California’s FiT and Persistent Faith in the Rational Market Theory, among other things
So much happening in California, much of it crucial to the forward progress of solar in the biggest market in the USA.
First, unemployment remains high, the budget remains in limbo with outgoing governor Schwarzenegger willing to let the situation pass on through to the next administration, while in the category of good news/bad news, Proposition 23 may set back the state’s renewable goals, the state FiT slowly moves ahead and the passage of Senate Bill 722 is close, but not quite at the finish line.
California’s November election may bring an end to the state’s executive order driven 33% RPS requirement via Proposition 23, dubbed the jobs bill by its backers.
Prop 23 would freeze parts of AB 32, notably the suspension of requirements for renewables, until the state has four consecutive quarters of 5.5% unemployment. Ignoring the high unlikelihood of the state’s employment falling to this level anytime soon, and despite the pall this might cast over renewable projects in the state, passage or non-passage of Prop 23 is likely to go down to the wire on election day.
Of course, if California Senate Bill 722 (State Senator Joe Simitian) passes and is signed into law (or not vetoed) by Governor Schwarzenegger the effect of its passage on solar would largely be neutralized. SB 722 would make California’s 33% RPS requirement law (instead of by executive order). Currently, the legislature and the Governor’s office are quibbling over how many electrons should come from out-of-state, with the utilities and the Governor favoring a regional approach. The regional approach would have a significant percentage come from out of state, perhaps fed into the western grid.
Meanwhile, in August the California Public Utilities Commission (CPUC) officially adopted the Renewable Auction Mechanism, which goes under the acronym, RAM, as applicable to the state’s FiT rates. RAM applies to projects <20 MWp, will use an auction approach to set prices, and will be applicable to California’s three largest investor owned utilities (IOUs), PG&E, SCE, and SDG&E.
The CPUC has taken a rational market position concerning its tariff setting auction structure. The danger of an auction approach with downward price pressure is that projects may be underbid, which would prove the CPUC’s assumption of market rationality false. In a free market, rational behavior can and often is more a perception than a reality.
The existing FiT (for projects <1.5 MWp) uses rates that are set by the CPUC, that are equal to the market price referent (MPR). For the new FiT, this fixed price approach will continue to apply to projects <3 MWp. As the CPUC apparently does not view a fixed price FiT (a proven, though complex and risky, tool for market stimulation) as a competitive market approach, RAM will be used as the pricing mechanism for projects >3 MWp and <20 MWp.
It is worth nothing that even with a fixed price approach to a FiT, competition (often aggressive) exists. The CPUC was not swayed in favor of a fixed price approach to setting the FiT price in terms of controlling transaction costs, and as the utility-scale market in the USA is significantly transaction cost laden, a second look might be in order. It may well be that several layers of expertise will be added to the project budget in terms of auction bidding expertise.
As a further mechanism to control price, a simplified preapproval threshold (SPT) was set at MPR + 50%. The CPUC appears to view the SPT as price controlling rather than a price cap.
The tariff(s) will reflect firm, non-firm peaking and non-firm non-peaking rate levels, essentially, time of day pricing with terminology designed and assumed to reflect technology generation strengths.
A capacity cap of 1 GWp has been set for the state’s FiT, and though a megawatt rush (the analogy being a gold or land rush) can be expected, it may be controlled by the auction process. There will be four auctions, taking place over a two year period. Each auction has a must-take obligation, but only up to the auctions capacity cap (250 MWp per auction).
The total megawatt allocations by utility are as follows: SCE 498.4 MWp (~50%), PG&E 420.9 MWp (42%), and SDG&E 80.7 MWp (~8%). To control the allocation of megawatts over the two year period, projects in each utility area are restricted to no more than 25% of each utilities total allocation during each auction period. Of course, this does not limit players from bidding for projects in different utility areas.
Projects are not limited to the CAISO grid, and projects must be on-line within 18-months, which will be a limiting factor for CSP projects and for PV projects during supply-constrained periods. Project conditions and tariff are on a take-it-or-leave-it basis. Criteria for acceptance include site control, Development experience (at least one similar project), use of approved and commercialized technology, and demonstration that the interconnection application has been filed.
There is no longer a requirement that the seller be a retail customer of the utility, and the property does not have to be owned, or under control of the retail customer. This change, unlike the auction process, should increase competition and potentially, project quality. Risks of project reselling can be mitigated by deposits and damage penalties set at appropriately high levels. Unfortunately, as has been demonstrated time and again, some degree of speculation should be expected with project transaction costs increased accordingly.
California’s IOUs are now expected to work together to establish one common RAM tariff, along with a standard contract and remaining documents. The IOUs have 21 days from August 24 to file Tier 2 advice letters, and have 20 days after that to file protests and add comments. The IOUS will hold simultaneous RAM auctions within 90 days of the date that the last of the tariffs, contracts and bid protocols become effective. Following the first auction, RAM auctions will be held (simultaneously by the three IOUs) 180 days later, with the timing under CPUC supervision.
And finally … of interest to solar projects and installers in all US states, is the failure of the US Senate to pass a climate bill in 2010, and along with this failure a growing likelihood that the ITC grant (cash in lieu of investment tax credit) will not be extended beyond December 31, 2010. Without an extension, project developers are scrambling to start construction on projects before December 31, 2010. Though the tax credit is not expiring … cash is always king.
Posted 31/08/2010 by Paula Mints
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