The time-honored discounted cash flow method for determining appropriate utility returns falls short when interest rates are low. Inadequate ROEs ultimately increase cost of capital and wipe away...
Ontario's Standard Offer
Financial incentives work, but beware potential pitfalls.
in the USA
To date, state programs in the United States to encourage the development of renewable energy have been based largely on renewable portfolio standards (RPS) and renewable-energy credits (REC). These programs have had varying levels of success in encouraging development of renewable-energy projects. A recent report by the International Energy Agency suggests countries that have employed feed-in tariffs have tended to stimulate higher levels of renewable-energy development than those using other approaches. 6 The RESOP is similar to a feed-in tariff in that it has a set price for compensating renewable energy, and doesn’t limit the amount of capacity to receive compensation. Therefore, to the extent the United States is interested in examining or pursuing a feed-in tariff model, it need only turn north to Ontario for an example of what such a program might look like.
The experience Ontario has gained provides a useful model for demonstrating the kind of responses such a program might receive in the United States. More important, the lessons learned from the RESOP will prove valuable. First, far more renewable generation was proposed than the province expected. That suggests that setting prices right is critically important to stimulating interest without over-obligating the government or utilities to excessive payments. Second, the behavior of project developers in sizing and queuing projects suggests that better controls on program participation are necessary, perhaps through more onerous project-development prerequisites. Finally, it is clear from the RESOP that developing realistic program targets is necessary to ensure that project proposals don’t drastically exceed the expectations of the program administrator. To the extent that a feed-in tariff approach in the United States is likely, the RESOP could be a very useful and relevant model to study.
The Ontario RESOP experience shows that financial incentives for renewables will attract interest from a wide range of potential providers. Renewable standard-offer programs can be an efficient way to gain interest in development of generation from renewable sources. But response to a program offering an attractive price can create problems if the electrical, technical and administrative infrastructure is not ready to support it. Further, any policy objectives intended to limit responses or participation need to be considered carefully and incorporated into the program design.
1. Standard-offer programs also are called standing-offer programs. Feed-in tariffs are similar in that they offer a standard price to participants meeting the criteria, but they do not always offer long-term contracts.
2. OPA is an agency of the Ontario Government, charged with both integrated system planning and with procurement of generation supply. In effect, the contracts are with an agency of the government.
3. OPA still is accepting applications for projects less than 10 kW and for farm-based biogas of less than 250 kW.
4. Fuels derived from municipal solid waste or construction waste are excluded.
5. To September 2008, HONI has completed about 400 connection-impact assessments and has about another 800 in its queue. OPA has signed RESOP contracts with 362 proponents.
6. Deploying Renewables – Principles for Effective Policies , International Energy Agency, 2008.