On Tuesday, the California Public Utilities Commission (CPUC) issued a proposed decision (pdf) to launch a new 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 under 20 MW in size.
California has the world’s largest program for encouraging residents to use solar to power their homes and businesses. The California Solar Initiative is designed to develop a local solar industry capable of delivering solar power more cheaply than retail rates. At grid parity–and we are not far off at all–the market can continue without incentives. At the same time, the state’s RPS (in the process of being raised to 33%) is driving large-scale project development. There is a clear gap in the middle. Yesterday’s CPUC proposal is designed to unlock that missing piece, driving development for mid-sized projects that can come online relatively quickly, using the existing distribution network, and at politically palatable price-points.
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 megawatt 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, and make sure contract queues are not filled with speculative, non-performing projects.
This model addresses has some significant advantages:
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. Using data from recent solar purchases by Arizona Public Service, Sacramento Public Utilities District, and Southern California Edison we can infer that solar projects in this size range can deliver power for under 14 cents/kWh. Prices like these are what it takes to convince even the most penny-pinching of policy-makers to see how solar can scale to serve a significant part of our future energy needs…and support the enabling policies to make that happen.
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. It’s an elegant solution to the problem.
The proposed decision is different from the staff proposal, and we are still evaluating details. Nonetheless, while we reserve the right to propose changes, the effort is directionally helpful and provides a nice model for tapping into the wholesale distributed generation market. The Commission could vote on this as soon as thirty days.