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California Moves to Avoid Europe's Perils in Encouraging Green Power

The state has become one of few governments worldwide—and the first in the U.S.—to finalize a unique auction program to ramp-up renewables

Sep 1, 2011
Solar power panels on the Palm Desert, Calif. Walmart

Trying to avoid the potential perils of European-style feed-in tariffs, California regulators are moving forward with a new financing technique to stimulate immediate development of small-scale renewable energy projects. 

This month the state became one of few governments worldwide—and the first in the United States—to finalize a bidding program for clean energy projects. The so-called renewable auction mechanism, or RAM, will bring 1,000 megawatts of green electricity online over two years—enough to power roughly 800,000 homes. Put simply, the idea is for developers to submit bids to utilities for 1.5- to 20-megawatt projects. The proposals must be able to be completed within 18 months at the lowest cost possible.

Auction models exist in India, France and South Africa, but RAM is the "trailblazer" in terms of its scope, said Adam Browning, executive director of the San Francisco-based advocacy group Vote Solar.

Four auctions—two a year—will be held in California starting this fall. At each sale, utility giants Pacific Gas & Electric, San Diego Gas & Electric and Southern California Edison will be required to divvy up and auction off a collective 250 megawatts.

Proponents say the pilot RAM program will cut costs and time spent on bringing solar and other renewables online. But not everyone is cheering. Two of the three utilities have derided RAM for being too restrictive due largely to its 18-month deadline—which they say ignores longer-term needs—and for forcing them to take part even after they've met the state's aggressive clean energy targets.

"RAM isn't going to do all things for everybody. But the one thing that it is really designed to do, it is going to do really well," Browning said, referring to the price and time savings RAM aims to achieve. 

The California Public Utilities Commission unanimously approved the program last December after also considering use of feed-in tariffs, which helped make Germany one of the world's largest markets for solar power but also set off boom-bust cycles in other countries, namely in Spain and the Czech Republic. There, overly generous tariff regimes led to a rush to connect solar to the grid and mounting subsidy bills, which couldn't be paid.

Problem of Fixed Rates

Feed-in tariffs require utilities to buy clean electricity from power generators at above-market, government-set prices so alternative energies can compete with cheaper sources. Utilities pay artificially high rates for up to decades, putting part of the burden on electricity ratepayers. The attraction is in the policy's long-term contracts that provide guarantees for investors.

But fixed rates can create problems, said Mike Hall, CEO of San Diego-based solar developer Borrego Solar. "The price is either set too low and solar doesn't get developed, or the price is set too high and ratepayers overpay."

In a December filing on its RAM proposal, the CPUC noted that setting high feed-in tariffs could undermine the stability of California's solar development by making both ratepayers and utilities hostile toward the program.

Proponents of RAM say the auction model avoids this pitfall. Prices for renewable energy systems are essentially set by market forces and can respond quickly to changes, such as plummeting prices of solar panel parts. "RAM has the advantage of not forcing the regulators to set the perfect price," Hall said.

The way RAM works is that utilities award the first contracts to the lowest-priced and most viable projects. They then continue giving contracts to the next-cheapest proposals until each utility meets its quota for the auction.

To prevent developers from offering poorly designed projects or unrealistically low prices, winners must meet a minimum criteria for feasibility, as well as pay up to $60 per kilowatt in advance.

Feed-In Tariffs or Auctions?

Feed-in tariffs have been the green policy du jour across Europe and North America for several years, though signs are emerging that their popularity may wane.

More than 50 countries and six U.S. states have enacted feed-in tariffs, including California. The Golden State passed a limited policy—considered by many to be ineffective—in 2008. Just last week Japanese lawmakers approved legislation that would create a national mechanism in 2012.

But at the same time Europe is scaling back. Spain, France, Italy and the United Kingdom have slashed their feed-in tariffs after generous rates fueled solar booms followed by major busts. Spain in particular has become a cautionary tale about the dangers of hastily conceived renewable energy incentives.

Late last year, the Czech Republic was forced to impose a tax on solar installations in an attempt to cool off its red-hot solar market that was fueled by a feed-in tariff. The move could destroy investor confidence in that country's industry.

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