-of-use tariff, with a net cost increase to new systems. All California incentives are scheduled to decrease in the future depending as a function of the amount of PV capacity installed..

The price/kWh or kWp of the FIT or investment subsidies is only one of three factors that stimulate the installation of PV. The other two factors are insolation (the more sunshine, the less capital is needed for a given power output) and administrative ease of obtaining permits and contracts (Southern European countries are reputedly relatively complex)