The California Public Utilities Commission (CPUC) on Wednesday proposed a new feed-in tariff requiring investor-owned California utilities to purchase electricity from midsized renewable energy systems–ranging from 1 megawatt (MW) to 20 MW in size.
The 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. The Commission can act
to finalize and adopt the program in as soon as thirty days.
Advocates at the Vote Solar Initiative and the Interstate Renewable Energy Counsel (IREC) applauded the CPUC proposal.
"California has robust policies for developing large, utility-scale solar power plants and for putting smaller systems on homes and businesses, but there is a clear gap in the middle. Yesterday’s CPUC proposal is designed to unlock that missing piece, providing an additional opportunity for solar market and job growth and for quickly bringing massive new amounts of clean energy to the state," said Adam Browning, Executive Director of Vote Solar. "Although there are a few mechanics of the program still in need of clarification, this proposal largely draws on proven best practices for mid-sized renewable procurement."
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.
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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 http://www.FITCoalition.com
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