A new, innovative feed-in tariff for small-scale solar development is coming to California. Rather than setting a fixed price in an environment in which technology costs appear to be dropping, the California Public Utilities Commission (CPUC) has proposed a market-based approach, allowing developers to bid the lowest prices at which they would be willing to develop projects. This approach focuses on adding capacity to meet California’s aggressive renewable portfolio standard (RPS), and appears to avoid the pitfall of setting a price that is too high or too low. Time will tell if the approach is effective, but the outline of the program released by the CPUC looks promising.
Feed-in tariffs have been employed around the world for a number of years as a policy mechanism designed to encourage the adoption of renewable energy sources. Because non-renewable energy sources (e.g., fossil fuel combustion) cost significantly less to develop in a pure unregulated market environment, renewables require subsidies to make them competitive. Of course, the reason for the disparity is that we already subsidize non-renewable energy development by not assessing the full cost of the resource extraction activities, but that’s a topic for another article.
One approach to the cost disparity problem would be for governments to start taxing non-renewable energy generation, assessing the full cost to society and the environment for those activities. A more politically realistic solution is to provide an incentive to those developing renewable energy resources. The feed-in tariff is an innovative incentive program that is designed to provide a level playing field for renewable energy project development.
A feed-in tariff typically includes three key provisions: 1) guaranteed grid access, 2) long-term contracts for the electricity produced, and 3) purchase prices that are based on the cost of renewable energy generation. Under feed-in tariff regulation, utilities are required to buy renewable electricity from all eligible participants, effectively leveling the market for electricity generation.
Feed-in tariffs have been successfully employed in many countries over the last few years, most notably in Germany and Spain. The goal is described as “grid parity”: the point at which renewable electricity is equal to or cheaper than (non-renewable) grid power.
The California Approach
California regulators, guided by the CPUC, have flirted with a feed-in tariff for a number of years. Standard Offer Contracts for renewable power development were first introduced in California in the early 1980s in response to the state’s investor-owned utilities (IOUs) perceived discrimination against small power producers. The CPUC ordered the utilities to offer standardized contracts and to offer one such contract, Standard Offer No.4 (SO4) with fixed prices. By the mid-1980s, private power producers had installed a significant amount of wind capacity in California, much of which is still in service today. Solar technologies had not matured to a level sufficient to take advantage of SO4.
California’s renewable portfolio standard (RPS) implemented in 2002 significantly raised the stakes for solar development. The California RPS program requires electric corporations to increase procurement from eligible renewable energy resources by at least 1% of their retail sales annually, until they reach 20% by 2010. On September 15, 2009, Governor Schwarzenegger signed an Executive Order directing the California Air Resources Board (CARB) to adopt regulations increasing California’s Renewable Portfolio Standard (RPS) to 33 percent by 2020. As currently designed, RPS projects tend to be large and located in remote areas with abundant available land, but little transmission access or capacity. These larger projects take several years, at a minimum, to develop, due to the generation and transmission permitting processes, as well as the construction time required.
In early 2008, and as a means to promote smaller scale renewable projects, CPUC adopted a feed-in tariff that directs IOUs to offer a standard contract at the so-called market price referent (MPR) to all renewable technologies up to 1.5 megawatts (MW). However, this program has been generally ineffective because the price is not high enough to attract solar development: the MPR is based on the cost of generating electricity with a combined cycle gas turbine facility.
Renewable Auction Mechanism (RAM)
In August 2009, the CPUC issued a new proposal designed to significantly increase the amount of solar energy installed in the state from smaller producers. It has moved away from using MPR to set the price and instead proposes to implement an innovative bid mechanism. The program would first expand the current feed-in tariff to 10 MW (to cover projects in the 1 – 10 MW size). Rather than setting the price at MPR, the CPUC proposes to allow developers to bid out projects through market-based pricing in what is termed a renewable auction mechanism (RAM). Under this system, developers would bid the lowest prices at which they would be willing to develop renewable energy projects and IOUs would be required to accept eligible projects starting at the lowest bid. As stated in the CPUC proposal: “This mechanism would also allow the state to pay developers a price that is sufficient to bring projects online but that does not provide surplus profits at ratepayers’ expense.”
Solicitations would be staggered for each IOU throughout the year using standard long-term power purchase agreements whose terms would not be negotiable. The program would be capped in each year and IOUs would be required to accept contracts up to the maximum amount of the cap. The program as currently envisioned totals 1 GW over 4 years, although industry observers believe that once implemented it could be easily expanded.
An Administrative Law Judge is currently reviewing certain jurisdictional objections raised by Southern California Edison after the initial CPUC proposal. The issue is whether the state commission can set wholesale prices or whether such an action can only be mandated by the Federal Energy Regulatory Commission (FERC). The RAM approach adopted by the CPUC appears to moot any such jurisdictional challenge. A decision is expected shortly. Once the decision is rendered, the content and mechanism for roll-out of the program will come up for deliberation and vote at an upcoming meeting of the CPUC.
David Niebauer is a corporate and transaction attorney, located in San Francisco, and a founding partner of Energy Counsel Partners, LLP (www.energycounselpartners.com). David’s practice is focused on renewable energy project development and environmental technologies. www.niebauer.net.