Solar Energy Procurement Options for Utilities

Q: What kind of procurement options does a utility have for acquiring solar power projects?

Solar procurement options range from the traditional resource procurement options to more innovative and aggregated techniques. The list of options includes:

  • Traditional: Issue a Request for Proposal (RFP) and after selecting the best option among the respondents, negotiates a power purchase agreement (PPA). This can either be an all source solicitation or solar only;
  • Utility owned, built as a turnkey project by a third-party or the utility itself;
  • Non-traditional methods include:
    • Joint procurement with other utilities, either a PPA or utility owned;
    • Electronic auctions;
    • Standard offers;
    • Franchise bidding;
    • Combined purchasing;
    • Reverse auctions; and
    • Forward pricing with volume guarantees

Joint Procurement has been a successful strategy for the development of large-scale utility resources, both generation and transmission. The most successful of these efforts have been where there exists a legal framework (i.e., joint powers agreement, professional association or affiliate relationship among the purchasers) that can manage the process. New consortiums of utilities that have tried to aggregate are encountering problems from attrition of participation, changed expectations over time and the difficulties of properly allocating risks and rewards among participants.

Electronic auctions are referred to broadly as e-procurement, such as electronic and web-based systems that can serve to reduce costs for buyers and sellers by increasing transparency, efficiency, competition and access to all potential participants. Electronic procurement can serve to automate aspects of supply chain management, lower business to business transaction costs, and improve buyer and seller communication through a shared web-based infrastructure.  However, they have not been tested for large capacity acquisitions or long-term contractual commitments.

Standard offers have been most often associated with PURPA, which the U.S. Congress passed in 1979.  Lawmakers expressed a commitment to the development of smaller-scale technologies from renewable resources and those that could improve the generating efficiency of an aging utility fleet, particularly through cogeneration of both electricity and thermal energy.  Congress imposed an economic restraint on the development of these new generation resources by requiring that they should be able to produce electricity at an “avoided cost” calculated at or below the price a utility would otherwise pay to build its own resources or purchase power from another source. This economic restraint meant that the new class of non-utility generation needed to meet a stringent cost hurdle, particularly in regions and territories where the system average cost of generation was perceived as low.

A reverse auction flips the role of the buyer and seller, with the buyer driving the auction. Online auctions can provide price transparency and control that the paper-based RPF process may not always provide.  Quoting performed in the real-time via a web-based platform results in dynamic bidding, helping to achieve rapid downward price pressure that is not normally achieved using more conventional and static paper-based bidding and procurement.  So far the results from several markets have been mixed.

A forward commitment procurement model involves providing the market with advance information of future needs, early engagement with potential suppliers, and the incentive of a “forward commitment” to purchase a product or service that currently does not exist, at a specified future date, providing it can be delivered to agreed performance levels and costs.  The model is perceived as a way to manage risk in the marketplace by making the market aware of genuine needs and requirements and offering to buy products that meet these needs once they are available at a price commensurate with their benefits. This model is being tested by some public sector agencies, but seems better suited for obtaining components or services rather than large-scale utility grade generation resources.

These are discussed in more detail in SEPA’s study entitled “Utility Procurement Study: Solar Electricity in the Utility Market,” which can be downloaded here.

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