Yesterday my day was all about feed-in tariffs. I participated in a really interesting panel addressing feed-in tariff policy in California that was part of the CPUC's 21st Century Thought Leaders Series. And just hours before the panel, the CPUC issued a ruling in the feed-in tariff (FiT) portion of the RPS proceedings that included a very detailed staff proposal to use a reverse auction process to implement the policy. The NYTimes covered the proposal in an article today.
My company, Recurrent Energy, develops projects in the US, Canada, Spain, and Germany so we have an informed perspective on the relative merits of various feed-in tariff policies. Overall, we think feed-in tariffs have proven to be very effective policy tool in emerging markets. They set a clear price signal and, when done well, they provide the long-term market stability needed to encourage investment.
However, feed-in tariffs are also something of a blunt instrument and they have a number of risks. Bottom line, European-style feed-in tariffs are a form of government price-setting. Regulators who try to set a price are almost guaranteed to get it wrong, either too high or too low. Set it too high and you overheat the market. Set it too low and nothing will happen.
Spain is a perfect example of the risks of setting an FiT too high. In 2008, the Spanish feed-in tariff burdened the country with $26B in obligations to pay for 20 years of solar power they permitted. The political backlash of that obligation is now likely to erode the long term stability of the market—it just wasn’t sustainable as a policy. Unfortunately, it also turns out that it's very hard to design a regulatory process that can respond to adjust pricing fast enough to approximate a competitive market.
We believe feed-in tariffs have a very specific place in the policy toolkit—to get stuck markets unstuck. On the one hand, California has a very effective residential and commercial incentive program in the combination of CSI and net-metering (<1MW). While at other end of the scale, California's RPS is clearly stimulating demand for “mega solar” projects (200-300MW) out in the desert lands. The RPS is also starting to see medium-scale 10-50MW projects gaining momentum.
There is a clear gap right now in California's 2-10MW distributed-scale solar market. The irony is that it is this type of “urban infill” solar projects where PV shines best as a technology. Solar PV enables us to put clean, quiet generating plants right next to the load centers where clean power is needed most. There’s no other power technology that can do that.
We're very supportive of the CPUC's proposal to use a feed-in tariff approach as a transitional policy to ‘unstick’ the 2-10MW distributed solar market. And we definitely agree with the staff recommendation that a competitive solicitation via the Reverse Auction Market [note: you have to love the subtlety of the choice of acronym, RAM!] would be much better than a fixed price tariff. Such an approach is very likely to spur a large volume of PV projects in the state.
We’re also very supportive of the emphasis in the proposal for viability requirements--criteria that ensure bidders in the auction are actually in a position to execute the project if they win. After pricing, viability is the most important policy element to ensure this sort of program produces results.
Overall, there are only minor items in the proposal to disagree with. We favor longer delivery windows—the proposal was for 18 months, we’d like to see 3 years or more. We’d like to see slightly higher development securities ($30 vs $20/kW) because forcing developers to put real skin in the game aligns everyone's interests. And, we’d like to see interconnection filings as part of the submittal because interconnection is a key part of larger scale project viability.
I'm hopeful we'll see the proposal move ahead quickly in the proceeding to become yet another policy that enables California to maintain its leadership in solar power in the US.