Solar supporters generally agree that solar electricity has the potential to make a tremendous impact on our nation's energy mix. Disagreement comes when you ask industry insiders and supporters how best to create policies that will maximize that impact.
Ultimately the optimum policy will drive demand, resulting in fast development and construction of projects; use public and rate payer funds as efficiently as possible; set the appropriate incentive level; and result in solar being located where it makes the most sense. To date, policies and subsidy programs around the world at best get mixed marks. In California, I believe the regulators may be close to cracking the code.
The California Public Utilities Commission (CPUC) has approved a number of solar programs to promote Wholesale Distributed Generation using what they call a reverse auction as the method of procurement.
To date the CPUC has approved programs to procure 700 megawatts over five years using this procurement mechanism. In addition, they have issued a draft decision to approve a program to procure an additional 1,000 megawatts over two years through a new Reverse Auction Mechanism program. These new programs are among the first in the world that deal with the majority of solar subsidy concerns in an elegant and efficient manner.
The programs borrow elements from the incredibly successful feed-in-tariff programs that have been used in Europe and Ontario, Canada. These programs give successful 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 with the utility company. This gives a project investor a creditworthy counter party and eliminates market risk such as the price of energy or tradable credits. 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 a building's retail energy price (a problem with the net metering system most commonly employed in the U.S.). Essentially, these programs implement elements from Germany's successfully proven program while modifying the allocation method to improve on the German program's shortcomings.
One of the key innovations of these proposed programs is the use of the reverse auction as a procurement mechanism. To my knowledge this is the first large scale use of this procurement mechanism for distributed generation. A reverse auction is an auction in which sellers bid in hopes of winning part or all of a buyer's business. In a reverse auction the lowest bidders win (as opposed to highest bidders in a conventional auction). Reverse auctions have become a popular procurement tool for all sorts of large material and service purchases. The challenge in running a reverse auction is to make sure that the auction process properly accounts for risk and value elements beyond the price.
Virtually all other solar feed-in tariff 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 a developer is guaranteed to receive a subsidy at a given level if it is able to complete the project 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" and reserve rebates 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 policy makers to correctly predict a workable subsidy level. If they are not set correctly, bad things can happen. If subsidy levels are set too low, than the programs will fail and very few projects will get developed. If subsidy levels are set too high, then there will be a flood of demand as developers and equipment providers look to take advantage of an over subsidized market. The date-based mechanism does not easily allow for the government or utilities to cap their exposure. As a result, an over-subsidized market can result in payouts of subsidy dollars far higher than anticipated or budgeted.
Spain was a prime example of this. The Spanish government put a feed in tariff in place similar to the program that had been so successful in Germany. They used a date-based trigger, allowing developers who completed their projects before year end to sign a 20-year fixed price PPA with the government. Unfortunately the program designers set the subsidy level far too high. The Spanish market grew from negligible size to over 2 gigawatts in a year. This resulted in far more solar being developed in Spain than the government had hoped for--or could afford. The Spanish government was forced to completely rethink the program resulting in the market shrinking back to almost zero before climbing to a more sustainable level of 500 megawatts.
The reverse auction mechanism relieves the pressure on the program designers to set an incentive level correctly. Instead it allows the market to set the incentive levels by forcing developers to compete to participate in the program. The mechanism also easily allows program designers to cap their risk and specify the exact amount of energy they want to procure.
The only apparent danger in the implementation of the reverse auction mechanism is that it will attract bidders developing highly speculative projects. If participation hurdles (cash deposits, development experience, and demonstration of project viability) are not set sufficiently high, then the program will be flooded with projects that will never be built. This is a problem that California is already facing with previous efforts to meet our Renewable Energy Portfolio standard through the development of large utility-scale power plants. Unfortunately, to date the vast majority of the Power Purchase Agreements signed by the utilities have not resulted in renewable energy being produced. If the program designers can avoid this trap than the program should successfully result in the rapid development of a massive amount of solar energy at the best market prices.
Simply put, these new programs being considered by the CPUC illustrate a genius combination of the German type feed-in tariff with a new allocation mechanism. If implemented properly these could serve as an international model of how to successfully and efficiently drive the development of renewable energy.
Mike Hall is the chief executive of Borrego Solar, which handles installation, finance, monitoring and maintenance of solar systems.
See Also:
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