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.
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
Craig Lewis
FIT Coalition
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
Craig and Jeffebros, thanks for your comments. A couple of notes in response-
First, relax. This is going to work just fine. I know it doesn’t meet your definition of a feed-in tariff, but we tried to make the distinction that this is something new, something different–any problems with terminology should be taken up with the judge. In our opinion, a feed-in tariff is a means to an end, not an end in-and-of itself, and this program delivers the goods and then some.
You make a great point that a successful program is made up of multiple elements, and is only as strong as the weakest link. Agreed that interconnection is a paramount make-or-break issue–but that’s the case regardless of whether contracts are fixed-price or competitive. The PD highlights the necessity for transparency–perhaps you missed it. In any event, there’s a lot of work to be done, but it’s a problem that will be solved in the regulatory venues.
However, the idea that the developer of a 20 MW facility needs a fixed price in order to participate in project development, or that the very act of competing is somehow ruinous is…not supported by reality.
The fact is–regardless of whether the pricing is fixed or competitive–in a capped program, not everyone gets a contract. In a capped program, policymakers need to answer two additional questions: 1) how to decide between winners and losers, and 2) how to make sure that the contracts that are selected are viable, and not speculators taking up limited space without the ability or intent to deliver. In terms of picking winners, there are three options: first-come-first-served, a lottery, or best value. This program chooses contract winners based on best value to ratepayer. And in order to make sure that the contracts are real, it requires skin in the game via development security, and relatively short project development timelines.
The idea is to make sure that developers only bring forward well-baked projects. The early days of the RPS encouraged experimentation and there were contracts signed by developers that proved unable to deliver. Craig, I think you are familiar with the phenomenon. But this program is quite different and learns from those lessons.
Yes, not everyone gets a contract. But that’s going to be the same whether it’s fixed-price or competitive.
If it’s fixed-price, you are chosing based on who gets their application in first, or a lottery. SMUD did first-come first-served, and one developer got 60 MW. And those that didnt get contracts havent filed for bankruptcy. The fact is, there’s always going to be an imbalance between supply and demand. That’s what makes prices go down.
Finally, one of the advantages of this program is that it is compliant with federal law. Frankly, this is a non-trivial benefit. Just ask the CHP folks who are waiting for their AB 1613 contracts. Craig, I visited your website, and I sure hope you have a better plan than AB 1106. Craig should know better, but for those that havent followed the issue, check:
http://www.greentechmedia.com/articles/read/ferc-defines-states-feed-in-tariff-authority/
Bottom line, the program is going to work just fine.
I am very excited about your programs. You quote that these systems ‘can deliver power for under 14 cents/kWh.’ This seems like an incredible price. Can you share your analysis of solar purchases by Arizona Public Service, Sacramento Public Utilities District, and Southern California Edison? This price seems so great I want to be able to share it with others, but need the hard data to really understand it (because it is something like half the cost per/kwh I have seen from other estimates of the CPUC and OECD). Does this include subsidies?
Some LCOE estimates include:
Comparative Costs of California Central Station Electricity Generation Technologies (2010) pages 18 & 20
http://www.energy.ca.gov/publications/displayOneReport.php?pubNum=CEC-200-2009-017-SF
2010 US Energy Information Administration Estimated Levelized Cost of New Generation Resources 2016 (includes transmission) http://www.eia.doe.gov/oiaf/aeo/electricity_generation.html
2009 Lazard Levelized Cost of Energy Analysis — Version 3.0 (especially slide 7 which highlights costs without tax incentives) http://efile.mpsc.state.mi.us/efile/docs/15996/0145.pdf
Thanks — it would be great to have real numbers from the field so I appreciate any help on this.
Thanks,
SCEIP in Sonoma & PACE in California come down to community control v. ignorance & fear. We own the grid; our tax dollars built it. The regulators in Washington simply want to protect their turf, like a dog looking at a fire hydrant with no bladder control. It’s time to change that — woof woof!
Go ouitside, get on your roof, look at the sun & forgive the idiots, then call a solar roofer NOW! The fastest way “out from under” for every homeowner in California is to turn your roof into a revenue stream NOW!
With Sonoma SCEIP over-subscribed, PACE will roll across the state then across the nation in the sanest thing that’s happened since the Boston Tea Party. Not to do so is to give in to fear, intimidation & generic shareholder-owned grid manipulation.
Wake up, good citizens, you are smarter than that! Sonoma SCEIP is a ray of sunshine at a dark & ignorant tea party. Mother Nature smiles upon those who act yesterday. Bottom line, your children will breath easier & you’ll be more than $100,000 ahead of the “grid game” over then next 25 years. Ka-ching! Kapish?