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Next-Generation Feed-in Tariff for California?

By Rosalind Jackson, Vote Solar
August 26, 2010 | 6 Comments

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California -- On Tuesday the California Public Utilities Commission (CPUC) issued a proposed decision to launch a new renewable incentive program designed to drive mid-sized renewable energy development. This next-generation feed-in tariff program will require investor-owned California utilities to purchase electricity from renewable energy systems between 1 and 20 MW in size.

The CPUC proposal establishes a 1-gigawatt (GW) pilot program for power from eligible mid-sized renewable energy systems. The program requires California’s three largest investor-owned utilities to hold biannual competitive auctions into which renewable developers can bid.

Utilities must award contracts starting with the lowest cost viable project and moving up in price until the MW requirement is reached for that round. The program will use standard terms and conditions to lower transactional costs and provide the contractual transparency needed for effective financing. Development security and relatively short project development timelines ensure project viability. The Commission can act to finalize and adopt the program in as soon as thirty days.

This Renewable Auction Mechanism (RAM) feed-in tariff model addresses many of the challenges facing wholesale renewable energy policy in California and around the world:

Mid-Sized Project Size Expedites Solar Development

CPUC analysis identifies transmission as the single most significant barrier to development of large-scale renewable projects that have been the focus of much utility solar activity to date. While the state works out its transmission solutions, this proposed program stimulates immediate activity by establishing a market for smaller (up to 20 MW) renewable projects that can be incorporated into existing utility distribution infrastructure. These smaller projects will also likely be easier to finance, another critical hurdle in the current economic climate.

Market-Based Pricing Delivers Long-Term Value in a Dynamic Market

Some governments have used fixed-price feed-in tariffs to incentivize renewable energy development. One point of difficulty has been getting the fixed pricing right. If the price is set too low, it does not stimulate the desired level of market activity. If the price is set too high, ratepayers pay unnecessary costs, suppliers throughout the value chain are not encouraged to reduce prices, and the program can lose political support. In contrast, the CPUC program uses competition to establish a price that is both sufficient for project development and protective of ratepayers. By continuing to deliver maximum ratepayer value by driving down installed solar costs and capturing changes in market conditions, the bidding mechanism is also more likely to provide a long-term market for the growing solar industry.

Market-Based Pricing Overcomes Legal Hurdles

Last month, the Federal Energy Regulatory Commission (FERC) ruled that states do not have the authority to establish wholesale electricity rates that exceed utility “avoided costs.” The CPUC program overcomes this jurisdictional challenge by instead requiring utilities to purchase a certain type of energy (e.g. from renewable energy systems under 20 MW in size with particular power characteristics) and letting market mechanisms determine the price.

Below, Vote Solar's Adam Browning gets down to the nitty gritty, sharing the details of what's happening with state solar programs across the U.S.

Solar Energy

6 Reader Comments

Comment
1 of 6

craigermp

August 29, 2010

Although the RAM might sound like a Feed-In Tariff (FIT), it is far from being one, and it fails to resolve the critical failures that exist in California's Renewables Portfolio Standard (RPS). True FITs have three fundamental features:

1) Fixed price: A fixed price allows property owners, developers, and investors to do the math before bidding to determine if they can deploy a renewable energy project in an economically viable fashion; before spending at least $100,000 participating in a solicitation process (like an auction). Solicitation processes require site control in order to bid, and at a minimum, this is defined as an option to control the property for the duration of the project.

2) Standard MUST-TAKE Contract: A must-take feature is fundamental to solving California's RPS failure, which today has a project failure rate in the high 90s. In other words, more than 97% of the projects bid into California's RPS solicitation processes today are rejected by the utilities. The level of parasitic transaction costs represented by this failure rate is immense, and those dollars evaporate rather than being available for investing to get viable renewable energy projects online. Again, under the RAM, each failed project will have generally invested at least $100,000 just to submit a bid.

3) Guaranteed Interconnection: Since distribution-grid interconnected projects in the United States require that 100% of any network upgrades to the grid will be paid for by the developer, the utilities should be mandated to pre-identify where on their distribution grids new generation can be interconnected in an economical fashion. Otherwise, many projects that "win" in an auction/solicitation process will never be built due to network upgrade assessments that turn the economics upside-down for many of those "winning" projects.

The 2011 REESA FIT legislation will result in 2GWs of solar per year instead of only 200MW. To learn more, go to www.FITCoalition.com

Comment
2 of 6

sahm

August 29, 2010

A misleading article
While couching this proposal in terms of "competition" and "lowest pricing" appeals to certain superficial political buzzwords, it really misses the point - auctions in general are not the most efficient approach in terms of either price or rate of development, and this particular plan is a good example of the potential problems of the auction approach. It's also confusingly titled, as this CPUC proposal has nothing to do with Feed in Tariffs.
As we have just seen with the first round of SCE's sub 20MW solar PV auction, we have little idea what the price results will be as the winning bids are kept confidential. This discourages many potentially competitive upcoming players from taking on the substantial cost risk of entering the auction as they have no idea what their chances will be. This also encourages big players to game the system by lowballing early rounds in order to push out competition and position themselves to dominate the bidding later. SCE's auction saw one supplier take on half the bids through it's own subsidiaries.
Likewise, while starting with the lowest bid sounds good for pricing control, the auction continues to pay higher and higher rates as needed to meet the MW quota from that single round of offers. By contrast, a Feed in Tariff establishes a predetermined price at which power will be purchased, so that the buyer knows exactly what they will pay and nothing more, and the seller knows that they will definitely have a contract if they can deliver that price.
Using this approach instead of an auction, Germany is installing more than fifteen times the PV capacity seen in California, and is doing so at net costs per kWh below anything achieved here (actually 30% below the prices apparently achieved by SCE's auction)
Because auctions require hefty up front costs and risk just to participate while attempting to guarantee prices that are only marginally profitable if you happen to win, they actually discourage market activity.

Comment
3 of 6

Anonymous

August 30, 2010

My apologies Rosalind, but I am also confused by your article.

RAMs and FITs, by anyone's definition, are completely different mechanisms.

I am only aware of a few scenarios where auctions for renewable energy deployment have had merit. These are large, remote transmission-problem laden projects, such as off-shore wind or remote CSP, where it is in the government's/utilities best interest to partner with a significantly large, financially strong organization that can bankroll a project of high risk over several years.

However, we're talking wholesale distributed generation, right? Under 20 MW, where as you say, the aim is to encourage and promote competition and implementation of many small projects in the most expeditious fashion.

How does CPUC think a "bi-annual" auction is going to stimulate this activity?

If you were a residential homeowner or commercial entity looking to contribute to the wholesale grid via PV on their roof or a few wind turbines on your farm, are you really encouraged to spend thousands of dollars on a proposal chock full of consultant and legal costs at risk of never being considered?

It would really be great if you could respond to clarify your article, as potraying an auction as a feed-in tariff is unfortunately incorrect and misleading to the audience.

We all want more solar, and fast. Choosing the right mechanism is so important for this to happen in California. Let's not settle for anything less.

Comment
4 of 6

Jeffebros

August 30, 2010

California can achieve the 33% RPS mandate, and do it with extremely competitive renewable pricing if it makes the necessary commitment to renewables. If the price isn't known, if the contract is not a standard must take and if interconnection is not guaranteed California will end up with a half hearted effort that will surely disappoint on multiple levels. Larger, well financed companies will play the odds and some projects will get built, but there won't be a renewable revolution. Manufacturers and developers will not make the strategic, long term commitments to locate and invest here, and the policy makers will ultimately state that renewables were given their day and unfortunately not capable of solving the problem with any scale. It's simply bull. Make the necessary commitment, and the companies will come...and drive down costs through the dramatic increase in volume. We are getting close to avoided cost of energy in solar. We can get there. We don't need extraordinary FIT rates such as in Germany. We need modest rates and predictable outcomes.
I am in awe of the capabilities of the renewable industry in California. Let's turn it lose and rejoice in the outcome...jobs, technological development, clean renewable energy, self satisfaction that we did it cheaper and smarter than anywhere else on the planet, and we did it with scale. The RAM program will not scale and will only disappoint.
Jeff

Comment
5 of 6

awb

August 31, 2010

This plan is so wrong-headed it makes one wonder what the CPUC is really thinking.

Comment
6 of 6

marco-piana-116433

September 28, 2010

I really don't get why somebody call it feed-in tariff. It's a bid. And, being a bid, you don't even have a tariff.....

I think that (unfortunately) the State of California did a huge step back. Ok, we have standard contracts for renewables...... but we don't have a tariff..... we don't have a must-take policy..... we are just closing a few contracts at ridiculous low prices.

Rosalind, I hope that this is not a next-generation feed-in tariff, but just a big mistake that the State of California did. All the Countries that really belive in the renewables choose completely different programs (and they are benefit from completely different results).

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