An Embarrassment of Riches

The nations that have led the way on renewable energy in the last decade have used robust “feed-in tariffs” to create entire new industries. The litany is familiar to those in the renewable energy business: Germany, Italy, Spain, Ontario (a province in Canada) and now China. These five regions have all seen growth go from low levels to record levels practically overnight right after they started requiring that utilities buy power at a set price from third party developers of wind, solar and other renewables.

A sixth jurisdiction is less well-known: California. But not the California we live in now. Rather, the California that created a robust feed-in tariff in the 1980s under the federal Public Utilities Regulatory Policy Act (PURPA). Under PURPA, California faced an “embarrassment of riches” in terms of renewable energy projects coming online, as the Public Utilities Commission (CPUC) described it at the time.

The large majority of wind and solar projects online today in California came online in the 1980s and 1990s under PURPA. Since PURPA was effectively gutted in the early 1990s, due to declining fossil fuel prices and tax policy changes, California has seen very little wholesale renewable energy come online. The current system, the Renewables Portfolio Standard (SB 1078 and SB 107), started in 2003 and has resulted in a tiny amount of new renewable energy development since then. All three of California’s big investor-owned utilities will fail to meet the current 20% by 2010 mandate for renewables and have, in fact, slid backwards in terms of their renewable energy percentages since the start of this policy (see figure 1, below).

Figure 1 (left). California investor-owned utility backsliding on renewables since the start of the RPS system. (Source: CPUC RPS Quarterly Reports).

The California Solar Initiative, which applies only to net-metered retail solar, is doing quite well and is probably on track to meet its goal of 3,000 megawatts (MW) of new solar by 2017. But this is only about 2% of the projected electricity demand by 2017 – a relative drop in the bucket when we consider that the state mandate for renewables has been expanded to 33% by 2020. With the state hovering around 12% (for investor-owned and publicly-owned utilities combined), it’s clear we need some very serious solutions to reach this mandate.

We need an “embarrassment of riches” – again. California has a very limited feed-in tariff on the books today. AB 1969, passed in 2007 and implemented in 2008, allows any renewable energy project up to 1.5 MW to be interconnected to the grid and the utility must buy the power at the “market price referent,” which is the proxy cost for electricity from a new natural gas power plant. Only a handful of new projects have come online under this new feed-in tariff, however, because the size cap – what amounts to a single large wind turbine for wind power projects – and the price offered, are too low to attract investors. In addition, the interconnection process is opaque, lengthy and can be quite costly due to very limited oversight by the CPUC or CAISO, the non-profit agency that oversees the transmission grid.

SB 32, passed in 2009, would double this size limit to 3 MW, and provides authority to the CPUC to improve the pricing formula by accounting for the environmental benefits of renewables, instead of purely the traditional power component of renewable energy. But the law also gives great discretion to the CPUC to implement this law – or not – which is a major flaw in the law. The CPUC has so far declined to implement the law, almost a year after it passed.

It’s time to get serious on renewables in California. We need a new, robust, European-style feed-in tariff. The CPUC has suggested an expanded quasi-feed-in tariff system, known as the Renewable Auction Mechanism. But this isn’t a true feed-in tariff because companies have to bid into the system and wait for the utilities to select the winning bidders. There is no price transparency, so other companies won’t even know what the winning price was after the fact. And it costs a lot of money to develop project sites to the point where serious bids can be made. It takes deep pockets that only a few companies have. In other words, all but the wealthiest developers are shut out of the market.

That’s no way to create a long-term market to benefit all Californians. Last, as we’ve already seen, it takes a long time to ramp up new systems like the auction policy – we’re still waiting for a proposed decision a year after the staff proposal was released.

AB 1106 (Fuentes), a bill that I co-authored, is pending in Sacramento. It failed to get out of committee last year, partly due to the competition from SB 32 and the perception that that much weaker bill could actually be passed into law. SB 32 did pass, but we now know that the CPUC has no intention of getting serious on feed-in tariffs. SB 32 still hasn’t been implemented and even if it is eventually implemented, the size cap is still way too small to make a big difference.

The size cap under PURPA was 80 MW. AB 1106 would allow projects up to 10 MW to qualify for the “must buy” feed-in tariff. This is a good start – far better than the 3-MW cap under SB 32.

With prices for wind, solar and other renewables now dropping significantly as production ramps up around the world, price is becoming less of an issue. The market price referent system, which includes a boost for peak power deliveries, can be quite good even for small wind power projects. The key market barriers for wind projects in the less than 20-MW range are generally not pricing anymore – rather market barriers relate now to difficulties with interconnection access and finding areas that have good wind that can be permitted without significant opposition.

For solar, pricing is still difficult under today’s market price referent formula, but costs continue to come down for solar so this may change in the next few years, which will leave access to the grid as the major problem for solar projects.

The key benefit of a true feed-in tariff is certainty: market players know that if they meet certain criteria they can develop a project and have a guaranteed buyer for the renewable energy delivered to the grid, in a streamlined process. And they know the price they’ll be paid, making financing easier.

With this kind of certainty financiers will accept lower profit margins, thus reducing prices charged to ratepayers. For example, under an auction system, financiers may require 12-15% return on equity, which is pricey. But with a true feed-in tariff, financiers are happy with less than 10% because they know they’ll actually make this money year in, year out, without a lot of money wasted on speculation or failed projects.

For this reason and others, a recent National Renewable Energy Laboratory concluded: “Experience from Europe is also beginning to demonstrate that properly designed FITs may be more cost-effective than” auction systems like California’s current system and the new system proposed by the CPUC for smaller projects.

It’s time for California to reclaim its lead in renewable energy. We don’t have time to tinker around with new policies every few years, hoping they will work, and then conceding failure. Let’s take the tried and true policy that is widely accepted as the best way to rapidly accelerate renewable energy deployment. We need a robust feed-in tariff in California. Now.

Tam Hunt, J.D., is President of Community Renewable Solutions LLC, a consulting company and developer of medium-scale wind, solar and biomass projects. He is also a Lecturer in climate change law and policy at the Bren School of Environmental Science & Management at UC Santa Barbara.