Last week the California Public Utilities Commission (CPUC) voted unanimously to approve a new program designed to drive small to mid-sized renewable energy development. Called a "Renewable Auction Mechanism" (RAM), this next-generation feed-in tariff program will require investor-owned California utilities to purchase electricity from solar and other renewable energy systems up to 20 MW in size.
Solar advocates and industry representatives applauded the CPUC for its innovative approach to helping California meet its renewable goals and build a strong new energy economy.
The Commission vote 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. To ensure project viability and realistic pricing, the program requires development security and relatively short project development. Utilities must file implementation plans in the next 60 days, and the program is expected to be operational this spring.
The RAM procurement model addresses many of the challenges facing wholesale renewable energy policy in California and around the world:
Small to 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 drive 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. Instead of guaranteeing a price, this approach guarantees a market—providing necessary long-term certainty to developers.
Program Designed to Reduce Transaction Costs
Standardized contract terms and conditions level the playing field and reduce parasitic transaction costs associated with project development. Multiple annual solicitations provide more continual access to selling opportunities. And strong project viability criteria, including development security, reduce the problems associated with underbidding and speculative developers holding contracts but failing to deliver. The program builds upon best practices to create a fluid, functional competitive renewable energy market.
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