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The California Way: Auction Trumps Feed-In Tariff

There has been no shortage of debate on the best way to boost renewable electricity generation. Feed-in tariff or renewable portfolio standard (with competitive bidding)? Throwing money at project developers or consumers and businesses that use the energy?

California regulators are set to visit a new proposal to encourage mid-size projects next week. It’s called Renewable Auction Mechanism (RAM), and it will require developers to submit non-negotiable bids for a chance to build projects of up to 20 megawatts each. The three large investor-owned utilities in the state will hold auctions twice a year and select the lowest and plausible bids. The state proposes to cap the program at 1 gigawatt.

The California Public Utilities Commission has been tweaking this proposal for about a year and half, and it’s set to review the RAM plan next Thursday. CPUC drafted the proposal to expand a feed-in tariff (FIT) program it approved in 2007. The FIT is one of several state incentive programs designed to help the three utilities meet a mandate to have 20 percent of their electricity from renewable sources by the end of the year. The next goal is 33 percent by 2020.

Under the FIT program, projects wouldn’t be larger than 1.5 megawatts, and many types of renewable sources are eligible, including solar, wind and geothermal. It was opened to retail customers of the three utilities, but the tariffs have been far from attractive. Regulators have set the prices based primarily on the cost of producing electricity from combined-cycle natural gas power plants, not on the cost of building and operating the more expensive renewable energy projects.

Feed-in tariffs, by the way, are supposed to be fixed prices that utilities must pay in a long-term contract. The tariffs are higher than the prices paid for electricity from conventional source such as coal and natural gas. Such policy has made Germany and the rest of Europe the largest solar market in the world. Spain’s program fizzled because policy makers failed to put in mechanisms to rein in an explosive growth that came at the expense of ratepayers.

The Canadian province of Ontario, inspired by the success of Germany and Spain, launched a FIT program in October 2009. Ontario, too, saw a huge interest and had to adjust the pricing so that its ratepayers wouldn’t see a huge hike on their bills.

California’s proposal isn’t the same as the European variety, and some critics have bristled at the idea of even calling California’s version a feed-in tariff. Purists say feed-in tariffs are the opposite of competitive bidding or auction. The state’s proposal doesn’t allow price negotiations – developers have to submit non-negotiable bids.  But it does set what it calls a “simple preapproval threshold,” or SPT, to help determine what should be the maximum pricing for each contract (when the electricity is delivered to the grid throughout the day will affect the pricing). The idea is to set a limit so that consumers don’t end up overpaying for renewable energy.

“We adopt an SPT recognizing that a 1,000 MW capacity cap provides important protection, but does not itself protect against excessive cost for any one individual contract. The adopted mechanism provides the right balance of streamlined administration, preapproved cost recovery for the (utilities), reasonable resource portfolio administration, and focused Commission consideration of the prudence of entering into certain contracts,” according to the CPUC filing.

The SPT in the proposal would be 150 percent of the market price referent, which is the price of a long-term contract with a combined-cycled natural gas power plant. The RAM would be open to project developers, not just retail customers of the three utilities. 

“I really like the program. It’s a unique way to do something that a FIT program does but without running into some of the pitfalls that FIT has hit,” said Shayle Kann, managing director of solar research at GTM Research. ”The main worry I have is the possibility of underbidding in order to win that contract.”

The CPUC proposal includes measures to protect utilities and consumers from unscrupulous or inexperienced developers who fail to deliver their projects. One measure will require developers to put down a security deposit of a set price per kilowatt. A second measure requires a deposit for guaranteeing the power output of each project. For a project that is less than 5 megawatts, the performance deposit would be $20 per kilowatt. Larger projects would require 5 percent of their expected revenues.

The CPUC staff included this interesting comment from Southern California Edison, which explained why performance deposit is a good thing:

"SCE's experience, however, is that developers continuously reevaluate the financial performance of their project as their operating and maintenance costs, the energy prices available elsewhere in the market, and their tax incentives change over the life of the contract. Determinations are made whether continued performance under a contract is warranted versus other alternatives that may be available to maximize the developer's return on investment. Developers have in the past and continue today to seek ways to terminate their obligations under existing contracts because they believe a better deal may exist. Performance assurance [deposit] is designed to mitigate the consequences of SCE having to replace the failed project with a similar project."

Photo courtesy of Duncan Rawlinson via Flickr

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