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Learning from California's QF Auction

Fortnightly Magazine - April 15 1995

QF submitted a bid with the following operating data:

Availability: As-available

Peak Capacity Factor: 100%

Overall Capacity Factor: 90.39%

Energy-related Capacity

Cost: ($/Kw-year) 5550

Peak Shortage Cost:

($/Kw-year) 51.75

Energy Cost: (›/Kwh) -69

This QF submitted a bid with a negative energy cost. The auction allowed a QF to bid a negative energy cost to account for tax credits for energy production from renewable resources. With a negative energy cost, the QF would pay the utility to take energy. The utility would pay the QF for capacity. Nevertheless, this bid is unusual for several reasons. First, the capacity factors total about five times higher than expected for a wind project. Second, the energy-related capacity cost runs 10 to 50 times higher than expected for a wind project. Third, the energy price of -69›/Kwh seems much lower than tax credits could support.

Otherwise, this QF achieved a score of 1.43›/Kwh in 1998 dollars, or about two and one-quarter cents under the score for the first losing bid for the IDR block, which came in at 3.68›/Kwh. This differential would produce a second-price premium of $179.67 per kilowatt-year. But capacity factors and performance factors would be treated differently in the bid-scoring procedure than in setting actual payments under a purchased-power contract, giving rise to possible distortions.

In scoring the bid and setting the second-price premium, the auction assumed that the QF's operating hours per se could be the minimum of 8,760 times the all-period capacity factor (90.4 percent), 8,760 minus allowed maintenance hours (840), or the economic dispatch hours (7,920). If the QF operated accordingly, it would generate 118.8 gigawatt-hours (Gwh) per year, receiving a net payment of $4.139 million in 1988 dollars.

But now suppose that the QF operates at more realistic peak-period and all-period capacity factors of 20 percent. In this case, the QF would generate only 26.3 Gwh per year. Assuming that the bid capacity factor remains constant for all periods and the QF uses all its allotted 840 hours of maintenance per year, its performance factor would be (0.2 x 8760) , (0.904 x [8760 - 840]) = 0.2447. The QF would receive yearly payments in 1998 dollars of $5.390 million (em up $1.25 million from the smaller payment with a larger capacity factor.

Why the increase?

Remember, because of offsetting tax credits for renewable energy, our wind-powered QF actually carries a negative energy payment. For each kilowatt-hour less of energy, the QF cuts its "payment" to the utility by $0.69. Of course, its performance factor would fall as energy production moves down to the lower capacity factor. However, its performance factor is divided by 0.9 (and capped at 1.0) when calculating the capacity payment that the utility makes to the QF. Consequently, the capacity payment that the QF receives falls at a slower rate than the rate of decrease in the negative energy payment.

One utility received 23 bids similar to Example 1. The problem with such bids comes from the fact that the CPUC's bid-scoring system diverged from the method used to calculate actual payments.

Example 2 (em