California Moves to Avoid Europe’s Perils in Encouraging Green Power

Trying to avoid the potential perils of European-style feed-in tariffs, California regulators are moving forward with a new financing technique to stimulate immediate development of small-scale renewable energy projects. 

This month the state became one of few governments worldwide—and the first in the United States—to finalize a bidding program for clean energy projects. The so-called renewable auction mechanism, or RAM, will bring 1,000 megawatts of green electricity online over two years—enough to power roughly 800,000 homes. Put simply, the idea is for developers to submit bids to utilities for 1.5- to 20-megawatt projects. The proposals must be able to be completed within 18 months at the lowest cost possible.

Auction models exist in India, France and South Africa, but RAM is the “trailblazer” in terms of its scope, said Adam Browning, executive director of the San Francisco-based advocacy group Vote Solar.

Four auctions—two a year—will be held in California starting this fall. At each sale, utility giants Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison will be required to divvy up and auction off a collective 250 megawatts.

Proponents say the pilot RAM program will cut costs and time spent on bringing solar and other renewables online. But not everyone is cheering. Two of the three utilities have derided RAM for being too restrictive due largely to its 18-month deadline—which they say ignores longer-term needs—and for forcing them to take part even after they’ve met the state’s aggressive clean energy targets.

“RAM isn’t going to do all things for everybody. But the one thing that it is really designed to do, it is going to do really well,” Browning said, referring to the price and time savings RAM aims to achieve. 

The California Public Utilities Commission unanimously approved the program last December after also considering use of feed-in tariffs, which helped make Germany one of the world’s largest markets for solar power but also set off boom-bust cycles in other countries, namely in Spain and the Czech Republic. There, overly generous tariff regimes led to a rush to connect solar to the grid and mounting subsidy bills, which couldn’t be paid.

Problem of Fixed Rates

Feed-in tariffs require utilities to buy clean electricity from power generators at above-market, government-set prices so alternative energies can compete with cheaper sources. Utilities pay artificially high rates for up to decades, putting part of the burden on electricity ratepayers. The attraction is in the policy’s long-term contracts that provide guarantees for investors.

But fixed rates can create problems, said Mike Hall, CEO of San Diego-based solar developer Borrego Solar. “The price is either set too low and solar doesn’t get developed, or the price is set too high and ratepayers overpay.”

In a December filing on its RAM proposal, the CPUC noted that setting high feed-in tariffs could undermine the stability of California’s solar development by making both ratepayers and utilities hostile toward the program.

Proponents of RAM say the auction model avoids this pitfall. Prices for renewable energy systems are essentially set by market forces and can respond quickly to changes, such as plummeting prices of solar panel parts. “RAM has the advantage of not forcing the regulators to set the perfect price,” Hall said.

The way RAM works is that utilities award the first contracts to the lowest-priced and most viable projects. They then continue giving contracts to the next-cheapest proposals until each utility meets its quota for the auction.

To prevent developers from offering poorly designed projects or unrealistically low prices, winners must meet a minimum criteria for feasibility, as well as pay up to $60 per kilowatt in advance.

Feed-In Tariffs or Auctions?

Feed-in tariffs have been the green policy du jour across Europe and North America for several years, though signs are emerging that their popularity may wane.

More than 50 countries and six U.S. states have enacted feed-in tariffs, including California. The Golden State passed a limited policy—considered by many to be ineffective—in 2008. Just last week Japanese lawmakers approved legislation that would create a national mechanism in 2012.

But at the same time Europe is scaling back. Spain, France, Italy and the United Kingdom have slashed their feed-in tariffs after generous rates fueled solar booms followed by major busts. Spain in particular has become a cautionary tale about the dangers of hastily conceived renewable energy incentives.

Late last year, the Czech Republic was forced to impose a tax on solar installations in an attempt to cool off its red-hot solar market that was fueled by a feed-in tariff. The move could destroy investor confidence in that country’s industry.

The policy has fared better in Germany, which has become one of the world’s top installers of solar panels. German authorities have gradually marked down tariffs to align with falling costs of solar parts, avoiding above- or below-market pricing, said Robert Freehling, a private consultant of renewable energy policy in Sacramento.

“[Germany] followed these costs in the market to cash in on the benefits of the dramatically decreased cost in solar energy,” he said. As a result, a rooftop solar project under 100 kilowatts costs about $4 per watt in Germany but nearly $8 per watt in the United States.

Freehling said he doesn’t oppose RAM in California, but he believes that the state’s current feed-in tariff would be more successful in spurring development of small- and mid-sized renewable energy systems, known as “locally distributed” generation. Both RAM and the feed-in tariff are part of a mix of state measures that aim to bring 20,000 megawatts of clean power — or 33 percent of the state’s electricity profile—online by 2020. More than half of that will come from locally distributed power.

But California’s feed-in tariff hasn’t had much success since it got its start, especially for smaller projects. Only a few dozen megawatts of clean energy systems under 1.5 megawatts have been installed under the policy. Current legislation to expand the feed-in tariff hasn’t been implemented as CPUC hearings on the policy drag on.

Still, Freehling said: “People who sign contracts with feed-in tariffs generally deliver because they know what the price is in advance. In a bidding situation, people are scrambling … to get the lowest bid, and sometimes they over-promise in their eagerness to win.”

He added that developers will “have to put in quite a bit of money up front to enter the bidding process, and if they lose, they lost all that time and money and effort.”

Utilities Appealing RAM Design

Like Freehling, some utilities say the current RAM design isn’t the answer to California’s renewable energy challenges. They charge that the policy would create even stricter regulatory oversight on how the three investor-owned utilities meet their green targets.

“The ideal situation would be to allow us to have some flexibility on how we achieve our RPS goals,” said Mike Marelli, Southern California Edison’s director of contracts for renewable and alternative power.

Both SCE and PG&E are seeking a re-hearing on CPUC’s decision to adopt RAM.

The utilities say RAM is in violation of the state’s renewable portfolio standard, which says that all load-serving entities, including municipal utilities, will be subject to the same requirements as the big three utilities. They also object to the RAM provision that forces them to participate in auctions after they’ve met the RPS mandate to get 20 percent of their electricity from clean sources.

Marelli said the utility generally supports competitive solicitations for contracts. Indeed, they are the basis for its own renewables program, which was a feed-in tariff until SCE made the switch. Last year, the utility received over 2,500 megawatts worth of bids for 260 megawatts in auctioned contracts—an outcome that, ironically, helped influence CPUC’s decision to adopt RAM. 

“Our overall perspective [on RAM] is that it’s alright,” Marelli said. “There is nothing particularly spectacular one way or the other.” But RAM’s one-size-fits-all approach for big utilities is “stifling,” he continued. In addition to alleged unfair treatment toward investor utilities, SCE opposes RAM’s requirement that winning projects must wrap up within 18 months after signing the contract.

“We don’t have a need for renewables in the next 18 months,” Marelli said, noting that already 19.4 percent of SCE’s total power deliveries came from renewable energy sources last year.

“Our needs are longer term, yet the [CPUC] says that everybody has to procure under those rules,” he said. “We don’t think that gets the best outcome for our customers. If we had longer start-up deadlines … it would increase the competition and we think drive down the prices that our customers would pay.”

Solar Developers Hopeful

For their part, solar developers believe that RAM can help bring crucial medium-sized solar projects online. To date, most of the state’s solar programs target residential-scale installations or 100-plus megawatt solar plants.

“We think that’s the sweet spot for solar energy—distributed generation large enough to capture the economies of scale so we can deliver low-price energy,” Borrego’s Hall said. The solar provider has installed 40 megawatts of small- to mid-sized projects in California and the Northeast, with 135 megawatts in the design or construction phases.

Tim Keating, vice president of marketing and field operations for Skyline Solar, said the size of projects solicited by RAM would help the developer of emerging concentrating photovoltaics  technology compete with traditional PV systems. The Mountain View, Calif.-based firm has four facilities online that use reflectors and tracking systems to concentrate the sun’s rays on silicon solar panels.

“The more of these standard contract projects that get implemented, the bigger the opportunity for Skyline,” Keating said.

“What we’re going to see in California is not one type of mechanism,” said Browning of Vote Solar, “but different programs that serve different purposes.”