CPUC Proposes Feed-In Tariff for renewable energy

DFN: The CPUC is trying to stimulate the development of renewable energy plants no larger than 20MW. It is ‘incentivizing’ this development by requiring the three largest utilities in the state to purchase up to 1GW from these plants. It doing so for a number of reasons: (1) Lower the barriers to development of renewable energy plants (2) Give the state time to workup a transmission plan that more adequately addresses larger scale plants issues.

California Proposes Feed-in Tariff for Solar Energy
August 31, 2010 | By Nikki Chandler

The California Public Utilities Commission has issued a proposed decision to launch a new renewable incentive 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 between 1 and 20 MW in size.

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 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. Development security and relatively short project development timelines ensure project viability. The Commission can act to finalize and adopt the program in as soon as 30 days.

According to Interstate Renewable Energy Council (IREC), 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 may 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, the IREC says.

Market-Based Pricing Overcomes Legal Hurdles

Last month, the Federal Energy Regulatory Commission 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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