Is the FIT essentially a put option?


A put option is conventionally defined as an option held by an owner of an asset or commodity. Under the option, the put buyer or holder has the right to sell the asset or commodity at a price called the “strike price”; and this right is set up for a certain period. Correlative to the right of the put option holder is the obligation of the put “writer” or seller to buy the asset or commodity from the put holder.

From the above definition, it can be deduced that the FIT under the RE Act is the strike price of a put held by the eligible RE producer. The put writer, or the party with the obligation to buy the electricity from the RE producer is the grid operator.

If the underlying price of electricity (i.e., the actual generation price as might be set in the wholesale market) were to fall, the put holder is protected because he can continue to sell his output at the strike or FIT price. The entity behind the put writer (in the Philippines, the put writer is the grid operator, but the entity ultimately responsible is the consumer through the FIT-Allowance) is however not protected because he is obliged to buy electricity at the FIT. However, since the “avoided” cost (the actual market price) has declined, this means that the subsidy to be collected from the consumer would have to increase.

If the underlying price of electricity were to rise above the FIT, the RE producer will no longer sell to the grid under the FIT scheme. This is because of the nature of the FIT as the strike price of a put. The RE producer will simply sell into the grid at the prevailing market price. At that point, the subsidy element of the FIT scheme will have been eliminated.

Note: There is at least a suggestion from a government official that the FIT is a fixed-price in the context of a long-term forward contract. In other words, a FIT-eligible producer would have to accept the FIT price if in the future the wholesale market price were to rise above the FIT. This would mean that the FIT scheme also includes a call on the part of the grid operator, who will have the right but not the obligation to buy at the FIT price.    


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