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Cali Gets it Right

Not your father’s feed-in tariff.

Fortnightly Magazine - July 2011

Solar supporters agree that solar electricity—particularly photovoltaic (PV) technology—has the potential to make a tremendous impact on our nation’s energy mix. The disagreement comes when you ask how best to create policies to maximize that impact.

The optimum policy will achieve a number of objectives, including: drive demand for fast development and construction of projects, use public and rate payer funds as efficiently as possible, set appropriate incentive levels, and result in solar being located where it makes the most sense.

So far, no subsidy program or policy worldwide has gotten better than mixed marks in all of these areas. However, regulators in California may be close to cracking the code. The California Public Utilities Commission (CPUC) recently approved what’s known as the RAM (reverse auction mechanism) program, which mandates that utilities procure 1,000 MW of distributed solar generation. While this program has yet to prove a success, its design makes it the first large-scale solar program that has the potential to effectively accomplish virtually all of the major policy objectives.

Lessons from Europe

California borrows elements from feed-in-tariff (FiT) programs that have been used in Europe and Ontario. Such programs give developers a financeable 20-year cash flow, which is critical to attracting the investment dollars required to rapidly deploy solar energy systems. In these programs, a developer will sign a 20-year power purchase agreement (PPA) with the utility company. This gives a project investor a credit-worthy counter party and eliminates market risk, such as the price of energy or tradable credits (renewable energy credit, carbon credits, etc.). Furthermore, these programs encourage developers to locate systems in the most cost-effective locations, by paying based on performance and disaggregating the cash flow from the customer’s retail energy price—a problem with the net-metering system most commonly employed in the United States. Essentially, California’s program implements elements from Germany’s program while modifying the allocation method to improve on its shortcomings.

One of the key innovations of California’s proposed program is the use of the reverse auction as a procurement mechanism. This appears to be the first large-scale use of this procurement mechanism for distributed generation. Virtually all other solar FiT type programs (both in North America and Europe) make use of a fixed subsidy-level allocation with a date-based trigger. In a date-based trigger, developers are guaranteed to receive a subsidy at a given level if they are able to complete their projects by a specified date. The mechanism gives developers a clear deadline to meet project milestones and qualify for a guaranteed subsidy level, and also has the advantage of not allowing developers to act like squatters, which reserve allocations only to sit on them and wait until conditions allow a project to move forward—a prevalent problem in previous evolutions of California solar programs.

However, the big problem with the date-based trigger is that it requires that policy makers correctly predict a workable subsidy level. If the level isn’t set correctly,

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