As of yesterday (2010-04-01), electrical micro generation receives a guaranteed sum for each kilowatt hour generated, the aim to promote the installation of such technology.
How does it work?
Imagine you're a homeowner (in this day and age?) or run a small business. You can install solar PV panels, a wind turbine, or even a small hydroelectric turbine if you happen to have a stream nearby.
You generate electricity. You get paid by your supply company for every kWh (kilowatt hour, aka a "unit") you generate and use at home (electricity which displaces the electricity you would have otherwise bought) and if you're really lucky you can export electricity back to them and get paid for that too, though that rate is much smaller.
This is guaranteed for a fixed term, and the rates are index linked for inflation. This should provide a return on investment of around 5-8%. So, if you have a spare £30k lying around to install the technology, it seems a fairly risk-free investment.
This is great news, on the whole. Micro generation is a step towards distributed generation (lots of small generators instead of or complementing a few centralised plants) and it's exploited a resource which otherwise wouldn't be used. As the technology is so expensive at the moment, investing without the support of a feed in tariff would be more risky, and it would certainly be almost impossible to pay back the capital expenditure of installing the technology in the first place. The feed in tariff removes the uncertainty of how much will be paid per unit, so the only variable is the energy resource (wind, sunshine etc).
In the UK, this scheme caps at installations of 5MW (more than you'd ever have at home - this amount would be a small onshore wind farm.) In other countries, for example Germany, the feed in tariff does not cap, and is available to all generators, including the owners of large wind farms. In the UK we have a different, more complicated method for large renewable generators known as the Renewables Obligation (which I'll describe in another post).
Where does the money come from?
If you have micro generation, you receive money for it from your supplier (the utility company). So, the money comes from the pockets of the utility. But, of course, it doesn't. The utility will pass on the costs to its customers through the bill. Since those with micro generation probably won't buy much electricity in the first place, the bills of those who don't have micro generation will pay for those who do.
You may have a problem with how fair this is. Remember that it costs a considerable amount to gain access to the investment (to install solar panels or a wind turbine), so the people who do so will probably be fairly well off already. Those who cannot gain access to it are those without the money to invest: the poorer. So, the poor are essentially paying a little extra to pay for the wealthy, who make money out of the process.
Thus, the cost of the tariff is socialised. Remember, though, that there are also social benefits. Micro generation reduces the burden on the central power system, and can even generate to the grid, so it's not as simple as taking from the poor to give to the rich (those truly vulnerable to price increases would be protected, and given that the few people who will install micro generation will be small compared to all the customers of the utility, the cost will be tiny when spread out.)
The feed in tariff applies only to electricity: this time next year will hopefully see the introduction of the "Renewable Heat Incentive", which promises the same function for micro generated heat.