It is a policy mechanism to guarantee a fixed price for renewable energy generated by individuals, businesses, or communities and fed back into the grid.
The idea is to provide a financial incentive for the development of renewable energy projects by guaranteeing a stable and predictable return on investment. The fixed price is set at a level that is higher than the market price for electricity, making it attractive more for investors for developing and operating renewable energy projects.
The concept is used for encouraging the development of a variety of renewable energy technologies such as solar, wind, hydro, geothermal, and biogas. It can be implemented at the national, regional, or local level and is set typically for a certain period of time such as 20 or 25 years.
They are considered one of the most effective policy instruments in promoting the deployment of renewable energy, In many countries like Italy, Germany, Spain, etc, they implemented and got a scientific increase in the renewable energy projects and companies operating in the country.